Employee Leasing; GET

Establishes license requirements for persons who engage in or
offer employee leasing services in the State.  Exempts from the
general excise tax amounts received by employee leasing companies
that are received and charged for leased employees' compensation
and benefit amounts.  (HB838 HD1)

HOUSE OF REPRESENTATIVES                H.B. NO.           H.D. 1
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            

                   A  BILL  FOR  AN  ACT



 1      SECTION 1.  The legislature finds that in Hawaii and many
 2 other states, the number and complexity of laws and rules that
 3 businesses must comply with require extensive knowledge and time.
 4 For example, one small mistake by a business in complying with
 5 the law could result in fines or penalties to the business.  This
 6 is particularly true of small businesses that devote their full
 7 time to the business itself and then must devote additional time
 8 to meet the many laws and rules that apply to the business.
 9 Complying with laws and rules are the cost of doing business.
10 However, relief may be provided to businesses by employee leasing
11 companies that perform much of the paperwork required by laws and
12 rules.  Leasing companies are responsible for all the records and
13 requirements for the employee and lease the employee to the
14 business.  As a result, the business can then concentrate on the
15 employee's work while the employee leasing company provides the
16 expertise necessary to meet many legal requirements.  In return,
17 the business pays to the employee leasing company a fee for the
18 services provided, and all costs, direct and indirect, relating
19 to the leasing of employees, such as salaries, workers'
20 compensation costs, and retirement plan payments.

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                                     H.B. NO.           H.D. 1

 1      The legislature also finds that the employee leasing
 2 business is a growing area in many states other than Hawaii.  In
 3 Hawaii, the cost of using an employee leasing company is
 4 increased because payments, salaries, workers' compensation
 5 payments, and all others made to the employee leasing company,
 6 are subject to the general excise tax.  Unlike hotels under
 7 section 237-24.7(1), orchard properties under 237-24.7(4), or
 8 management companies related to entities engaged in the business
 9 of selling interstate or foreign telecommunications services
10 under section 237-24.7(9), Hawaii Revised Statutes, employee
11 leasing companies do not have an exemption from the general
12 excise tax for worker-related payments and do not come within the
13 agency exception of the general excise tax.
14      While it is necessary to provide a general excise tax
15 exemption for employee leasing companies to encourage this
16 activity in Hawaii, the legislature notes that many states either
17 register or license these companies.  Research indicates that
18 this is done to protect the assigned workers.  In states where
19 there are a number of employee leasing companies, it has been
20 found that some of the companies are not properly paying
21 withholding taxes, workers' compensation payments, and other
22 required payments.  The legislature finds that the employee
23 leasing industry should be encouraged in Hawaii, particularly in

Page 3                                                     838
                                     H.B. NO.           H.D. 1

 1 this time of economic difficulty, to allow small businesses to
 2 concentrate on the business itself.  However, in return for the
 3 general excise tax exemption, employee leasing companies should
 4 be licensed and required to maintain minimum assets to protect
 5 their assigned employees.
 6      The purpose of this Act is to:
 7      (1)  License employee leasing companies; and
 8      (2)  Provide a general excise tax exemption for certain
 9           payments made to employee leasing companies in a manner
10           that is similar to that which is provided for the hotel
11           and other industries.
12      SECTION 2.  The Hawaii Revised Statutes is amended by adding
13 a new chapter to be appropriately designated and to read as
14 follows:
15                             "CHAPTER
16                    EMPLOYEE LEASING COMPANIES
17        -1  Definitions.  As used in this chapter:
18      "Applicant means a business entity applying for a license or
19 renewal of a license under this chapter.
20      "Assigned employee" means an employee under an employee
21 leasing services arrangement whose work is performed in the
22 State.  The term does not include an employee hired to support or
23 supplement a client company's work force as temporary help.

