HB1427 HD1.DOC

SECTION 1. The Hawaii Revised Statutes is amended by adding a new chapter to be appropriately designated and to read as follows:

"Chapter

professional employer organizations

§ -1 Definitions. As used in this chapter, unless the context indicates otherwise, the following terms shall mean as follows:

"Client" means any person who enters into a professional employer agreement with a professional employer organization.

"Co-employer" means either a professional employer organization or a client.

"Co-employment relationship" means a relationship which is intended to be an ongoing relationship rather than a temporary or project specific one, wherein the rights, duties, and obligations of an employer that arise out of an employment relationship have been allocated between co-employers pursuant to a professional employer agreement and this chapter. In a co-employment relationship:

(1) The professional employer organization is entitled to enforce only those employer rights, and is subject to only those obligations specifically allocated to the professional employer organization by the professional employer agreement and this chapter;

(2) The client is entitled to enforce those rights, and is obligated to provide and perform those employer obligations allocated to the client by the professional employer agreement and this chapter; and

(3) The client is entitled to enforce any right and is obligated to perform any obligation of an employer not specifically allocated to the professional employer organization by the professional employer agreement or this chapter.

"Covered employee" means an individual having a co-employment relationship with a professional employer organization and a client who meets all of the following criteria:

(1) The individual has received written notice of co-employment with the professional employer organization; and

(2) The individual's co-employment relationship is pursuant to a professional employer agreement subject to this chapter. Individuals who are officers, directors, shareholders, partners, and managers of the client shall be covered employees to the extent that the professional employer organization and the client have expressly agreed in the professional employer agreement that the individuals shall be covered employees and provided that the individuals meet the criteria of this definition and act as operational managers or perform day-to-day operational services for the client.

"Department" means the department of commerce and consumer affairs.

"Director" means the director of commerce and consumer affairs.

"Professional employer agreement" means a written contract by and between a client and a professional employer organization that provides for the following:

(1) The co-employment of covered employees; and

(2) The allocation of employer rights and obligations between the client and the professional employer organization with respect to the covered employees.

"Professional employer organization":

(1) Means any person engaged in the business of providing professional employer services. A person engaged in the business of providing professional employer services shall be subject to this chapter regardless of whether the person uses such a term or conducts business expressly as a "professional employer organization," "PEO," "staff leasing company," "registered staff leasing company," "employee leasing company," "administrative employer," or any other such name; and

(2) Shall not be deemed to include any of the following:

(A) Arrangements wherein a person, whose principal business activity is not entering into professional employer arrangements and that does not hold itself out as a professional employer organization, shares employees with a commonly owned company within the meaning of section 414(b) and (c) of the Internal Revenue Code of 1986, as amended;

(B) Independent contractor arrangements by which a person assumes responsibility for the product produced or service performed by a person or the person's agents and retains and exercises primary direction and control over the work performed by the individuals whose services are supplied under those arrangements; or

"Professional employer organization group" means two or more professional employer organizations that are majority-owned or commonly controlled by the same entity, parent, or controlling person or persons.

"Professional employer services" means the service of entering into co-employment relationships under this chapter in which all or a majority of the employees providing services to a client or to a division or work unit of a client are covered employees.

"Registrant" means a professional employer organization registered under this chapter.

"Temporary help services" means services consisting of a person:

(1) Recruiting and hiring the person's own employees;

(2) Finding other organizations that need the services of those employees;

(3) Assigning those employees to perform work at, or services for the other organizations, to support or supplement the other organizations' workforces, or to provide assistance in special work situations such as, but not limited to employee absences, skill shortages, and seasonal workloads, or to perform special assignments or projects; and

(4) Customarily attempting to reassign the employees to other organizations when they finish each assignment.

§ -2 Registration requirements. (a) No person shall provide, advertise, or otherwise hold oneself out as providing professional employer services in this state, unless the person is registered under this chapter.

