BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 459
                                                                  Page  1

          Date of Hearing:   June 28, 2011

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                  Mike Feuer, Chair
                     SB 459 (Corbett) - As Amended:  May 27, 2011

                              As Proposed to be Amended

           SENATE VOTE  :   24-12
           
          SUBJECT  :   EMPLOYMENT:  INDEPENDENT CONTRACTORS

           KEY ISSUE :  SHOULD THE STATE ENACT ADDITIONAL MEASURES TO 
          PREVENT, DETER AND PENALIZE THE MISCLASSIFICATION OF EMPLOYEES 
          AS INDEPENDENT CONTRACTORS?
           
           FISCAL EFFECT  :  As currently in print this bill is keyed fiscal.

                                      SYNOPSIS
          
          This bill continues the efforts by the author and others to 
          address the problem of misclassification of employees as 
          independent contractors, a violation of law that has significant 
          consequences not only for the employee but for fair business 
          competition, the economy, and the state budget.  This bill would 
          prohibit the willful misclassification of an employee as an 
          independent contractor and would provide for civil penalties for 
          a violation.  In addition, in order to inform persons whose 
          rights are affected by misclassification, the bill requires 
          employers to provide to independent contractors a form developed 
          by the Employment Development Department (EDD) regarding the 
          factors affecting and significance of being classified an 
          independent contractor.  This bill would require employers to 
          maintain for two years a record of all independent contractors 
          hired by the employer.  Finally, to combat the use of 
          unscrupulous consultants, the bill provides that a person who 
          knowingly advises another person for money or other valuable 
          consideration to treat a worker as an independent contractor to 
          avoid employee status for the worker shall be jointly and 
          severally liable with the employer if the worker is not found to 
          be an independent contractor, with specified exemptions.  
          Supporters believe these steps will help address the serious 
          problem of employee misclassification.  The bill is opposed by 
          business interests who argue that the bill unfairly exposes them 
          to potential liability because the classification of employees 








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          is an uncertain undertaking that is not controlled by a single 
          objective test.  They also contend that the standard for 
          willfulness under the bill is too low.  Opponents also object to 
          the form requirement, contending that it is burdensome and 
          unnecessary.

           SUMMARY  :  Regulates the misclassification of employees as 
          independent contractors.  Specifically,  this bill  : 

          1)Prohibits any person or employer from engaging in willful 
            misclassification of an employee as an independent contractor 
            or charging a fee to an employee who has been willfully 
            misclassified as an independent contractor, or making any 
            deductions from compensation for any purpose where the 
            employer would have been in violation of the law if the 
            employee had not been misclassified.

          2)Provides that, if the Labor and Workforce Development Agency 
            (LWDA) or a court finds that any person engaged in any of the 
            above unlawful activities, that person shall be assessed civil 
            penalties of not less than $5,000 and not more than $15,000 
            for each violation, in addition to any other penalties or 
            fines permitted by law.  The civil penalties would increase 
            when the person has engaged in any of the above unlawful 
            activities and the person has engaged in a pattern or practice 
            of these activities.  This bill defines "willful" as voluntary 
            and intentional.

          3)Requires employers to provide to independent contractors a 
            form developed by the Employment Development Department (EDD) 
            regarding their status as an independent contractor, with 
            specified content.

          4)Authorizes EDD to process a request for advice by an 
            individual as to whether that individual is an independent 
            contractor or employee.

          5)Requires employers to maintain for at least two years the 
            records of all independent contractors hired by the employer, 
            as specified.

          6)Provides that a person who knowingly advises another person 
            for money or other valuable consideration to treat a worker as 
            an independent contractor to avoid employee status for the 
            worker shall be jointly and severally liable with the employer 








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            if the worker is not found to be an independent contractor.  
            Under this bill, a person who provides advice to his or her 
            employer and attorneys authorized to practice law in 
            California or another United States jurisdiction that provides 
            legal advice in the course of the practice of law would be 
            exempt from this provision.