Page 4                                                     838
                                     H.B. NO.           H.D. 1

 1      "Client company" means a person that contracts with a
 2 license holder and is assigned employees by the license holder
 3 under that contract.
 4      "Department" means the department of labor and industrial
 5 relations.
 6      "Director" means the director of labor and industrial
 7 relations.
 8      "Employee leasing services" means an arrangement by which
 9 employees of a license holder are assigned to work at a client
10 company and the employee's assignment is intended to be of a long
11 term or continuing nature, rather than temporary.  The term does
12 not include temporary help.
13      "Employee leasing company" means a business entity that
14 offers employee leasing services.
15      "Government entity" means the State, or an agency, county,
16 public corporation, or other subdivision of the State or county.
17      "License holder" means a person licensed under this chapter
18 to provide employee leasing services.
19      "Net worth" means the applicant's assets minus the
20 applicant's liabilities, as shown on the applicant's financial
21 statement, or most recent federal income tax return, plus the sum
22 of any guarantees, letters of credit, or securities that shall be
23 submitted to the department.

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                                     H.B. NO.           H.D. 1

 1      "Offer" means a proposal for acceptance or rejection that is
 2 made in a form so that the promises or performance to be rendered
 3 by each party are reasonably certain.
 4      "Temporary help" means an arrangement by which an
 5 organization hires its own employees and assigns them to a client
 6 to support or supplement the client's work force in a special
 7 work situation, including:
 8      (1)  An employee absence;
 9      (2)  A temporary skill shortage;
10      (3)  A seasonal workload; or
11      (4)  A special assignment or project.
12        -2  License required.  No person shall engage in or
13 offer employee leasing services in Hawaii unless the person holds
14 a valid license issued under this chapter.
15        -3  Net worth requirements.(a)  An applicant for an
16 original or renewal license shall demonstrate a net worth as
17 follows:
18      (1)  $100,000 if the applicant employs fewer than two
19           hundred fifty assigned employees;
20      (2)  $200,000 if the applicant employs at least two hundred
21           fifty but not more than seven hundred fifty assigned
22           employees; and
23      (3)  $300,000 if the applicant employs more than seven

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                                     H.B. NO.           H.D. 1

 1           hundred fifty assigned employees.
 2      (b)  The applicant may demonstrate the applicant's net worth
 3 to the department by providing the department with the
 4 applicant's audited financial statement.  The applicant may also
 5 satisfy the net worth requirement through guarantees, letters of
 6 credit, a bond in an amount that demonstrates compliance with the
 7 requirements of subsection (a), or other security acceptable to
 8 the department.  A guarantee is not acceptable to satisfy this
 9 subsection unless the applicant submits sufficient evidence to
10 satisfy the department that the guarantor has adequate resources
11 to satisfy the obligations of the guarantee.
12      (c)  In computing net worth, an applicant shall include
13 adequate reserves for all taxes and insurance, including reserves
14 for claims incurred but not paid and claims incurred but not
15 reported under plans of self-insurance for health benefits,
16 including workers' compensation, temporary disability insurance,
17 and prepaid health care.  The computation of net worth shall be
18 made in accordance with generally-accepted accounting principles.
19      (d)  A document submitted to establish net worth shall show
20 the net worth on a date not earlier than nine months before the
21 date on which the application is submitted.  A document submitted
22 to establish net worth must be reviewed or audited by an
23 independent certified public accountant.  Information submitted

Page 7                                                     838
                                     H.B. NO.           H.D. 1

 1 to the department is a public record under chapter 92F, except
 2 information related to:
 3      (1)  Identification of client companies;
 4      (2)  Net worth;
 5      (3)  financial statements; and
 6      (4)  Federal or state income tax returns.
 7         -4  License application.(a)  To receive an employee
 8 leasing company license, a person shall file with the department
 9 a written application, a demonstration of net worth as required
10 under section   -3, and the application fee.  The department
11 shall require the applicant for a license to provide the
12 information necessary to determine that the applicant meets the
13 licensing requirements of this chapter.  Before denying a license
14 application, the department shall provide written notice to the
15 applicant specifying the reasons for denial.
16      (b)  Following denial or revocation of a license, and prior
17 to issuing a new license or reinstating a license, the department
18 shall consider:
19      (1)  The extent to which the applicant or license holder has
20           corrected any problems resulting in denial or
21           revocation; and
22      (2)  Whether the applicant or license holder has
23           demonstrated that the applicant or license holder