(b) Each applicant for registration under this chapter shall provide the department with the following information:

(1) The name or names under which the professional employer organization conducts business;

(2) The address of the principal place of business of the professional employer organization and the address of each office that the professional employer organization maintains in this state;

(3) The professional employer organization's taxpayer or employer identification number;

(4) A list, by jurisdiction, of each name under which the professional employer organization has operated in the preceding five years, including any alternative names, names of predecessors and, if known, successor business entities;

(5) A statement of ownership, which shall include the name and evidence of the business experience of any person that, individually or acting in concert with one or more other persons, owns or controls, directly or indirectly, twenty-five per cent or more of the equity interests of the professional employer organization;

(6) A statement of management, which shall include the name and evidence of the business experience of any person who serves as president or chief executive officer, or otherwise has the authority to act as senior executive officer of the professional employer organization;

(7) Proof of valid workers' compensation coverage; and

(8) A financial statement setting forth the financial condition of the professional employer organization or professional employer organization group. At the time of application for a new license, the applicant shall submit the most recent audit of the applicant, which may not be older than thirteen months. Thereafter, a professional employer organization or professional employer organization group shall file on an annual basis, within one hundred and eighty days after the end of the professional employer organization or professional employer organization group's fiscal year, a succeeding audit. An applicant may apply for an extension with the department but the request shall be accompanied by a letter from the auditor stating the reasons for the delay and the anticipated audit completion date. A professional employer organization that provides proof to the agency that it has been operating in the state prior to January 1, 2010, shall have twenty-four months from January 1, 2010, to submit a financial audit as specified in this section.

The financial statement shall be prepared in accordance with generally accepted accounting principles audited by an independent certified public accountant licensed to practice in the state, and shall be without qualification as to the going concern status of the professional employer organization. A professional employer organization group may submit combined or consolidated audited financial statements to meet the requirements of this section. A professional employer organization that has not had sufficient operating history to have audited financials based upon at least twelve months of operating history shall meet the financial capacity requirements of section -4 and present financial statements reviewed by a certified public accountant.

(c) Each professional employer organization operating within this state as of January 1, 2010, shall complete its initial registration not later than one hundred and eighty days after January 1, 2010. The initial registration shall be valid until one hundred and eighty days after the end of the professional employer organization's first fiscal year under registration; provided that the professional employer organization's first fiscal year ends more than one year after January 1, 2010.

Each professional employer organization not operating within this state as of January 1, 2010, shall complete its initial registration prior to commencement of operations within this state.

(d) Within one hundred and eighty days after the end of a registrant's fiscal year, the registrant shall renew its registration by notifying the department of any changes in the information provided in the registrant's most recent registration or renewal. A registrant's existing registration shall remain in effect during the pendency of a renewal application.

(e) Professional employer organizations in a professional employer organization group may satisfy registration requirements on a combined or consolidated basis; provided that each member of the professional employer organization group guarantees the obligations under this chapter of each other member of the professional employer organization group. In the case of a professional employer organization group that submits a combined or consolidated audited financial statement that includes entities that are not professional employer organizations or that are not in the professional employer organization group, the controlling entity of the professional employer organization group under the consolidated or combined statement shall guarantee the obligations of the professional employer organizations in the professional employer organization group.

(f) The department shall maintain a list of professional employer organizations registered under this chapter that is readily available to the public by electronic or other means.

(g) The department may prescribe forms necessary to promote the efficient administration of this section.

(h) The department, to the extent practicable, shall permit by adoption of rules in accordance with chapter 91 the acceptance of electronic filings, including the applications, documents, reports, and other filings required under this chapter. The department, by adoption of rules, may provide for the acceptance of electronic filings and other assurance by a bonded, independent, and qualified assurance organization approved by the director; provided that the assurance organization provides satisfactory assurance of compliance acceptable to the department consistent with the requirements of this chapter and the rules adopted thereunder. Use of an approved assurance organization shall be optional and not mandatory for a registrant. Nothing in this subsection shall limit or change the department's authority to register or terminate registration of a professional employer organization or to investigate or enforce this chapter.

(i) All records, reports, and other information obtained from a professional employer organization pursuant to this chapter, except to the extent necessary for the proper administration of this chapter by the department, shall be confidential and shall not be published or made available for public inspection other than to public employees in the performance of their public duties.

§ -3 Fees. (a) Upon filing an initial registration statement under this chapter, a professional employer organization shall pay to the department an initial registration fee not to exceed $1,500. Upon each annual renewal of a registration statement filed pursuant to this chapter, a professional employer organization shall pay a renewal fee not to exceed $1,500. The department shall determine by rule any fee to be charged for a professional employer organization group registration. A professional employer organization seeking to register electronically shall pay an initial and annual fee not to exceed $1,500.

§ -4 Financial capability. (a) Each professional employer organization or collectively, each professional employer organization group, shall maintain positive working capital as defined by generally accepted accounting principles at registration as reflected in the financial statements submitted to the department with the initial registration and each annual renewal. A professional employer organization that provides proof to the agency that it has been operating in the state prior to January 1, 2010, shall have twenty-four months from January 1, 2010, to prove compliance with this section.