           EXISTING LAW  : 

          1)Provides comprehensive requirements, rights, and remedies 
            relating to the employer-employee relationship, including, but 
            not limited to, wages and other compensation, working hours, 
            workers' compensation, labor code violation actions, 
            employment contracts, and working conditions standards.  (Lab. 
            Code Secs. 200 et seq., 500 et seq., 2698-2699.5, 2700 et 
            seq., and 3200 et seq.)

          2)Defines a contract of employment as a contract by which one, 
            the employer, engages another, the employee, to do something 
            for the benefit of the employer or a third person.  (Lab. Code 
            Sec. 2750.)

          3)Provides a rebuttable presumption affecting the burden of 
            proof that a worker performing services for which a license is 
            required, as specified, or who is performing such services for 
            a person who is required to obtain such a license is an 
            employee rather than an independent contractor.  Proof of 
            independent contractor status includes satisfactory proof of 
            the following factors: the individual has the right to control 
            and discretion as to the manner of performance of the contract 
            for services; the individual is customarily engaged in an 
            independently established business; and the individual's 
            independent contractor status is bona fide and not a 
            subterfuge to avoid employee status.  A bona fide independent 
            contractor status is further evidenced by the presence of 
            cumulative factors such as control over the time and place the 
            work is performed, supplying the tools or instrumentalities 
            used in the work other than tools and instrumentalities 
            normally and customarily provided by employees, hiring 
            employees, performing work that is not ordinarily in the 
            course of the principal's work, performing work that requires 
            a particular skill, holding a license pursuant to the Business 
            and Professions Code, the intent by the parties that the work 
            relationship is of an independent contractor status, or that 
            the relationship is not severable or terminable at will by the 








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            principal but gives rise to an action for breach of contract.  
            (Lab. Code Sec. 2750.5)

          4)With respect to lawful obligations of the employer such as 
            worker's compensation coverage, defines "employee" to mean 
            every person in the service of an employer under any 
            appointment or contract of hire or apprenticeship, express or 
            implied, oral or written, whether lawfully or unlawfully 
            employed, as specified.  (Lab. Code Sec. 3350.)

          5)With respect to lawful obligations of the employer such as 
            worker's compensation coverage, defines "independent 
            contractor" to mean any person who renders service for a 
            specified recompense for a specified result, under the control 
            of his principal as to the result of his work only and not as 
            to the means by which such result is accomplished.  (Lab. Code 
            Sec. 3353.)

          6)Provides that any person who holds a valid state contractor's 
            license and who willingly and knowingly enters into a contract 
            with any person who does not meet the burden of proof of 
            independent contractor status, as specified, shall be subject 
            to a civil penalty of $200 per person so contracted with for 
            each day of the contract.  The civil penalties provided for by 
            this section are in addition to any other penalty provided by 
            law.  (Lab. Code Sec. 1021.5.)

          7)Provides that employers must provide reports, as requested, to 
            the commission; allow inspection of employment records by the 
            commission or Division of Labor Standards Enforcement; and 
            keep records of employee information, as specified.  (Lab. 
            Code Sec. 1174.)  Employers failing to do so are subject to 
            civil penalties of $500 and may be found guilty of a 
            misdemeanor.  (Lab. Code Secs. 1174.5 and 1175.)

           COMMENTS  :  In support of the bill, the author states:

               When a worker is misclassified as an independent 
               contractor, he or she is not subject to California minimum 
               wage and overtime protection laws.  Additionally, the 
               worker has no workers' compensation coverage if injured on 
               the job, no right to family leave, no unemployment 
               insurance, no legal right to organize or join a union, and 
               no protection against employer retaliation.









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               The misclassification of workers as independent contractors 
               creates an unfair playing field for responsible employers 
               who honor their lawful obligations to their employees.

               The misclassification of workers results in a loss of 
               payroll tax revenue to the State and increased reliance on 
               the public safety net by workers who are denied access to 
               work-based protections.

               SB 459 helps remedy this in the following ways:

                        Prohibits the willful misclassification of an 
               employee as an independent contractor.

                        Provides that a consultant who knowingly advises 
               an employer to treat an individual as an independent 
               contractor to avoid employee status for the worker shall be 
               jointly liable with the employer if the worker is not found 
               to be an independent contractor. 