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                                     H.B. NO.           H.D. 1

 1           exercised due diligence to avoid the reasons for the
 2           denial or revocation.
 3 The applicant or license holder shall bear the burden of proof
 4 with respect to paragraphs (1) and (2).
 5         -5  License issuance; term; renewal.(a)  The
 6 department shall issue a license to an applicant that the
 7 department determines has met the requirements of this chapter.
 8 The department shall notify the applicant of any deficiency in
 9 the application not later than the thirtieth day after the date
10 in which the department received the application forms.  The
11 department shall issue the license within ninety days after the
12 date in which the completed application is filed with the
13 department.
14      (b)  A license issued or renewed by the department under
15 this chapter is valid for two years from the date of the issuance
16 or renewal of the license.  The department shall renew a license
17 upon receipt of a completed renewal application form and payment
18 of the license renewal fee.
19         -6  Fees.(a)  Each applicant for an original or
20 renewal of an employee leasing company license shall pay to the
21 department before the issuance of the license or license renewal
22 a fee of $         for the two-year license period.
23      (b)  Fees collected under this chapter shall be deposited

Page 9                                                     838
                                     H.B. NO.           H.D. 1

 1 into the state general fund.
 2         -7  License not assignable; change of name or location.
 3 (a)  A license holder shall not conduct business under any name
 4 other than that which is specified in the license.  A license
 5 issued under this chapter is not assignable.  A license holder
 6 shall not conduct business under any fictitious or assumed name
 7 without prior written authorization from the department.  The
 8 department shall not authorize the use of any name that is
 9 similar to that of a public office or agency or to that of
10 another license holder in a manner that the public may be
11 confused or misled by the use of the name.  A license holder
12 shall not conduct business under more than one name unless the
13 license holder has obtained a separate license for each name.
14      (b)  A license holder may change the license holder's
15 licensed name at any time by notifying the department and paying
16 a fee of $         for each change of name.  A license holder may
17 change the license holder's name upon the renewal of the license
18 without the payment of the name change fee.
19      (c)  A license holder shall notify the department in writing
20 of:
21      (1)  Any change in location of the license holder's primary
22           business office;
23      (2)  The addition of more business;

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                                     H.B. NO.           H.D. 1

 1      (3)  Any change of ownership or control; or
 2      (4)  Any change in the location of business records
 3           maintained by the license holder.
 4      (d)  A license holder may amend the name specified in a
 5 license to add a trade name, trademark, service mark, or company
 6 name.  An amendment made under this subsection shall comply with
 7 the requirements imposed under subsection (a).  The department
 8 may charge a fee of $      for processing the amendment.
 9      (e)  A license holder offering employee leasing services in
10 more than one state may advertise in this State using the name of
11 its parent company or under a trade name, trademark, or mark;
12 provided that the trade name, trademark, service mark, or parent
13 company named shall be listed on the license in addition to the
14 licensed name used by the license holder in this State.
15      (f)  Each written proposal provided to a prospective company
16 and each contract between a license holder and a client company
17 or assigned employee shall clearly identify the name of the
18 license holder.  A proposal or contract may also identify the
19 trade name, trademark, service mark, or parent company name of
20 the license holder.  A license holder may use written materials
21 including forms, benefit information, letterhead, and business
22 cards that bear only the trade name, trademark, service mark, or
23 parent company name of the license holder.