(b) As an alternative to subsection (a), a professional employer organization or professional employer organization group may provide a bond, irrevocable letter of credit, or securities with a minimum market value in an amount sufficient to cover the deficit that provides proof of positive working capital to the department. The bond shall be held by a depository designated by the department and shall be of sufficient amount to secure the payment by the professional employer organization of all taxes, wages, benefits, or other entitlements with respect to the covered employees.

§ -5 General requirements. (a) Except as specifically provided in this chapter, the co-employment relationship between the client and the professional employer organization, and between each co-employer and each covered employee, shall be governed by the professional employer agreement. Each professional employer agreement shall specify the following:

(1) The professional employer organization shall have responsibility to pay wages to covered employees; to withhold, collect, report, and remit payroll-related and unemployment taxes; and, to the extent the professional employer organization has assumed responsibility in the professional employer agreement, to make payments for employee benefits for covered employees. As used in this section, the term "wages" does not include any obligation between a client and a covered employee for payments beyond or in addition to the covered employee's salary, draw, or regular rate of pay, such as bonuses, commissions, severance pay, deferred compensation, profit sharing, or vacation, sick, or other paid time off pay, unless the professional employer organization has expressly agreed to assume liability for those payments in the professional employer agreement; and

(2) The professional employer organization shall have a right to hire, discipline, and terminate a covered employee, as may be necessary to fulfill the professional employer organization's responsibilities under this chapter and the professional employer agreement. The client shall have a right to hire, discipline, and terminate a covered employee.

(b) Except to the extent otherwise expressly provided by the applicable professional employer agreement:

(1) A client shall be solely responsible for the quality, adequacy, or safety of the goods or services produced or sold in the client's business;

(2) A client shall be solely responsible for directing, supervising, training, and controlling the work of the covered employees with respect to the business activities of the client and shall be solely responsible for the acts, errors, or omissions of the covered employees with regard to those activities;

(3) A client shall not be liable for the acts, errors, or omissions of a professional employer organization or a covered employee of the client and the professional employer organization when the covered employee is acting under the express direction and control of the professional employer organization;

(4) A professional employer organization shall not be liable for the acts, errors, or omissions of a client or a covered employee of the client when the covered employee is acting under the express direction and control of the client; and

(5) A covered employee is not, solely as the result of being a covered employee of a professional employer organization, an employee of the professional employer organization for purposes of general liability insurance, fidelity bonds, surety bonds, employer's liability exclusive of workers' compensation, or liquor liability insurance carried by the professional employer organization unless the covered employees are included by specific reference in the professional employer agreement and applicable prearranged employment contract, insurance contract, or bond.

Nothing in this subsection shall serve to limit any contractual liability or obligation specifically provided in the written professional employer agreement.

§ -6 Workers' compensation. The protection of the exclusive remedy provision of the workers' compensation law shall apply to the professional employer organization, the client, and to all covered employees and other employees of the client irrespective of which co-employer obtains the workers' compensation coverage. Exclusive remedy protection shall extend for both coverage A and coverage B of a workers' compensation policy.

§ -7 Enforcement. (a) No person may:

(1) Offer or provide professional employer services or use the names PEO, professional employer organization, staff leasing, employee leasing, administrative employer, or other title representing professional employer services without first becoming registered pursuant to this chapter; or

(2) Knowingly provide false or fraudulent information to the department in conjunction with any registration, renewal, or in any report required pursuant to this chapter.

(b) Disciplinary action may be taken by the department against any person for a violation of subsection (a) or for:

(1) Being convicted of a crime that relates to the operation of a professional employer organization and involves fraud or deceit;

(2) Knowingly making a material misrepresentation to the department or other governmental agency; or

(3) Wilfully violating this chapter or any order issued by or rule adopted by the department pursuant to this chapter.

(c) If the director finds, after notice and an opportunity to be heard, that a professional employer organization or a controlling person of a professional employer organization has violated this chapter, the director shall impose one or more of the following disciplinary actions:

(1) A denial of an application for registration;

(2) Revocation, restriction, or refusal to renew a registration;

(3) Imposition of an administrative fine in an amount not to exceed $1,000 for each violation;

(4) Suspension, subject to specified conditions; or

(5) A cease and desist order.

§ -8 Conflict with chapter 373K. In case of any conflict between this chapter and chapter 373K, this chapter shall prevail."

SECTION 2. This Act shall take effect on July 1, 2112.

HOUSE OF REPRESENTATIVES	H.B. NO.	1427
TWENTY-FIFTH LEGISLATURE, 2009		H.D. 1
STATE OF HAWAII