                        Requires employers to provide to an independent 
               contractor with information about their classification, 
               their tax obligations and eligibility for labor and 
               employment protections, and how to request a determination 
               from the State Employment Development Department a  
               determination as to whether they should be classified as an 
               employee or independent contractor.

          The co-sponsor, California Labor Federation, adds:

               The latest census data shows the greatest gap between the 
               rich and poor that has ever
               existed. Fundamental economic changes have shrunk the 
               middle class by replacing good
               jobs with low-wage work. But low wages are only the 
               beginning.

               Over the past few decades, the nature of work has changed 
               dramatically. Industry by
               industry, the traditional employer-employee relationship 
               has eroded. Whether hiring
               temporary workers, using labor contractors, or 
               misclassifying workers as "independent
               contractors," all forms of contingent work arrangements are 
               on the rise. In this new model, workers have no guaranteed 








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               hours or shifts, no job security, no traditional employee 
               benefits, and no long-term economic stability.

               The growth in contingent work has only exacerbated the 
               abuse of workers in California's underground economy. The 
               underground economy, in which employers use cash pay to 
               void paying taxes, following regulations, and complying 
               with labor law, has thrived due to decades of inadequate 
               enforcement. Since 1980, the state population has grown 62 
               percent, while the number of wage and hour inspectors rose 
               just 7%. Budget cuts and furloughs have made already feeble 
               enforcement efforts even less effective.
               Employers have also become more sophisticated at evading 
               justice. Those who abuse workers' rights have learned how 
               to use labor contractors and temporary agencies as 
               smokescreens to hide who is really in charge. But perhaps 
               the most effective way to get off the hook for worker wage 
               and hour violations is by misclassifying the worker as an 
               independent contractor.

           The Problem of Employee Misclassification.   Employee 
          misclassification is believed to be a serious problem in the 
          United States.  When companies classify workers as independent 
          contractors instead of as employees, these workers do not 
          receive worker protections, including minimum wages, overtime 
          pay, and health and vacation benefits, to which they would 
          otherwise be entitled.  Standard employee protections such as 
          anti-discrimination laws and safety regulations also do not 
          apply to independent contractors.  Additionally, businesses do 
          not deduct taxes, 401(k), Social Security, or Medicare payments 
          from the paychecks of independent contractors, which results in 
          a loss of state tax income from the businesses as well as a 
          potential loss of income from the individual worker who may not 
          properly report income.  Because employers do not pay 
          unemployment taxes for independent contractors, workers who are 
          misclassified cannot obtain unemployment benefits if they lose 
          their jobs.

          A number of reports in the last several years have chronicled 
          the societal consequences of and impacts upon American workers 
          of misclassification of workers as independent contractors 
          versus employees.  The United States Government Accountability 
          Office conducted a study of misclassification of workers as 
          independent contractors and found that employee 
          misclassification cost the United States government $2.72 








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          billion in revenue from Social Security, unemployment and income 
          taxes in 2006 alone.  (GAO, Employee Misclassifications:  
          Improved Outreach Could Help Ensure Proper Worker 
          Classification, GAO-07-859T (Washington, D.C.: May 8, 2007) 
          www.gao.gov/cgi-bin/getrpt?GAO-07-859T as of Apr. 15, 2011, pg. 
          1.)

          Similarly, the California Employment Development Department 
          (EDD) reported that the number of misclassified employees 
          increased 54 percent from 2005 to 2007, reaching 15,751 workers 
          in 2007. During this 3-year period, the EDD recovered a total of 
          $111,956,556 in payroll tax assessments, $18,537,894 in labor 
          code citations, and $40,348,667 in assessments on employment tax 
          fraud cases. 

           New Penalty For Willful Misclassification and For Imposing Fees 
          or Deductions on Employees Who Have Been Willfully 
          Misclassified.   The bill proposes a new Labor Code section 
          establishing that it is unlawful for any person or employer to 
          engage in the following activities:

            (1) Willful misclassification of an individual as an 
            independent contractor.

            (2) Charging an individual who has been willfully 
            misclassified as an independent contractor a fee, or making 
            any deductions from compensation for any purpose.

