BILL ANALYSIS ----------------------------------------------------------------------- |Hearing Date:April 5, 2010 |Bill No:SB | | |1254 | ----------------------------------------------------------------------- SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT Senator Gloria Negrete McLeod, Chair Bill No: SB 1254Author:Leno As Amended:March 22, 2010 Fiscal:Yes SUBJECT: Contractors: workers compensation. SUMMARY: Authorizes the registrar of the Contractors State License Board to issue a stop order to any unlicensed contractor who as an employer who has failed to secure workers' compensation insurance coverage for his or her employees; establishes procedures to request a hearing to protest a stop order; authorizes the Director of the Department of Consumer Affairs to designate 12 persons as peace officers for assignment to the special investigations unit of the Board. Existing law, the Business and Professions Code: 1) Licenses and regulates more than 250,000 contractors under the Contractors State License Law by the Contractors State License Board (CSLB) within the Department of Consumer Affairs (DCA). The CSLB is under the direction of the registrar of contractors (Registrar) 2) Requires every licensed contractor to have on file at all times with the CSLB a current and valid Certificate of Workers' Compensation Insurance or Certification of Self-Insurance, or a statement certifying that he or she has no employees and is not required to obtain or maintain workers' compensation insurance coverage. 3) Provides that failure of a licensed contractor to obtain or maintain workers' compensation insurance coverage, if required under this chapter, shall result in the automatic suspension of the license by operation of law. The suspension shall be effective on the earlier of the date that the workers' compensation insurance SB 1254 Page 2 coverage lapses or the date that workers' compensation coverage is required to be obtained. 4) Makes it a misdemeanor for an unlicensed person to engage in the business or act in the capacity of a contractor and makes a first offense punishable by imprisonment in the county jail for up to six months, or by a fine up to $5,000, or both. The law further establishes enhanced penalties imposed by the court for a repeat unlicensed contractor offender. 5) Provides that persons employed as investigators of CSLB's special investigations unit and designated by the Director of DCA have the authority of peace officers in investigating contractor law violations or with any criminal prosecution arising from any investigation conducted under these laws. Existing law, the Labor Code: 1)Requires private employers to secure the payment of compensation by obtaining and maintaining workers' compensation insurance or to self-insure as an individual employer or as one employer in a group of employers. 2)Provides that when an employer has failed to secure the payment of compensation as required, the Director of the Department of Industrial Relations (DIR) shall issue the employer a stop order prohibiting the use of employee labor until the employer complies with the worker's compensation insurance requirements. a) The stop order shall become effective immediately upon service. b) Any employee so affected by work stoppage under the stop order shall be paid by the employer for the time lost, not exceeding 10 days, pending compliance by the employer. 3)Establishes specified procedures to request a hearing to protest a stop order, as follows: a) An employer may protest the stop order by filing with the Director of DIR a written request for a hearing within 20 days after service of the stop order. b) The hearing must be held within 5 days from the date the SB 1254 Page 3 request is filed. c) The Director of DIR must notify the employer of the time and place of the hearing by mail. d) At the conclusion of the hearing the stop order shall be immediately affirmed or dismissed, and within 24 hours thereafter the Director shall issue and serve by registered or certified mail the written findings of the hearing. e) A writ of mandate may be taken from the findings to the appropriate superior court within 45 days after the mailing of the findings. Existing law, the Penal Code: 1)Designates specified persons employed by specifically-identified state agencies as peace officers and gives those persons the power of arrest. 2)Authorizes the Director of DCA to designate 3 persons as peace officers to be assigned to the special investigations unit of the CSLB, and prohibits those persons from carrying firearms. This bill: 1) Authorizes the Registrar to issue a stop order to any unlicensed contractor who as an employer has failed to secure workers' compensation insurance coverage for his or her employees. 2) Makes failure to comply with the stop order a misdemeanor (crime) punishable by imprisonment in the county jail for up to 60 days, or by a fine up to $10,000, or both. 3) Establishes specified procedures to request a hearing to protest a stop order, that mirror "Existing law, the Labor Code:" Item #3). These procedures include the following: a) An unlicensed contractor employer may protest the stop order by filing with the Registrar a written request for a hearing within 20 days after service of the stop order. b) The hearing must be held within 5 days from the date the request is filed. SB 1254 Page 4 c) The Registrar must notify the employer of the time and place of the hearing by mail. d) At the conclusion of the hearing the stop order shall be immediately affirmed or dismissed, and within 24 hours thereafter the Registrar shall issue and serve by registered or certified mail the written findings of the hearing. e) A writ of mandate may be taken from the findings to the appropriate superior court within 45 days after the mailing of the findings. 