PEO bill: Veto only if administration can enforce existing law

There has been a lot of discussion recently about Senate Bill 2424, which requires professional employer organizations (PEOs) to register and meet certain requirements in order to do business in Hawaii.

SB 2424 is currently on the governor’s desk awaiting his signature.

Given that even small PEOs handle millions of dollars in client funds annually, the fundamental need for oversight and financial accountability of the PEO industry in Hawaii is something we can all agree on.

However, a law to this effect already exists. The 2010 Legislature passed SB 1062, which was signed by the governor as Act 129 with little fanfare. It requires PEOs operating in Hawaii to provide registration information to include, among other things:

>> Proof of valid workers compensation insurance coverage.

>> Proof of disability insurance law compliance in Hawaii.

>> Proof of compliance with the Hawaii prepaid health care act.

>> Proof of compliance with Hawaii employment security laws.

>> Financial statements audited by a Hawaii-licensed certified public accountant.

>> Posting of a $250,000 security bond.

Despite some PEOs’ claims that there is no need for regulation of the industry, when PEOs are handling large sums of client funds, the opportunities for misuse or error are present.

Such behavior, while admittedly rare, has indeed happened both on the mainland and in Hawaii — here as recently as 2007. (Because of our belief that this is important, ProService has been voluntarily regulated by the Employer Services Assurance Corp., the gold standard for national independent oversight, auditing and bonding, since 2006.)

None of the requirements in Act 129 are onerous. They are also in line with what other states’ PEO laws require, and for good reason: There is no question that the state should require a basic level of financial competence, capitalization and oversight through audited financials, a statement of going concern from the auditor, and a surety bond put in place by an A-rated carrier.

This is simply to safeguard the thousands of Hawaii businesses who entrust PEOs with hundreds of millions of dollars in payroll and benefits premiums each year.

So why are we still talking about this?

Although Act 129 has been state law since 2010, the state Labor Department has had difficulty enforcing the current law due to staffing reductions. To our understanding, the department was advocating the passage of a new bill this year, SB 2424, primarily so that it can fund three part-time positions to do so.

While ProService advocates registration and oversight, SB 2424 has raised some concerns. The high fees could pose a hardship to some companies. We also would have preferred Department of Commerce and Consumer Affairs oversight and changes in some technical aspects of the bonding requirement.

So while SB 2424 is not perfect, we do not recommend a veto if it means the Labor Department will not be able to fully enforce the current law because of lack of funding. We would support a veto only if Act 129 could be fully enforced.

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On vacation: New York Times columnist David Brooks is on vacation.