Page 11                                                    838
                                     H.B. NO.           H.D. 1

 1         -8  Agreement; notice.  (a)  A license holder shall
 2 establish the terms of an employee leasing services agreement by
 3 a written contract between the license holder and the client
 4 company.
 5      (b)  The license holder shall give written notice of the
 6 agreement as it affects assigned employees to each employee
 7 assigned to a client company worksite.
 8      (c)  The written notice required by subsection (b) shall be
 9 given to each assigned employee not later than the first payday
10 after the date in which that individual becomes an assigned
11 employee.
12         -9  Contract requirements.(a)  A contract between a
13 license holder and a client company shall provide that the
14 license holder:
15      (1)  Reserves a right of direction and control over
16           employees assigned to the client's worksite;
17      (2)  Assumes responsibility for the payment of wages to the
18           assigned employees without regard to payments by the
19           client to the license holder;
20      (3)  Assumes responsibility for the payment of payroll taxes
21           and the collection of taxes from the payroll of
22           assigned employees;
23      (4)  Retains a right to hire, fire, discipline, and reassign

Page 12                                                    838
                                     H.B. NO.           H.D. 1

 1           the assigned employees; and
 2      (5)  Retains a right of direction and control over the
 3           adoption of employment and safety policies and the
 4           management of workers' compensation claims, claim
 5           filings, and related procedures.
 6      (b)  Each license holder is responsible for the license
 7 holder's contractual duties and responsibilities to manage,
 8 maintain, collect, and make timely payments for:
 9      (1)  Insurance premiums;
10      (2)  Benefit plans maintained by the license holder;
11      (3)  Other employee withholding;
12      (4)  Any other expressed responsibility within the scope of
13           the contract for fulfilling the duties imposed under
14           this subsection, subsection (a), and sections   -15 and
15             -21.
16         -10  Employee benefit plans.  A license holder may
17 sponsor and maintain employee benefit plans for the benefit of
18 assigned employees.  A client company may include employees in
19 any benefit plan sponsored by the client company.
20         -11  Workers' compensation.(a)  A license holder may
21 contract with a client company to obtain workers' compensation
22 insurance for the license holder's assigned employees through an
23 insurance company and subject to the requirements of chapter 386.

Page 13                                                    838
                                     H.B. NO.           H.D. 1

 1      (b)  If a license holder maintains workers' compensation
 2 insurance, the license holder shall pay workers' compensation
 3 insurance premiums based on its own experience rating.
 4         -12  Health benefit plans.  A license holder shall not
 5 sponsor a plan of self-insurance for health benefits except as
 6 permitted by the Employee Retirement Income Security Act of 1974
 7 (29 USC section 1001 et seq) or as required by chapter 393.
 8         -13  Unemployment taxes; payroll.  A license holder is
 9 the employer of an assigned employee for the purposes of chapters
10 235 and 383.
11         -14  Posting requirements.  Each license holder shall
12 post in a conspicuous place in the license holder's principal
13 place of business in this State the license issued under this
14 chapter.  Each license holder shall display, in a place that is
15 in clear and unobstructed public view, a notice stating that the
16 business operated at the location is licensed and regulated by
17 the department and that any questions and complaints should be
18 directed to the department.
19         -15  Required information.  Each license holder shall:
20      (1)  Maintain adequate books and records in this State
21           regarding the license holder's duties and
22           responsibilities;
23      (2)  Maintain and make available at all times to the

Page 14                                                    838
                                     H.B. NO.           H.D. 1

 1           director the following information, which shall be
 2           treated as proprietary and confidential under chapter
 3           92F and is exempt from disclosure to persons other than
 4           other governmental agencies having a reasonable,
 5           legitimate purpose for obtaining the information:
 6           (A)  The correct name, address, and telephone number of
 7                each client company; and
 8           (B)  Each client company contract.
 9         -16  Agent for service of process.  Each license holder
10 shall maintain a business office and a registered agent for
11 service of process in the State.
12         -17  Prohibited acts.(a)  A person shall not:
13      (1)  Engage in or offer employee leasing services without
14           holding a license under this chapter as an employee
15           leasing company;
16      (2)  Use the name or title "employee leasing company",
17           "staff leasing company", "licensed staff leasing
18           company", "licensed employee leasing company",
19           "professional employer organization", or
20           "administrative employer", or otherwise represent that
21           the person or entity is licensed under this chapter
22           unless the person or entity holds a license issued
23           under this chapter;

Page 15                                                    838
                                     H.B. NO.           H.D. 1