4) Authorizes the Director of DCA to designate 12 persons as peace officers for assignment to the special investigations unit of the CSLB. FISCAL EFFECT: Unknown. This bill has been keyed "fiscal" by Legislative Counsel. COMMENTS: 1.Purpose. This bill is sponsored by Contractors License Board , the Marin Builders Association , the Engineering Contractors Association , the Flasher/Barricade Association and the California Fence Contractors Association (Sponsors). The Sponsors argue that unlicensed contractors have an illegal, unfair advantage over legitimate licensees; and the use of uninsured employees represent a potential risk to the public by the fact that a property owner could be held liable for injures to an uninsured worker. The Sponsors state that this bill will provide the CSLB with the authority to issue an administrative stop work order to unlicensed contractors who are not providing workers' compensation for their employees, and make failure to comply with the order a misdemeanor. The Sponsors also state that although the bill would increase the number of peace officers that the CSLB may employee from 3 to 12, the bill does not automatically increase the number of CSLB's peace officers. There are still the current multi-layer approval requirements. The CSLB would still have to seek authorization to employ the additional peace officers through a Budget Change Proposal (BCP). The BCP to employ additional peace officers would have to be approved by both DCA and the Department of Finance, and ultimately the funds must be appropriated by the Legislature through the annual Budget process. The Sponsors stress that while the CSLB SB 1254 Page 5 has funding available for these positions, none will be funded without ultimate approval in the Budget. The bill provides mere authorization to move forward in the budget process with these new positions. 2.Background. The Labor Code requires private employers to secure the payment of compensation by obtaining and maintaining workers' compensation insurance or to self-insure as an individual employer or as one employer in a group of employers. These provisions apply to contractors, and the Business and Professions Code requires a contractor to have workers compensation insurance or to certify to the CSLB that they do not have any employees as a condition for licensure. There is widespread belief in the business community that high costs are making it increasingly difficult to do business in California. Often cited as a primary example of this is the state's workers' compensation system. In 2004, the Legislature undertook reform of policies and procedures in that system, hoping to curb the skyrocketing costs of workers' compensation premiums in the state and made some fundamental reforms. However, the deteriorating economy has made it difficult for those engaged in business to make ends meet. In some cases, legitimate contractors have gone out of business and have had to lay off their employee workforce. In some cases, those former employees who do not hold contractor licenses seek to work in the building or home improvement industry, and ultimately become unlicensed contractors. It naturally would follow that those contracting without a license would be unlikely to obtain workers compensation insurance for the workers that they may employ. This cuts the cost margins for the unlicensed contractor, and often allows the unlicensed contractor to undercut legitimate, licensed contractors on price. Failing to secure unemployment insurance jeopardizes not only the employees of the unlicensed contractor, but also the consumer (often a homeowner). If a worker is injured on the job and there is no workers compensation insurance, the homeowner may be held liable for medical costs. Often, homeowners insurance does not cover uninsured workers in such cases. 3.Battling the Underground Economy. The underground economy is an ongoing threat to California's citizens and legitimate businesses. Illegal and unlicensed operators who fail to pay taxes and comply with licensing and insurance laws take revenues earmarked for public schools, law enforcement, and other public services. It is estimated that California loses between $60 to $140 billion in SB 1254 Page 6 revenues and unpaid taxes each year as a result of the underground economy. In battling the underground economy, in 2006, the CSLB joined with various state and federal regulators to form the Economic and Employment Enforcement Coalition (EEEC) in performing a number of construction sweeps. In addition the CSLB continues its proactive enforcement efforts with its Statewide Investigative Fraud Team (SWIFT) carrying out numerous undercover sting operations each year, targeting unlicensed operators and repeat offenders. Through these efforts, the CSLB is able to initiate action against numerous unlicensed contractors and repeat unlicensed offenders. These unlicensed persons are typically cited or arrested, and cases are referred to local district attorneys for prosecution. The CSLB also cooperates with DIR's Division of Labor Standards Enforcement (DLSE) in enforcing the workers compensation laws. However, the DLSE currently has certain enforcement tools that the Sponsors of this bill believe would be useful and effective for the CSLB to have. Specifically, (1) the authority to issue an administrative order to stop the further use of uninsured employees and, (2) the ability to press criminal charges for a violation of the order. The Sponsors believe that while CSLB and DLSE work together at times, providing the CSLB with this authority (specifically for unlicensed contractors) would further enhance the state's efforts to enforce these provisions in the law, most notably targeting the underground economy with CSLB enforcement efforts designed for that purpose. 