State lawmakers want greater financial guarantees from firms that handle human resources for small businesses, but some worry that a bill before Gov. Neil Abercrombie would favor a few large firms that dominate the industry and push competitors out.
Professional employer organizations have become cost-effective options for many small businesses that want to outsource payroll, health benefits, unemployment insurance and workers’ compensation functions. ProService Hawaii and Altres are the largest of more than 30 firms in the growing industry.
Two years ago a new law required the firms to register with the state Department of Labor and Industrial Relations and post bonds of $250,000 to protect small businesses and employees from defaults. But the state has been slow to fully implement the law, and lawmakers now want to impose new fees and a higher bond threshold.
Every two years, firms would have to pay fees of between $2,500 and $10,000. The $250,000 bond threshold, already the highest in the nation, would remain for companies that cover fewer than 100 employees, but for others it would increase to between $500,000 and $1 million.
"You need to be able to show that you have the financial wherewithal to be in this business," said state Sen. Rosalyn Baker (D, West Maui-South Maui), chairwoman of the Senate Commerce and Consumer Protection Committee.
Thirty-eight states regulate professional employer organizations. Most of the states that have bond requirements have set the threshold at $100,000 or less.
Industry experts believe the underwriting process itself, and not necessarily the bond amount, offers protection because firms have to undergo thorough financial vetting to qualify.
ProService Hawaii and Altres, the industry leaders, were open to state regulation two years ago and suggested draft language for the new bill. Altres, for example, told the House Finance Committee in April that its industry representatives were working "hand in hand" with lawmakers and regulators on the draft. Altres recommended the $500,000-to-$1 million bond threshold for medium and large firms. ProService, however, did caution lawmakers that the fees were too high and could negatively affect Hawaii businesses due to the lack of market competition.
"I think it’s to protect the consumers. We definitely take in a lot of payroll. The client can trust us with a lot of funds," Nelson Befitel, chief compliance officer at ProService Hawaii, said of the need for regulation.
None of the smaller firms was involved at the Legislature when the bill was being drafted, but many are now urging Abercrombie to veto the bill, warning that it could force some out of business. The firms have created a website — Stop SB2424 — describing the bill as a "disaster."
Jack Schneider, president of JS Services Inc., said he doubts many smaller firms can get bonds from surety companies and would have to put up cash as collateral with banks.
"You might as well close up and walk away, which I think is the idea," he said.
Matthew Delaney, president and chief executive officer of Hawaii Human Resources Inc., said lawmakers should have consulted with others in the industry beyond ProService Hawaii and Altres. He believes the industry needs to be regulated but insists that even the existing $250,000 bond threshold is too high.
Some lawmakers also want Abercrombie to veto the bill. State Rep. Joseph Souki (D, Waihee-Waiehu-Wailuku) had tried to kill the bill by sending it back to committee on the final day of the session in May.
"The bill could be a lot of trouble for the small companies," he said.
Baker said the fees are needed to finance state regulation and that the bonds are necessary to ensure that professional employer organizations are financially accountable. But she said she is willing to discuss whether the bill — if it becomes law — should be tweaked, either in implementation or by lawmakers next session. She rejected any suggestion that the bill was written to benefit ProService Hawaii and Altres.
"None of us, when we were putting this together, sat down and said, ‘OK. How can we screw the small guys? How can we put them out of business?’" she said. "That was not part of the discussion, and none of us believed that what we were passing would do that."
Delaney said he hopes the issues the smaller firms have raised since the bill passed will persuade Baker to ask Abercrombie to veto the bill. He said that lawmakers, state regulators, professional employer organizations and insurers could then come up with a more realistic alternative.
"I wish she would be the hero here," he said. "And I wish she would come forward and say, ‘You know what? You’re right. We’ve learned more information. Let’s be inclusive about this.’"
