Lawmakers appear primed to send a new bill to Gov. Gavin Newsom’s desk that would create a regulatory framework for professional employer organizations in California.

John P. Kamin

Assembly Bill 1515 would bar businesses from advertising themselves as PEOs unless they are registered with the Division of Labor Standards Enforcement, which will require payment of an initial registration fee. The purpose of the registration would be to ensure that the state can enforce labor laws.

The bill made it through the Assembly and has since made significant progress in the state Senate, with the Senate Appropriations Committee approving the bill on Aug. 29.

AB 1515 was slated for a third reading and a vote by the Senate, which suggests that it had a strong chance of being sent to Newsom. Once the bill lands on Newsom’s desk, he has 30 days to either sign it into law or veto it.

The Division of Labor Standards Enforcement is a department within the Department of Industrial Relations, and it is headed by the labor commissioner. Its focus differs from the Workers' Compensation Appeals Board in that the DLSE enforces wage and hour complaints under the Labor Code. The bill appears to have a side benefit for workers’ compensation purposes, as it could give workers’ compensation practitioners a place to look up registration information for PEOs. Presumably, a workers’ compensation practitioner could request the registration information from the DLSE to help track down background information about PEOs.

Why it matters

As many of you already know, California (and other states) has had a problem with fly-by-night PEOs. While there are many PEOs that have good reputations, there are many that are created with the intention of going bankrupt in three years, often without workers’ compensation coverage later on during that time frame.

Why would any business do that? There are too many answers for that to go into here, but some of the usual suspects include:

• Pocketing premiums and then canceling coverage. Often, this fact pattern involves a high-deductible policy.
• Creation of a business entity solely for attaching a bunch of preexisting debt to it, then declaring bankruptcy in an attempt to escape the debt.
• Complex gamesmanship with assets and tax liability. There is historical evidence of bad actors using PEOs to allegedly make millions off payroll tax fraud.

Regardless of the reason for creating these shady PEOs, the problem they create is that they leave injured workers without coverage from their general employer, the PEO. This often leads to cases dragging on for years as parties dispute coverage and employment and all too often results in some unsuspecting carrier winding up with what should have been the PEO’s liability.

If you haven’t had a case with this problem yet, consider yourself lucky. These cases present a multitude of headaches and difficulties.

This is not a new practice. While researching this topic years ago, I found an article from the 1970s documenting this same scheme in New York. There have been many papers and articles about this topic, including this NAIC study, this article in the Seattle Times (paywall warning) and this Florida study.

What the bill does

While it does create an additional layer of bureaucracy for the law-abiding PEOs, it does require the less-trustworthy PEOs to register with the state. Among other things, the bill adds language to LC 1650, stating that PEOs must have workers’ compensation coverage and must report employee wages using the PEO’s federal identification number.

At the end of the day, that’s one step toward holding the fly-by-night PEOs accountable for injuries that occurred during their risk. That’s a step in the right direction, and may help reduce the number of bad PEOs that have sullied the names of the law-abiding PEOs that do everything by the book (maintain work comp coverage, report injuries, pay wages, etc).

Conclusion

While there are some who have voted against this bill along the way, AB 1515 has sailed through both legislative houses with relatively strong support. Even if it doesn't get to Newsom’s desk for any reason, this is the type of bill that could easily resurface in future legislative sessions.

John P. Kamin is a workers’ compensation defense attorney and partner at Bradford & Barthel’s Woodland Hills location. He is WorkCompCentral's former legal editor. This entry from Bradford & Barthel's blog appears with permission.