4.Arguments in Support. The CSLB, one of the Sponsors of the bill, writes in support and states that the bill will help to mitigate the harm to the industry and consumers by providing the CSLB with the authority to issue an administrative stop work order to unlicensed contractors who do not cover their employees with workers compensation insurance. CSLB believes that the bill's increase in the number of peace officers that may be employed from 3 to 12 is an essential component, and states that the enactment of these provisions "could more readily assist our enforcement efforts against unlicensed contractors and the burgeoning underground economy. These peace officer positions, if approved, would also be used to pursue criminal charges against licensees whenever the evidence obtained in a consumer case reveals workers' compensation insurance fraud and abuse." American Subcontractors Association-California (ASAC) writes that SB 1254 Page 7 hundreds of ASAC member companies have incredible difficulty competing with illegitimate, uninsured, underinsured, and unlicensed workmen. Unlicensed contractors shave costs and easily undercut our legitimate businesses. Not carrying workers' compensation insurance provides a loophole for these unlicensed persons and jeopardizes both their employees, day labor, and the public as property owners may be liable for injuries on their property, according to ASAC. California Applicants Attorneys Association believes the bill will help crack down on the underground economy, and ensure that workers have access to medical and indemnity benefits if they are injured on the job. California Landscape Contractors Association (CLCA) states that when an unlicensed contractor is cited and removed from the worksite, they may continue to direct the performance of illegal work using employees. By issuing a stop work order and making failure to comply with the order a misdemeanor, the bill expands the menu of remedies that the CSLB may seek to stop unlicensed contracting activities as well as violations of the state's labor laws. CLCA further states that by adding 9 sworn peace officer positions to the CSLB's special investigations unit, the bill would give each CSLB regional office a full time peace officer with the power to arrest persons who demonstrate a pattern of repeat violations. California Chamber of Commerce states that the bill offers protection to contractors that are issued a stop order by creating a timely and transparent dispute resolution process which provides protections to any contractor that can prove it has been inappropriately issued a stop order. Construction Industry Legislative Council (CILC) states that although CSLB currently issues administrative citations to unlicensed contractors, the accompanying orders of abatement are often ignored and the unlicensed contractors continue working. The criminal violation in the bill would add a considerable deterrent for ignoring a stop work order in these situations. 5.Related Legislation. AB 370 (Eng, Chapter 319, Statutes of 2009) increases the maximum criminal fines for unlicensed contractors; requires a mandatory jail sentence for a third or subsequent conviction for unlicensed contracting; clarifies that the enhanced penalties for persons with prior unlicensed activity convictions applies not only for performing work, but also for offering to perform or submitting a bid to perform contracting work. SB 1254 Page 8 AB 2412 (Eng) of 2008, was the same as AB 370, but was was one of an unprecedented number of bills that were vetoed by the Governor citing the delay in passing the Budget. AB 881 (Emmerson, Chapter 38, Statutes of 2006) requires all licensed roofers to have workers compensation insurance, and authorizes the Registrar to remove the roofing classification from a contractor license for failure to maintain workers' compensation insurance. 6.Policy issues: Suggested Amendments. a) Should these provisions also apply to licensed contractors? The Sponsors argue that unlicensed contractors with employees who are not covered under workers compensation costs legitimate contractors "playing by the rules" a significant amount of work, since overhead costs are significantly lower. Because of the cost savings from not having paying workers compensation insurance, and failure to pay or under-reporting income taxes, etc., such contractors are able to cut their costs and underbid legitimate contractors who play by the rules. However, the industry has not only suggested that unlicensed contractors, who fail to provide workers compensation insurance for their employees, take jobs from legitimate contractors and do harm to consumers, but also those contractors who are licensed and who do not obtain workers compensation insurance also harm both the legitimate contractor and the consumer. The Author may want to consider amending this bill to authorize the Registrar to issue a stop work order to a licensed contractor who fails to secure workers compensation insurance for his or her employees. b) Should the enforcement provisions in this bill more fully mirror the provisions in the Labor Code? The provisions of this bill which authorize the Registrar of the CSLB to issue a stop work order largely mirror those in Labor Code Section 3710.1 (See "Existing law, the Labor Code" items # 2) & #3), above). However, this bill does not specifically provide for the stop order to become effective immediately upon service, nor does it contain a requirement to pay any employee affected by such a work stoppage to be paid by the employer for such time lost, not to exceed 10 days, pending compliance by the employer. The Author may want to consider amending this bill to require that the stop work order issued by the Registrar become effective SB 1254 Page 9 immediately upon service, and to require that any employee affected by such a work stoppage shall be paid by the employer for such time lost, not to exceed 10 days, pending compliance by the employer. Support: Contractors License Board (Sponsor) California Fence Contractors Association (Sponsor) Engineering Contractors Association (Sponsor) Flasher/Barricade Association (Sponsor) Marin Builders Association (Sponsor) American Subcontractors Association-California California Applicants Attorneys Association California Association of Sheet metal and Air Conditioning Contractors National Association California Chamber of Commerce California Landscape Contractors Association California Legislative Conference of the Plumbing, Heating and Piping Industry California Spa and Pool Industry Education Council California State Council of Laborers California Teamsters Public Affairs Council Construction Industry Legislative Council Golden State Builders Exchanges National Electrical Contractors Association, California Chapter Plumbing-Heating-Cooling Contractors of California Western Electrical Contractors Association Opposition: None received as of March 31, 2010. Consultant:G. V. Ayers