A Guide to PEO in California

Employers in California are continuously seeking efficient ways to navigate the state’s detailed and ever-changing labor and employment laws. This is where professional employment organizations (PEOs) can help, especially for CFOs and Finance teams who are managing compliance alongside core financial duties.

Read on to learn more about the process and benefits of using a PEO in California.

The role of PEOs in California

A PEO is a firm that businesses partner with to outsource a wide range of employee management tasks, including but not limited to payroll, benefits administration, HR tasks, and compliance with state and federal laws.

When you partner with a PEO, you enter into a co-employment relationship. As the co-employer, the PEO shares some legal liabilities of employment. Meanwhile, the client company maintains day-to-day management of its workforce.

In California, it’s mandatory for all employers, including those partnering with PEOs, to have valid workers’ compensation insurance. Failure to do so is a criminal offense with potential fines up to $100,000 USD as per California Labor Code, section 3700.

Employers also need to ensure their workers’ compensation carrier, offered through a PEO or otherwise, is properly licensed by checking with the California Department of Insurance. Without valid coverage, employers face serious penalties.

Benefits of partnering with a California PEO

Partnering with a PEO offers businesses the opportunity to streamline their human resources operations, enhance employee benefits, and navigate California’s compliance requirements with expert guidance.

Efficiency gains in HR

CFOs and Finance teams are often tasked with streamlining HR operations to enhance efficiency and control costs. 

By outsourcing these functions to a PEO, businesses can significantly reduce the time and resources spent on HR tasks, enabling the finance team to allocate more effort toward strategic financial planning and analysis. Using a PEO is often more cost-effective than hiring a team of full-time HR staff, and offers a pricing model that is predictable month-over-month, which can help limit unforeseen costs.

PEOs also bring sophisticated HR technology platforms to the table, which automate and simplify payroll processing, track payroll spending, and provide real-time analytics. For CFOs, this means a more focused approach to growth and profitability, with the confidence that HR management is in expert hands.

Access to expertise

Small businesses and startups are often unable to afford in-house payroll and HR expertise that covers every state. With a PEO, they gain access to extensive knowledge and resources that would typically be out of reach.

This setup empowers HR teams, CFOs, and Finance departments to base their decisions on expert insights regarding payroll, HR, and regulatory compliance, ensuring that strategic choices are well-informed and supported by specialized knowledge.

Affordable employee benefits plans

One of the standout advantages of partnering with a PEO is the ability to offer a more comprehensive and cost-effective employee benefits package. 

Because PEOs co-employ a large number of employees, they are able to offer client companies competitive rates on benefits, such as health insurance, life and disability insurance, and retirement plans, thereby reducing costs.

Given the competitive job market in California, attractive benefits packages are essential for drawing and keeping top talent. By providing access to such benefits, PEOs help companies compete with larger corporations in terms of employee perks, thereby leveling the playing field. 

Stronger compliance protection

For California companies, the decision to partner with a PEO could be the difference between confidently and compliantly growing their business or facing financial, reputational, and legal repercussions from non-compliance.

For example, California recently updated its meal and break laws, affecting overtime rates and calculations. If a company doesn’t have the internal resources or expertise to stay on top of these updates, their practices may become non-compliant, leading to substantial consequences.

In 2023, the US Department of Labor recovered over $481,000 USD in back wages from a Burbank, California, paint and wall covering company after they failed to pay overtime wages to 117 workers. In Irvine, California, a global security provider who wrongly deducted meal breaks for over 700 workers was ordered to pay nearly $1.1 million in back wages and damages.

By delegating compliance tasks to a PEO, CFOs and Finance teams can concentrate on financial management and growth initiatives, ensuring their companies remain competitive and compliant in a challenging regulatory environment.

Payroll, labor, and employment laws in California

California’s stringent labor and employment laws often set standards beyond federal requirements. With a PEO, ensuring compliance with these requirements becomes the responsibility of the PEO rather than the client company.

Here’s a brief overview of some key laws and regulations specific to California:

Payroll and benefits laws

• Minimum wage: California’s minimum wage is higher than the federal minimum wage, with increases scheduled annually. As of 2024, California’s minimum wage for all employers is $16.00 USD per hour. Some exceptions apply, and some cities and counties have higher minimum wages than the state’s rate
• Overtime: California employees are entitled to overtime pay of 1.5 times their regular rate of pay for hours worked beyond 8 in a day or 40 in a week, and double time for hours worked beyond 12 in a day
• Paid sick leave: As of January 1, 2024, California employers must provide at least 40 hours or five days off each year to most workers. This includes full-time, part-time, and temporary workers. They must work for the same employer for at least 30 days within a year in California and complete a 90-day employment period
• California Continuation Benefits Replacement Act (Cal-COBRA): Cal-COBRA enables employees of small businesses (2 to 19 employees) to extend their health insurance for up to 36 months following qualifying events like job loss or reduced hours
• California pay transparency laws: Businesses with 15 or more employees are required to show the hourly or salary range in their job postings. All businesses must give current employees the salary range for their position if asked and keep records of each employee’s job title and salary history for as long as they work there, plus three years after they leave