          A violation of these provisions would be subject to a civil 
          penalty by the Labor and Workforce Development Agency, or any of 
          its departments, divisions, commissions, boards, or agencies, or 
          a court in an amount between $5,000 and 15,000.  If the Labor 
          and Workforce Development Agency, or any of its departments, 
          divisions, commissions, boards, or agencies, or a court finds 
          that person has engaged in or is engaging in a pattern or 
          practice of these acts, the civil penalty would increase to 
          between $10,000 and $25,000.

          The bill defines "willful" as "voluntary and intentional."

           New Form to Provide Information To Persons Classified As 
          Independent Contractors.   A second provision of the bill 
          requires a person employing labor to provide independent 
          contractors with a form to be developed by the Employment 
          Development Department that includes all of the following:








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            (1) A notice that the individual has been retained as an 
            independent contractor.

            (2) The factors the Employment Development Department uses to 
            determine whether an individual is an employee or an 
            independent contractor.

            (3) A statement explaining the impact that the individual's 
            status as an independent contractor has on his or her tax 
            obligations and his or her eligibility for labor and 
            employment protections.

            (4) A notice of the individual's ability to seek advice from 
            the Employment Development Department or the Labor 
            Commissioner as to whether that individual is properly 
            classified as an independent contractor. The notice shall 
            provide the telephone number for both the Employment 
            Development Department and the Labor Commissioner.

          The bill specifies that records of all independent contractors 
          are to be retained for at least two years, stating the name, 
          address, social security number, and, if applicable, federal tax 
          identification number of each independent contractor.  These 
          records are to be made available upon request of specified 
          investigators.  Willful failure to maintain these records in an 
          accurate and complete fashion or to allow inspection of these 
          records would be subject to a civil penalty of $500.  In 
          addition, it would be a misdemeanor to neglect or refuse to 
          furnish information requested, to refuse access to the person's 
          place of business or employment to specified investigators or to 
          hinder them from securing information.  Likewise it would be a 
          violation to fail to keep the specified records.

           Liability Of Employment Consultants For Knowingly Advising 
          Employer To Misclassify Employee.   This bill would provide for 
          the joint and several liability of a consultant and employer if 
          an individual has been adjudged by an administrative, court, or 
          other legal proceeding to be an employee and not an independent 
          contractor.  Existing law does not currently hold liable 
          consultants advising employers to wrongfully misclassify 
          workers.  

          Employment consulting firms assist employers in analyzing their 
          administration of employment-related activities.  Employers seek 








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          consulting advice typically to find ways to streamline the 
          business and cut costs.  Due to the recent economic downturn, 
          companies have been reducing costs of administration of 
          employment-related activities by misclassifying employees as 
          independent contractors.  Through misclassification, employers 
          avoid paying Social Security, Medicare, and unemployment 
          insurance taxes for those workers.  In the event the consultant 
          knowingly advises the employer to wrongfully misclassify 
          workers, this bill would provide that the consultant would be 
          jointly and severally liable with the employer.

          This bill would exempt licensed attorneys from joint and several 
          liability for knowingly advising an employer to misclassify 
          employees.  SB 1583 (Corbett, 2008) contained similar provisions 
          at the request of the State Bar, which noted that Rules of 
          Professional Conduct regulate attorney conduct and subjects 
          attorneys to an array of sanctions for violation, including 
          disbarment.

           ARGUMENTS IN OPPOSITION  :  A coalition of business interests lead 
          by the Chamber of Commerce argues against the bill as follows:

               SB 459 ? seeks to hold employers responsible for "willful 
               misclassification" of an employee as an independent 
               contractor, without also clarifying or outlining a clear 
               and objective test that employers may utilize to determine 
               if an individual is an employee or independent contractor.

               As stated by the California Department of Industrial 
               Relations on their website regarding the determination of 
               independent contractor status:

               "There is no set definition of the term "independent 
               contractor" for all purposes, and the issue of whether a 
               worker is an employee or independent contractor depends 
               upon the particular area of law to be applied. For example, 
               in a wage claim where employment status is an issue, DLSE 
               will often use the five-prong economic realities test to 
               decide the issue. However, in a separate matter before a 
               different state agency with the same parties and same 
               facts, and employment status again being an issue, that 
               agency may be required to use a different test, for 
               example, the "control test," which may result in a 
               different determination. Thus, it is possible that the same 
               individual will be considered an employee for purposes of 








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               one law' and an independent contractor under another." 
               (emphasis added).