 1      (3)  Represent as the person's own the license of another
 2           person or represent that a person is licensed if the
 3           person does not hold a license;
 4      (4)  Use or attempt to use a license that has expired or has
 5           been revoked.
 6      (b)  Violation of this section shall be a misdemeanor.
 7         -18  Interference with collective bargaining prohibited.
 8 For the purposes of the collective bargaining process, including
 9 but not limited to the right to organize employee units based on
10 specific worksites, each employee leasing company shall be bound
11 by labor relations law and shall be responsible for any violation
12 of a collective bargaining agreement covering any of its assigned
13 employees to which it is a party.  An employee leasing company
14 shall not reassign assigned employees to different client
15 companies for the purpose of interfering with the terms and
16 conditions of any collective bargaining or organizational
17 activity.  Nothing in this section shall relieve a client company
18 of its obligations under any applicable labor relations law.
19         -19  Grounds for disciplinary action.(a)  The
20 department may take disciplinary action against a license holder
21 on any of the following grounds:
22      (1)  Being convicted of:
23           (A)  Bribery, fraud, or intentional or material

Page 16                                                    838
                                     H.B. NO.           H.D. 1

 1                misrepresentation in obtaining, attempting to
 2                obtain, or renewing a license;
 3           (B)  A crime that relates to the operation of an
 4                employee leasing company or the ability of the
 5                license holder to operate an employee leasing
 6                company;
 7           (C)  A crime that relates to the establishment or
 8                maintenance of a self-insurance program, whether
 9                health insurance, workers' compensation insurance,
10                or other insurance;
11           (D)  A crime that relates to fraud, deceit, or
12                misconduct in the operation of an employee leasing
13                company;
14      (2)  Giving materially false or forged evidence to the
15           department in connection with obtaining or renewing a
16           license or in connection with a disciplinary proceeding
17           under this chapter;
18      (3)  Transferring or attempting to transfer a license issued
19           under this chapter;
20      (4)  Violating this chapter or any order or rule issued by
21           the department or director under this chapter;
22      (5)  Failing to cooperate with an investigation,
23           examination, or audit of the license holder's records

Page 17                                                    838
                                     H.B. NO.           H.D. 1

 1           conducted by the license holder's insurance company or
 2           the insurance company's designee, as allowed by the
 3           insurance contract or authorized by law;
 4      (6)  Failing to notify the department of a change in
 5           ownership, principal business address, or the address
 6           of accounts and records within thirty days after the
 7           change;
 8      (7)  Failing to correct any tax filings or payment
 9           deficiencies within a reasonable time as determined by
10           the department of taxation;
11      (8)  Refusing, after reasonable notice, to meet health and
12           safety requirements within the license holder's control
13           and made known to the license holder by a federal or
14           state agency;
15      (9)  Being delinquent in the payment of the license holder's
16           insurance premiums other than those subject to
17           legitimate dispute;
18      (10) Being delinquent in the payment of any employee plan
19           premiums or contributions other than those subject to a
20           legitimate dispute;
21      (11) Failing to maintain the net worth requirements required
22           under section       -3.
23      (b)  For the purposes of this section, "conviction" means a

Page 18                                                    838
                                     H.B. NO.           H.D. 1

 1 plea of nolo contendere or a finding of guilt, regardless of
 2 adjudication.
 3         -20  Sanctions.(a)  Upon a finding that a ground for
 4 disciplinary action exists under one or more provisions in
 5 section    -18 or    -19, the department may impose
 6 administrative penalties in an amount not less than $         but
 7 not more than $       .
 8      (b)  Disciplinary action may be taken, an application for a
 9 new or renewal license may be denied, or a license may be revoked
10 by the department subject to chapter 91, with notice and
11 opportunity for hearing provided to the affected applicant
12 license holder.
13      (c)  Upon revocation of a license, the license holder shall
14 immediately return the revoked license to the department and the
15 department shall notify the department of taxation of the date of
16 the revocation.
17         -21  Effect of other laws.(a)  This chapter does not
18 exempt a client company or any assigned employee from any license
19 requirements imposed under federal, state, or county law,
20 including without limitation, license requirements, labor or
21 employment laws, collective bargaining rights, anti-
22 discrimination provisions, or other laws with respect to the
23 protection and rights of employees.  The assigned employee shall

