BILL ANALYSIS Ó AB 1789 Page A Date of Hearing: April 18, 2012 ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT Sandre Swanson, Chair AB 1789 (Morrell) - As Amended: March 29, 2012 SUBJECT : Industrial Welfare Commission wage orders: review. SUMMARY : Requires the Industrial Welfare Commission (IWC) to review each wage order, as specified, and prohibits certain private rights of action based on violations of the IWC wage orders until such a review has been completed. Specifically, this bill : 1)Requires the IWC to review and, if necessary, revise every wage order in effect as of January 1, 2013, to ensure that each wage order is consistent with current work conditions in the industry covered by the wage order. 2)Requires the IWC, after such a review, to indicate on its web site that the wage order has been reviewed and whether the wage order needs to be revised. 3)Prohibits any action from being brought under the Labor Code Private Attorneys General Act (PAGA) for a violation of a wage order until it has been reviewed, and, if the wage order needs to be revised, until the effective date of any revision. FISCAL EFFECT : Unknown COMMENTS : This bill is intended to address what the sponsor considers to be a proliferation of lawsuits in recent years involving alleged violations of provisions of the IWC wage orders. Brief Background on the Industrial Welfare Commission The Industrial Welfare Commission (IWC) was originally established in 1913. Existing law requires the IWC to "ascertain the wages paid to all employees in this state, to ascertain the hours and conditions of labor and employment in the various occupations, trades, and industries in which employees are employed in this state, and to investigate the AB 1789 Page B health, safety, and welfare of those employees<1>." Existing law also requires the IWC to conduct a full review of the adequacy of the minimum wage at least once every two years<2>. The IWC fulfills this duty generally through the issuance of "wage orders." There are currently 17 separate wage orders which regulate various industries and occupations in California. The IWC is composed of five members appointed by the Governor. Two members represent organized labor, two members represent employers, and one member represents the general public. The IWC and the Fight Over the Eight-Hour Day When it was established in 1913, the IWC only had jurisdiction over working hours of women and minors. Exercising its authority, the IWC established daily overtime after eight hours for those groups. In 1974, the discriminatory impact of this approach was struck down in federal court. The IWC's efforts to adopt new wage orders led to a protracted legal battle. In 1980, the California Supreme Court upheld the adoption of final wage orders incorporating the eight-hour day for male and female employees. Those wage orders remained in effect until January 1, 1998, when the IWC amended five of them to eliminate daily overtime and provide that: "No overtime pay shall be required for hours worked in excess of any daily number" (Emphasis added). The five wage orders that were amended were Wage Order 1 (manufacturing industry), Wage Order 4 (professional, technical, clerical, and mechanical occupations), Wage Order 5 (public housekeeping industry), Wage Order 7 (mercantile industry), and Wage Order 9 (transportation industry). That action resulted in an unsuccessful legal challenge, legislation including SB 680 (1997) which was passed but vetoed by Governor Wilson, and ultimately AB 60, which was successfully passed and signed by Governor Davis effective January 1, 2000. AB 60, among other things, codified daily overtime after eight hours as the general rule in California. --------------------------- <1> Labor Code Section 1173. <2> Id. AB 1789 Page C The IWC Defunded As discussed above, the Labor Code requires the IWC to review the adequacy of the minimum wage at least once every two years. Last decade, many interested stakeholders expressed concern that the IWC had not complied with this statutory mandate. The Legislature defunded the IWC effective July 1, 2004. Subsequently, several bills were introduced in the Legislature to increase the minimum wage and index it in future years to inflation. In 2006, Governor Schwarzenegger expressed support for raising the minimum wage, but expressed opposition to any proposal that would index the minimum wage for inflation. In 2006, Governor Schwarzenegger revived the IWC with alternative funding. Many observers viewed this as an attempt by the Governor to effect an increase in the minimum wage administratively on terms that he could control - namely without indexing. However, subsequent to this, Governor Schwarzenegger signed AB 1835 (Lieber) of 2006, which increased the minimum wage to $7.50 per hour effective January 1, 2007, and to $8.00 per hour, effective January 1, 2008. AB 1835 did not index the minimum wage for inflation. Despite the fact that the IWC has been defunded, the wage orders remain in effect. The Department of Industrial Relations (DIR) continues to provide updates to certain requirements of the wage orders, such as hourly pay requirements for exempt computer software employees<3> and physicians<4>, which are indexed on an annual basis. Governor Brown has appointed one member to the IWC, which currently has four vacancies and continues to be defunded. The Labor Code Private Attorneys General Act of 2004 (PAGA) The Labor Code Private Attorneys General Act (PAGA) was enacted pursuant to SB 796 (Dunn), Chapter # 906, Statutes of 2003, and went into effect on January 1, 2004. The Legislative findings accompanying the enactment of SB 796 stated the following: --------------------------- <3> Labor Code Section 515.5(a)(4). <4> Labor Code Section 515.6(a). AB 1789 Page D "Adequate financing of essential labor law enforcement functions is necessary to achieve maximum compliance with state labor laws in the underground economy and to ensure an effective disincentive for employers to engage in unlawful and anticompetitive business practices. Although innovative labor law education programs and self-policing efforts by industry watchdog groups may have some success in educating some employers about their obligations under state labor laws, in other cases the only meaningful deterrent to unlawful conduct is the vigorous assessment and collection of civil penalties as provided in the Labor Code. Staffing levels for state labor law enforcement agencies have, in general, declined over the last decade and are likely to fail to keep up with the growth of the labor market in the future. It is therefore in the public interest to provide that civil penalties for violations of the Labor Code may also be assessed and collected by aggrieved employees acting as private attorneys general, while also ensuring that state labor law enforcement agencies' enforcement actions have primacy over any private enforcement efforts undertaken pursuant to this act." The co-sponsors of SB 796, the California Labor Federation, AFL-CIO and the California Rural Legal Assistance Foundation, argued that the bill would address inadequacies in labor law enforcement in two major ways. First, the bill assigned civil fine amounts to the large number of Labor Code provisions, which previously carried prohibitions or criminal fines, but not civil penalties. Second, it authorized the filing of civil actions to recover existing and new civil penalties by aggrieved workers acting as private attorneys general. The PAGA was significantly amended by SB 1809 (Dunn), Chapter # 221, Statutes of 2004. SB 1809 significantly amended the provisions of the PAGA by enacting specified procedural and administrative requirements that must be met prior to bringing a private action to recover civil penalties. Moreover, SB 1809 provided that no action AB 1789 Page E shall be brought for a posting, notice, agency reporting, or filing requirement, except as specified. The provisions of SB 1809 also expanded judicial review of PAGA claims by requiring courts to review and approve any penalties sought as part of a proposed settlement agreement, and those portions of settlements concerning violations of health and safety laws. In addition, courts were authorized to award a lesser amount if to do so otherwise would result in an award that is unjust, arbitrary and oppressive, or confiscatory. Finally, SB 1809 appropriated $150,000 from the General Fund to the Labor and Workforce Development Agency (LWDA) for the purposes of implementing its provisions, and changed the prior penalty formula to provide that 75 percent of most civil penalties recovered pursuant to PAGA shall go to the LWDA for labor law enforcement and education. PAGA and IWC Wage Order Violations As discussed above, the IWC wage orders contain a number of provisions applicable to various industries and occupations. Some of the requirements of the wage orders have been specifically codified (such as the eight-hour day for overtime and meal periods). Other provisions of the Labor Code have not specifically been codified in the Labor Code. However, Labor Code Section 1198 states the following: "The maximum hours of work and the standard conditions of labor fixed by the ÝIWC] shall be the maximum hours of work and the standard conditions of labor for employees. The employment of any employee for longer hours than those fixed by the order or under conditions of labor prohibited by the order is unlawful." (Emphasis provided). Therefore, in recent years, the question has arisen as to whether a violation of certain provisions of the IWC wage orders constitutes a violation of the Labor Code, through the operation of the language of Labor Code Section 1198 cited above. This in turn has given rise to questions about whether, if such violations do constitute a violation of the Labor Code, an employee may pursue a private right of action for civil penalties under PAGA for such violations. AB 1789 Page F Recently, several courts have answered this question in the affirmative with respect to provisions of the IWC wage orders that require employees to be provided with "suitable seats" under certain circumstances. The first case involved a class-action lawsuit filed against the discount retail chain 99 Cents Only Stores. Bright v. 99 Cents Only Stores, 189 Cal. App. 4th 1472 (2010). In that case, the plaintiff argued that by failing to provide "suitable seating" to its cashiers, her employer violated provisions of Section 14<5> of IWC Wage Order 7-2001 (which regulates the mercantile industry). Among other things, the plaintiff sought civil penalties under PAGA for the "suitable seating" violations. The lower trial court dismissed the plaintiff's PAGA claim on the grounds that IWC Wage Order 7-2001 restricts civil penalties to cases in which the employee was underpaid. However, on appeal the California Court of Appeal for the Second Appellate District reversed and reinstated the employees' claims. The court held that because Labor Code Section 1198 incorporated the labor conditions set by the IWC (as discussed above), a violation of the "suitable seating" requirement is a violation of the California Labor Code. Therefore, the court concluded that employees can recover monetary damages under PAGA when employers do not comply with IWC Wage Order requirements, including the "suitable seating" requirement. A similar