               Given the lack of a uniform, definitive test issued by all 
               state agencies for employers to utilize in order to 
               determine whether an individual is an independent 
               contractor, we believe it is completely unfair to subject 
               employers to statutory penalties, up to $25,000 per 
               violation, for the "willful misclassification" of an 
               individual as an independent contractor, which S8 459 seeks 
               to do. Noticeably, SB 459 requires an employer at the time 
               of hire to issue a notice prepared by the Employment 
               Development Department ("EDD") regarding the factors the 
               EDD uses to determine whether a person is an employee or 
               independent contractor, yet allows any agency, board, or 
               commission within the Labor and Workforce Development 
               Agency to determine if there has been a "willful 
               misclassification" of an employee for purposes of imposing 
               a statutory penalty. As the Department of Industrial 
               Relations admits, the tests utilized to determine 
               independent contractor status differs amongst state 
                                                                                          agencies. Accordingly, the factors the EDD utilizes and 
               discloses in the notice may not be the same as the factors 
               the Labor and Workforce Development Agency utilizes when 
               issuing a statutory penalty. This lack of consistency 
               creates a potentially impossible standard of compliance for 
               employers. 

               As being proposed as a new section in the Labor Code, SB 
               459 also subjects employers to additional litigation under 
               the Private Attorney General's Act. This will add another 
               layer of costs onto businesses due to the litigation fees 
               and expenses they will be forced to incur in defending such 
               actions. Moreover, S8 459 also burdens "any person or 
               employer" with the requirement to maintain records for two 
               years of all independent contractors that have been hired 
               by that person or employer, and imposes a penalty if the 
               person or employer fails to maintain the documentation. 

               Determining the status of a person as an independent 
               contractor versus an employee is daunting for many 
               businesses because the process is so ambiguous and complex 
               and provides no certainty for decision-making. Instead of 
               imposing new requirements and liabilities regarding 
               independent contractors, the process should look to ways in 








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               which to improve the ability of business to make accurate 
               and sound business decisions regarding the classifications 
               of their employees. 

          By contrast, another opponent of the bill, California Dump Truck 
          Owners Association (CDTOA), suggests that existing law regarding 
          employee misclassification is sufficient.  CDTOA argues that "a 
          statutory presumption exists that a worker is an employee rather 
          than an independent contractor should an employment status 
          dispute arise (Labor Code ÝSections] 2750.5, 3357).  Our State 
          agencies already vigorously enforce California's 
          misclassification laws and regulations. . . . Furthermore, the 
          federal government and our civil court system currently provide 
          additional protection against such misclassification 
          improprieties."

          The Personal Insurance Federation of California is opposed 
          unless amended to create an exemption for that industry.  PIFC 
          argues, 

               Insurance agents and brokers have long been classified as 
               independent contractors, with an extensive history of 
               federal court cases and Internal Revenue Service (IRS) 
               determinations that establish that this classification is 
               proper. Agents and brokers are individuals that own, 
               operate and manage their own businesses, receive 1099 forms 
               from their contracted insurers, and are individually 
               licensed by the California Department of Insurance. They 
               each operate in conjunction with insurance companies with 
               that relationship clearly outlined in agency contracts.  
               This bill would subject insurance companies and 
               agents/brokers to new burdens and requirements that are 
               unnecessary given the settled nature of independent 
               contractors in the insurance industry.  In addition to the 
               costs associated with providing a form to each agent and 
               broker, and maintaining specific records for two years, 
               insurers are subject to criminal misdemeanor penalties in 
               the event that a record is misplaced or if it cannot be 
               proven that the form was provided.

