SI Review: June 2014

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State by State: Best & worst legal locations for staffing firms

By Leslie Stevens-Huffman

Fighting frivolous lawsuits can take a big bite out of your bottom line. Defending a case through discovery and motion for summary judgment typically costs $75,000 to $125,000, and the tab for a jury trial can reach $250,000. Taxes, too, can be quite a burden for staffing firms. But the legal and tax climates vary greatly depending on the state in which you are operating.

“Favorable states let the federal threshold stand and are pretty hands-off from a regulatory perspective,” said Toby Malara, government affairs counsel for the American Staffing Association. “While unfavorable states have a pro-union presence in the legislature and tend to pass wage-and-hour statutes that build above the Fair Labor Standards Act (FLSA).”

Worst States

The worst states are in the West and Northeast, where judges often certify cases for trial that wouldn’t pass muster in other parts of the country. Lawmakers tend to view regulations as a tool for social change and compliance presents administrative challenges for staffing firms.

Moreover, it’s hard to keep an account manager from snatching your best clients and setting up shop across the street or temps from defecting mid-assignment for a nickel more per hour in most of these states.

“Some states prohibit non-competes by statute,” says Diane Geller, partner with Fox Rothschild LLP. “And then there are states like New York, where enforcement requires a narrowly tailored agreement so employers usually pay employees not to play.”

California. The Golden State’s vast economy is tempting, but you should look before you leap. California ranks 47th in the nation in its courts’ “fairness and reasonableness” regarding business lawsuits, according to a poll conducted by the U.S. Chamber of Commerce’s Institute for Legal Reform. The poll also found that Los Angeles County has the second-worst lawsuit climate among local jurisdictions and San Francisco fourth worst.

California’s encyclopedic labor code is difficult to navigate and an inadvertent misstep could cost big bucks because employees can file lawsuits and keep a portion of assessed fines and penalties under the so-called “Sue Your Boss Law” — SB 796.

“Essentially, an employee can sue you for shorting his paycheck by one cent,” said Steve Whitehead, partner with Taylor English Duma LLP. “California’s laws incentivize employees to find reasons to sue instead of doing their jobs.”

Even one of the state’s best attributes comes with a hitch. California’s unemployment tax (UI) is ranked 16th by the Tax Foundation, but the system drains quickly during an economic downturn, notes Malara, forcing the state to borrow money from the federal government. California employers were recently ordered to pay an additional payroll tax of $21 per employee per year until the state’s current loans are repaid.

Massachusetts. Massachusetts is known for passing legislation that causes headaches for the staffing industry. If voters approve a paid sick day proposal later this year, The Bay State would become just the second state to guarantee paid sick leave, joining Connecticut.

Plus, Massachusetts has the second-highest UI rate in the nation and the state Senate recently passed a reform bill that will increase rates for businesses with frequent layoffs after 2017. Add to that a recent law that requires employment agencies to provide temporary employees with a written job description, pay rates and other information before the start of every assignment. While the law went into effect Jan. 31, 2013, final regulations are still pending.

“As it stands, it’s a difficult law to administer,” Malara says.

New York. New York labor laws that deal with overtime, deductions, breaks, tips and benefits are some of the most detailed in the country. For instance, the state dictates a specific timeframe for meal breaks in certain industries and features strict wage deduction rules that make it difficult to recoup money owed by employees, according to Geller.

Then, there’s the Wage Theft Prevention Act (WTPA) that took effect in 2011 and requires employers to obtain written acknowledgement of job descriptions, pay rates and other pertinent info from employees every year.

New Jersey. New Jersey is another pro-union state that likes to enact its own labor laws. For instance, the New Jersey Family Leave Act allows an employee to use leave time for his or her own medical condition, instead of helping out a family member. And Geller notes that New Jersey’s hours of rest law is pages long and the state measures non-competes on “reasonableness,” making them difficult to enforce.

Jersey City recently passed a controversial Earned Sick Time Ordinance (JCESTO) that applies to anyone who works 80 hours in a calendar year within the city limits, requiring staffing firms to track the whereabouts of temps throughout assignments.

Rhode Island. The nation’s smallest state has the highest unemployment insurance (UI) rate in the nation, according to The Tax Foundation. State legislators have attempted to pass sales tax legislation several times and it also has an exclusive remedy law for workers’ compensation entitling injured workers to benefits that can be tricky.

Honorable Mention: Oregon. Watch out for California’s northern cousin. Oregon recently introduced a bill that would require contingents to make the same pay as regular staff and would preclude staffing firms from charging conversion fees. And Portland recently passed a sick leave law that applies to employees who work 240 or more hours in the city in a year.

Best States

Executives and lawyers laud state and local courts from Texas to Florida for protecting employees while quickly dispatching meritless cases. The best states generally follow federal labor laws and staffing firms get a fair shake when it’s time to consider new regulations because executives and franchisees are involved in state legislatures.

Texas. Texas is often named the best state for business, receiving four stars for taxes and regulations by Chief Executive.net. One reason is that Texas courts generally do not favor wrongful termination suits, so many of those actions are unsuccessful.

And when Texas passed a law that taxed staffing firms on revenue and PEOs on administrative fees, members of the Texas Association of Staffing rallied to the cause. Within a year, the legislature recognized the disparity and agreed to tax staffing firms on gross margin dollars.

Florida. Why was Florida ranked as the second best state for business by Chief Executive.net? For starters, most of Florida’s labor statutes apply to public sector employers, Geller says.

“Staffing firms have fewer things to navigate because Florida follows FLSA except for minimum wage,” she notes.

The Sunshine State comes in sixth for UI and when it looked like staffing firms would be precluded from participating in a 2010 tax credit program for hiring the unemployed, Florida staffing firms were successful in getting the law changed.

Georgia. With staffing veterans and franchisees taking an active role in the Georgia House of Representatives, it’s not surprising that the state provides a favorable regulatory environment for the industry.

“Georgia used to be second only to California for difficulty of restrictive covenant enforcement, but since it revised its statute, it has become predictable and employer-friendly in this regard,” says George Reardon, attorney at law.

Whitehead credits the 11th Circuit Court of Appeals with setting the tone in the Southeast: “It’s hard for plaintiffs to get a jury trial in Georgia,” he notes.

Honorable Mentions: North Dakota and South Dakota. South Dakota has no corporate income tax and has the 11th best legal climate in the country, according to the U.S. Chamber of Commerce survey. Meanwhile, North Dakota is the second best state for business and careers according to Forbes due to having the 17th best regulatory environment and the eighth best legal climate in the country. These factors combine to make the states from the former Dakota Territory worthy of consideration when it’s time to expand.

Freelance writer Leslie Stevens-Huffman can be reached at lesliestevens@cox.net

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