BILL ANALYSIS Ó Senate Committee on Labor and Industrial Relations Ted W. Lieu, Chair Date of Hearing: January 11, 2012 2011-2012 Regular Session Consultant: Gideon L. Baum Fiscal:Yes Urgency: No Bill No: SB 691 Author: Lieu As Introduced/Amended: January 4, 2012 SUBJECT Unemployment insurance: compensation. KEY ISSUE Should the Employment Development Department be permitted to share employment data and information with the Contractors' State License Board for the purposes of aiding any specific workers' compensation fraud investigation? PURPOSE To assist the Contractors' State License Board (CSLB) in preventing workers' compensation fraud. ANALYSIS Existing law establishes a workers' compensation system that provides benefits to an employee who suffers from an injury or illness that arises out of and in the course of employment, irrespective of fault. This system requires all employers to secure payment of benefits by either securing the consent of the Department of Industrial Relations to self-insure or by securing insurance against liability from an insurance company duly authorized by the state. Existing law vests the Employment Development Department (EDD) with the responsibility of ensuring employers remit appropriate Unemployment Insurance (UI) contributions and to collect the employee wage deductions to the Disability Fund. EDD uses these funds to finance the Unemployment Insurance and Disability Insurance (DI) Programs. (Unemployment Insurance Code §§ 301, 976, 984, 1025-1037, 1555-1562, & 3001-3015) Existing law also authorizes EDD to collect personal income taxes required to be withheld by employers. (Unemployment Insurance Code §§ 13000 &13020) Existing law requires that EDD collects appropriate data in order to carry out the responsibilities listed above. This information includes the employer's name and address, the number and contact information of employees employed by an employer, the wages paid to those employees, and any independent contractors that have performed services for an employer. (Unemployment Insurance Code §§ 1085-1093) Existing law requires that, unless specifically provided, the information obtained in the administration of the UI Program and DI program are confidential and must be used for the exclusive use and information of the director of Employment Development Department (EDD) in discharge of his or her duties. Any person violating the confidentiality of this information is guilty of a misdemeanor. (Unemployment Insurance Code §1094) Existing law specifically provides that EDD may share information to the district attorney of any county, the office of the Attorney General, the Department of Industrial Relations, and the Department of Insurance if that information is relevant to any specific workers' compensation fraud investigation. Information cannot be shared if doing so would violate federal law or regulations. (Unemployment Insurance Code §1095(o)) This bill would add the Contractors State License Board (CSLB) to the list of authorized governmental entities that EDD may share information with for the purposes of aiding any specific workers' compensation fraud investigation. COMMENTS Hearing Date: January 11, 2012 SB 691 Consultant: Gideon L. Baum Page 2 Senate Committee on Labor and Industrial Relations 1. Need for this bill? The State of California faces significant challenges from the underground economy, which is defined by the Employment Development Department as individuals and businesses that deal in cash and/or use other schemes to conceal their activities and their true tax liability from government licensing, regulatory, and taxing agencies. In short, it is an entire universe of illegal activities that can include such diverse activities as tax fraud, cigarette smuggling, and failure to provide employees the minimum wage. A 2005 Legislative Analyst's Office study on the underground economy estimated that California loses $6.5 billion in annual income tax revenues. One of the most egregious activities by employers who participate in the underground economy is workers' compensation fraud. This can include failure by the employer to report all of his or her employees to the insurance company when creating a policy, misreporting the type of work done by employees, or even failing to secure any workers' compensation coverage for all employees. In testimony before the Senate Select Committee on Small Business and the Underground Economy in 2011, Professor Frank Neuhauser of UC Berkeley testified that, on average, $15 to $68 billion of annual payroll in California went unreported, or 4-12% of the total payroll in California. These figures did not include wages or employees that were misreported into a lower premium class. Particularly in high risk occupations, this lack of reporting increased workers' compensation premiums by more than 300%, pressuring law-abiding employers to either go underground or go out of business. As the licensee of California's contractors, the Contractors' State License Board (CSLB) has frequent contact with occupations that are on the frontline of the fight against the underground economy. Contractors such as roofers and electricians face some of the highest workers' compensation premiums due to injuries, but also suffer from some of the most significant rate distortion due to misreporting and Hearing Date: January 11, 2012 SB 691 Consultant: Gideon L. Baum Page 3 Senate Committee on Labor and Industrial Relations underreporting. While the CSLB must ensure that licensed contractors appropriately maintain workers' compensation coverage, they do not currently have statutorily guaranteed access to EDD's databases to investigate possible workers' compensation fraud. SB 691 seeks to address this by permitting the Employment Development Department to share employment data and information with the CSLB for the purposes of investigating any specific workers' compensation fraud investigation. 2. Proponent Arguments : The Contractors' State License Board (CSLB), which supports this bill, states that SB 691 will assist their enforcement division by substantially enhancing our lead development capability and effectiveness. Similarly, the author notes that this bill assists the ongoing efforts of the newly-formed Labor Enforcement Task Force by encouraging data sharing and collaboration among governmental entities. 3. Prior Legislation : AB 878 (Berryhill), Chapter 686, Statutes of 2011, requires workers' compensation insurers to notify the Contractors State Licensing Board if a licensee is found to have misled the insurer on his or her workers' compensation coverage. AB 2305 (Knight), Chapter 423, Statutes of 2010, requires roofing contractors to maintain workers' compensation coverage. AB 2433 (Ruskin), Chapter 139, Statutes of 2010, authorizes the Board of Equalization to access EDD data to assist in the administration of tax programs. SUPPORT Contractors' State License Board (CSLB) Hearing Date: January 11, 2012 SB 691 Consultant: Gideon L. Baum Page 4 Senate Committee on Labor and Industrial Relations OPPOSITION None on file. Hearing Date: January 11, 2012 SB 691 Consultant: Gideon L. Baum Page 5 Senate Committee on Labor and Industrial Relations