          Similarly, the Direct Sellers Association states, "While we 
          appreciate the assurances that this bill is not targeted at 
          direct salespeople, as the bill is currently written, they will 
          be subjected to the legislation's burdensome paperwork 
          requirements and prosecuted for a misdemeanor for inadvertently 








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          failing to comply with these requirements.  Most importantly, 
          direct selling companies already provide their distributors with 
          notice of their independent contractor status in their 
          contracts.  To require another and separate notification form 
          would not only be redundant and unnecessary, but would also 
          cause confusion for Californians pursuing direct selling as an 
          income opportunity.  Additionally, for those salespeople trying 
          to expand their sales teams, this duplicative form will not only 
          be another piece of expensive red tape (up to $2 million 
          annually in enforcement costs) for the State of California, but 
          could dissuade potential distributors from joining.  Most 
          troubling, as noted above, under the bill's notice requirements 
          (which will generate millions of pieces of additional paper), 
          distributors could be prosecuted for a misdemeanor if they 
          forget to provide individuals the additional form when they 
          recruit."
           
          Governor Schwarzenegger's Vetoes of Prior Related Legislation.   
          This bill is similar to the enrolled versions of SB 622 (2007) 
          and SB 1583 (2008), both of which were vetoed by Governor 
          Schwarzenegger.

           Author's Technical Amendments.   To clarify the bill, the author 
          proposes the following helpful amendments:

          226.8. (a) It is unlawful for any person or employer to engage 
          in any of the following activities:
           
          (1) Willful misclassification of an individual as an independent 
          contractor.
           
          (2) Charging an individual who has been willfully misclassified 
          as an independent contractor a fee, or making any deductions 
          from compensation, for any purpose, including for goods, 
          materials, space rental, services, government licenses, repairs, 
          equipment maintenance, or fines arising from the individual's 
          employment where the employer would have been in violation of 
          the law if the individual had not been misclassified.
           
          (b) If the Labor and Workforce Development Agency, or any of its 
          departments, divisions, commissions, boards, or agencies, or a 
          court finds that person has engaged in any of the enumerated 
          violations of subdivision (a), a civil penalty of not less than 
          five thousand dollars ($5,000) and not more than fifteen 
          thousand dollars ($15,000) shall be assessed against the person 








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          for each violation, in addition to any other penalties or fines 
          permitted by law.
           
          (c) If the Labor and Workforce Development Agency, or any of its 
          departments, divisions, commissions, boards, or agencies, or a 
          court finds that person has engaged in any of the enumerated 
          violations  of subdivision (a  )  this section  and  there is evidence 
          that  the person has engaged in or is engaging in a pattern or 
          practice of these behaviors, a civil penalty of not less than 
          ten thousand dollars ($10,000) and not more than twenty-five 
          thousand dollars ($25,000) shall be assessed against the person 
          for each violation, in addition to any other penalties or fines 
          permitted by law.
           
          (d) For purposes of this section, "willful" means voluntary and 
          intentional.
           
          (e) Nothing in this section is intended to limit any rights or 
          remedies otherwise available at law.
           

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          California Labor Federation (co-sponsor)
          California Teamsters Public Affairs Council (co-sponsor)
          American Federation of State, County and Municipal Employees
          California Conference Board of the Amalgamated Transit Union
          California Conference of Machinists
          California Employment Lawyers Association
          California Nurses Association
          Consumer Attorneys of California
          Engineers and Scientists of California
          Greater California Livery Association
          International Longshore & Warehouse Union
          Professional & Technical Engineers, Local 21
          State Building and Construction Trades Council of California
          United Food and Commercial Workers Union, Western States Council
          UNITE HERE!

          Opposition 
           
          California Amway Distributors
          California Chamber of Commerce








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          California Delivery Association
          California Dump Truck Owners Association
          California Farm Bureau Federation
          California Grocers Association
          California Manufacturers & Technology Association
          California Newspaper Publishers Association
          California Retailers Association
          California Trucking Association
          CalSmallBiz
          Direct Selling Association
          Financial Services Institute
          Messenger Courier Association of the Americas
          Personal Insurance Federation of California
          Securities Industry and Financial Markets Association
          Western Electrical Contractors Association
          Western Growers Association
          Many private businesses


           Analysis Prepared by  :    Kevin G. Baker / JUD. / (916) 319-2334