Page 19                                                    838
                                     H.B. NO.           H.D. 1

 1 be deemed to be an employee of the client company with respect to
 2 the enforcement of those employee rights.  The client shall be
 3 deemed to have satisfied its obligations to its assigned
 4 employees under any applicable law, including, without
 5 limitation, workers' compensation laws, the Hawaii prepaid health
 6 law, temporary disability insurance law, and tax withholding and
 7 reporting laws if and to the extent that these obligations are
 8 satisfied by the employee leasing company acting as employer of
 9 the assigned employee.
10      (b)  An employee who is licensed, registered, or certified
11 under state law and who is assigned to a client company shall be
12 considered to be an employee of the client company for the
13 purpose of that license, registration, or certification.
14      (c)  A license holder is not engaged in the unauthorized
15 practice of an occupation, trade, or profession that is licensed,
16 certified, or otherwise regulated by a government entity solely
17 by entering into a employee leasing arrangement with a client
18 company and assigned employees.
19         -22  Exemptions.  This chapter shall not apply to labor
20 organizations, government entities, or temporary help service.
21         -23  Director's investigatory powers; rules.(a)  If
22 the director has a reliable basis to believe that any license
23 holder is violating this chapter, the director shall have the

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                                     H.B. NO.           H.D. 1

 1 right to review and inspect all of the license holder's books and
 2 records during regular business hours at the license holder's
 3 place of business.
 4      (b)  The director may adopt rules under chapter 91 for
 5 purposes of this chapter."
 6      SECTION 3.  Chapter 237, Hawaii Revised Statutes, is amended
 7 by adding a new section to be appropriately designated and to
 8 read as follows:
 9      "237-     Leased employees; exempt amounts.  There shall be
10 exempted from, and excluded from the measure of, the taxes
11 imposed by this chapter all of the value or gross proceeds that
12 are received by a licensed employee leasing business that are
13 attributable and charged to compensation, fringe benefits,
14 workers' compensation, and payroll taxes or assessments, paid for
15 on behalf of a leased employee; provided that:
16      (1)  Exempt amounts shall not include any service fee,
17           service charge, profit, mark-up of, or amounts
18           allocated to the overhead of any employee leasing
19           business; and
20      (2)  The exemption has not been withdrawn under section
21           378-   .
22      For the purposes of this section, "leased employee" means
23 the same as defined in section 414(n) of the Internal Revenue

Page 21                                                    838
                                     H.B. NO.           H.D. 1

 1 Code of 1986, as amended, but shall not include an employee who
 2 is hired by a temporary hire service and assigned to support or
 3 supplement the work force of a temporary help service's client."
 4      SECTION 4.  Chapter 378, Hawaii Revised Statutes, is amended
 5 by adding a new section to be appropriately designated and to
 6 read as follows:
 7      "378-     Leased employees; rights; employer's
 8 responsibilities.  (a)  Any law to the contrary notwithstanding,
 9 no employer, regardless of the use of leased employees, shall be
10 exempt from any requirements of any state, county, or federal
11 law.  Leased employees shall have the same rights, privileges,
12 and responsibilities as if the employee were directly employed by
13 the leasing employer.
14      (b)  The leasing employer of leased employees shall be
15 deemed to have satisfied requirements under chapters 383, 385,
16 386, 392, and 393, and the income tax withholding and reporting
17 requirements to the extent the employee leasing business has
18 satisfied those requirements in the name of the leasing employer.
19      (c)  If any leased employee is deprived of any rights and
20 benefits through contract negotiations between the employee
21 leasing company and the leasing employer, the exemption from
22 general excise tax under section 237-    shall be withdrawn and
23 all general excise tax plus penalties and interest with respect

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                                     H.B. NO.           H.D. 1

 1 to amounts received for the leased employee shall be due."
 2      SECTION 5.  New statutory material is underscored.
 3      SECTION 6.  This Act shall take effect on July 1, 1999.