holding was reached by the same court in a subsequent case involving "suitable seating." Home Depot U.S.A., Inc. v. Superior Court (Harris), 2010 WL 5175194 (2010). Since that time, employers have reported that they have seen a "flood" of lawsuits alleging PAGA claims arising from alleged violation of the IWC wage order "suitable seating" requirements. In addition, a provision of the IWC wage orders provides that the "temperature maintained in each work area shall provide --------------------------- <5> Section 14 of IWC Wage Order 7-2001 states, "All working employees shall be provided with suitable seats when the nature of the work reasonably permits the use of seats?When employees are not engaged in the active duties of their employment and the nature of the work requires standing, an adequate number of suitable seats shall be placed in reasonable proximity to the work area and employees shall be permitted to use such seats when it does not interfere with the performance of their duties." AB 1789 Page G reasonable comfort consistent with industry-wide standards for the nature of the process and the work performed." Some employers have also expressed fear about potential PAGA lawsuits alleging violations of the temperature provisions of the wage orders. ARGUMENTS IN SUPPORT : This bill is sponsored by the California Chamber of Commerce and a coalition of employer groups. They state the following in support of this bill: "The Industrial Welfare Commission was defunded in 2004 and the Commission's Wage Orders have not been substantively reviewed or updated since. Concerns regarding the ambiguous provisions of the Wage Orders, such as Wage Order 7-2001, Section 14 regarding appropriate "seating" was significantly exemplified in 2009 when a court confirmed an employee could file a representative action under PAGA for violation of these sections of the Wage Orders that have not been codified into statute. Since this ruling, costly "seating" cases against companies have been filed throughout the state. The merit of such cases are questionable as the basis of such lawsuits are that an employee was not "provided" proper seating while working, even when the employee never requested seating. These cases are generally accompanied with a costly settlement demand in the multi-million dollar range, with the threat of attorney's fees for the employee only if the employer chooses to fight the lawsuit, rather than resolve it through settlement. Such frivolous litigation against California employers needs to end. For the past ten years, numerous employers have been financially devastated by litigation regarding what it means to "provide" an employee a meal period. Now, the same employers are being threatened with costly litigation over what it means to "provide" an employee seating. Given that the IWC is currently defunded, employers are left with no agency or regulatory body to seek information regarding what the intent and meaning was of these ambiguous provisions of the Wage Orders. In order to prevent California employers from enduring another decade of such costly litigation, Ýthis bill] AB 1789 Page H prevents an employee from pursuing a PAGA claim for these provisions of the Wage Orders that have not been codified into statute, until the IWC is funded and reviews these outdated Wage Orders to make sure such provisions are consistent with the current work environment. Employees who believe they have been harmed by the lack of available seating may still seek administrative relief from the Division of Labor Standards Enforcement. ÝThis bill] will simply prevent predatory attorneys from exploiting these ambiguous provisions for financial gain and unwarranted litigation." ARGUMENTS IN OPPOSITION : The California Labor Federation, AFL-CIO, writes the following in opposition to this bill: "This proposal is unnecessary. Even without an active IWC, there is nothing to stop any industry from bringing forward a legislative proposal to change wages or working conditions, or workplace regulations. In fact, many industries have successfully changed overtime and meal break policies through the Legislature in recent years. It makes no sense to take away a worker's access to justice. While agency enforcement of all labor violations would be ideal, it is simply not realistic given the budget plight we face in California. PAGA was created because of widespread recognition that state resources are woefully inadequate to protect California workers. It allows workers to file a suit for violations of serious provisions of the Labor Code, and gives employers the opportunity to cure less serious violations. Without any meaningful enforcement, employers would have no incentive to follow the law. Basic rights would be ignored and workers would have little recourse. We cannot go back to a time when workers' rights violations could occur with impunity. " This bill, upon passage out of Labor Committee, is double-referred to Judiciary Committee. REGISTERED SUPPORT / OPPOSITION : AB 1789 Page I Support Associated Builders and Contractors of California California Chamber of Commerce California Farm Bureau Federation California Framing Contractors Association California Grocers Association California Hospital Association California Independent Grocers Association California Manufacturers and Technology Association California Restaurant Association Opposition American Federation of State, County and Municipal Employees California Employment Lawyers Association California Labor Federation, AFL-CIO California Nurses Association California Rural Legal Assistance Foundation Consumer Attorneys of California Analysis Prepared by : Ben Ebbink / L. & E. / (916) 319-2091