Labor laws

• Meal and rest breaks: Employees are entitled to a 30-minute unpaid meal break if they work more than 5 hours in a day, and a second meal break for workdays longer than 10 hours. Rest breaks of at least 10 minutes for every 4 hours worked are also required
• Paydays and pay periods: In California, employees must receive their wages at least twice per calendar month on predetermined paydays. Employers are obligated to set a consistent payday schedule and must display a notice indicating the payday, time, and place where payments will be made. Some exceptions apply
• Final paychecks: California law mandates that final wages be paid immediately upon involuntary termination and within 72 hours for voluntary resignation without notice. If an employee gives at least 72 hours of notice before resigning, final wages must be paid at the time of quitting

Employment laws

• Fair Employment and Housing Act (FEHA): This act prohibits discrimination, harassment, and retaliation in employment based on protected categories such as race, gender, age, disability, and more
• California Family Rights Act (CFRA): Similar to the federal Family and Medical Leave Act (FMLA), the CFRA provides up to 12 weeks of unpaid leave for certain family and medical reasons, with expanded eligibility criteria
• Worker Classification: California has strict criteria for determining whether workers are classified as employees or independent contractors, governed by the ABC test as outlined in Assembly Bill 5 (AB5)

See also: California Independent Contractor Laws: All You Need To Know

Additional requirements and enforcement

Employers in California must also adhere to specific regulations regarding workplace safety (Cal/OSHA), workers’ compensation insurance, and unemployment insurance. The state’s labor and employment laws are enforced by various agencies, including the California Labor Commissioner’s Office and the Department of Fair Employment and Housing (DFEH).

Where there is overlap between federal, state and/or local law, companies will generally be required to comply with the law that offers the greatest rights or benefits to the employee. 

See also: US Payroll Tax Guide: California

How to choose the right PEO in California

In California, a unique regulatory environment and competitive labor market demand careful consideration of a company’s specific needs and goals. Here are practical steps to ensure you select a PEO that aligns with your company’s requirements:

1. Define your business needs

Begin by conducting a thorough analysis of your current and projected HR-related expenditures, identifying areas where a PEO could offer savings or efficiencies. This includes understanding your needs for payroll management, benefits administration, HR compliance, workers’ compensation, and risk management, as well as considering how these services can scale with your company’s growth.

2. Research PEOs with California expertise

Focus your search on PEOs that have a strong presence and a proven track record in California. Look for case studies, client testimonials, and examples of their success in navigating the state’s complex labor laws and business environment.

3. Evaluate the range of services and quality of benefits

Examine the PEO’s offerings to ensure they meet your company’s specific needs. Assess the quality and cost-effectiveness of the benefits packages provided and whether the PEO offers customizable solutions that can adapt to your company’s changing requirements.

4. Assess compliance and risk management capabilities

Understand the PEO’s approach to managing continuous compliance with California’s labor laws and their capacity to mitigate risks related to employment practices and workplace safety. This step is crucial for reducing potential liabilities and ensuring regulatory compliance.

5. Check customer service and support

Evaluate the PEO’s reputation for customer service and support. Consider their responsiveness, the availability of dedicated support teams, and the quality of HR technology platforms they use for managing employee services. High-quality, responsive customer service is essential for a smooth partnership.

6. Review and negotiate the contract

Carefully review the PEO contract to understand all terms, conditions, fees, and exit clauses, with the help of legal advisors if necessary. It’s important to negotiate terms that serve your company’s interests, ensuring flexibility, transparency, and a clear understanding of responsibilities.

7. Plan for implementation and transition

Prepare for the transition to the PEO by communicating changes to your employees, integrating systems, and setting up processes for ongoing collaboration with the PEO. Effective planning and communication are vital to minimize disruption and ensure a successful partnership.

See also: How to Choose a PEO or US Payroll Provider: 9 Questions to Answer

Manage your California, US, and global workers with Deel

Deel makes payroll and HR management easy, whether you’re hiring in one state, across the country, or around the world. 

As your PEO*, Deel takes care of payroll, HR, and benefits administration while ensuring state tax compliance and handling sensitive issues by providing:

• Expert payroll administration
• Access to benefit plans from leading carriers and benefits administration
• Robust HRIS with free IT, Finance, and PTO management
• State-specific trainings, HR policies, and on-demand HR support
• Advanced tax and benefits compliance
• And more

Book a demo to learn more about using Deel’s PEO in California.

*Provided by Deel PEO US, LLC, Deel Employment Services, LLC, or through Deel's partnership with licensed providers where required.