BILL ANALYSIS Ó SENATE COMMITTEE ON BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT Senator Jerry Hill, Chair 2015 - 2016 Regular Bill No: SB 1228 Hearing Date: April 11, 2016 ----------------------------------------------------------------- |Author: |Runner | |----------+------------------------------------------------------| |Version: |February 18, 2016 | ----------------------------------------------------------------- ---------------------------------------------------------------- |Urgency: |No |Fiscal: |Yes | ---------------------------------------------------------------- ----------------------------------------------------------------- |Consultant|Nicole Billington | |: | | ----------------------------------------------------------------- Subject: Small business: California Small Business Regulatory Fairness Act SUMMARY: Authorizes a court to grant a small business relief from a final order of a state agency based on mitigating factors. Requires state agencies to provide 30 days notice and an opportunity to comply with the law before imposing a civil penalty or administrative fine on a small business. Requires state agencies to assist small businesses in achieving compliance with regulations and establish a policy to guide the reduction of penalties for small businesses. Existing law: 1)Requires, by the Administrative Procedure Act, that a state agency make available to the public facts, evidence, documents, testimony, or other evidence on which the state agency relied to support the agency's determination that the proposed action will not have a significant adverse impact on business. (Government Code (GC) §§ 11346-11348) 2)Establishes the Office of Small Business Advocate within the Governor's Office of Business and Economic Development (GO-Biz) and establishes the duties and functions of the Director of the Office of Small Business Advocate including representing the views and interests of small businesses before other state agencies whose policies and activities may affect small businesses. (GC §§ 12098-12098.9) SB 1228 (Runner) Page 2 of ? 3)Requires each state agency that significantly regulates or impacts small business to designate at least one person who is required to serve as a small business liaison. (GC § 11148.5) 4)Requires, under the federal Small Business Regulatory Enforcement Fairness Act, that federal agencies must have a penalty reduction policy for small businesses, involve small businesses in the development of some proposed rules through Small Business Advocacy Review Panels, produce Small Entity Compliance Guides for some rules, and be responsive to small business inquiries about compliance with the agency's regulations. (Title 5 U.S.C. Ch. 6 §§ 601-612) This bill: 1)For purposes of the relief and notice provided to small businesses, defines "small business" as having the same meaning as set forth in Government Code § 14837. 2)Excludes the Franchise Tax Board and the State Board of Equalization from consideration as a "state agency" for the purposes of the small business relief outlined in the bill. 3)Requires a state agency to assist a small business: a) In achieving compliance with statutes and regulations administered by the state agency. b) During an enforcement action by the state agency. c) With participating in the rulemaking process required by the Administrative Procedure Act (commencing with GC § 11340), which must include providing a small business with information on how to participate in the rulemaking process and the contact information of any ombudsman or small business liaison that can assist the small business, including, but not limited to, the Office of Small Business Advocate. 4)Requires a state agency to include all of the following information on any notice of regulatory violation, penalty assessment, or other punitive action sent to a small business: SB 1228 (Runner) Page 3 of ? a) How the small business can comply with the law or remedy the violation, pursuant to proposed GC § 11367.2. b) All administrative and judicial remedies available to the small business. c) The Internet Web site, if available, and contact information for all of the following: i) The Office of Small Business Advocate. ii) Any applicable ombudsman that may assist the small business. iii) The small business liaison for the state agency. 5)Requires a state agency, before imposing any civil penalties or administrative fines on a small business, to provide no less than 30 days actual notice to the small business and provide the small business with an opportunity to comply with the law or remedy the violation of the law if ignorance of the violation is reasonable under the circumstances and the violation does not constitute a crime or a basis for strict liability before, notwithstanding any other law. 6)Requires all other notices of regulatory violation, which result in penalty assessment or other punitive action, sent to a small business to be delivered as expeditiously as possible to allow the small business to comply with the law and mitigate any losses. 7)Requires notices mandated under this proposed section (GC § 11367.2) to be delivered to the small business in person by an authorized agent of the state agency or by certified mail. 8)Requires a state agency to establish a policy to provide for reduction, and under certain circumstances waiver, of civil penalties for a small business based upon principles of equity and fairness no later than December 31, 2017. 9)Requires a state agency to consider factors when adopting the policy including, but not limited to: a) The small business has not been subject to previous SB 1228 (Runner) Page 4 of ? enforcement actions by the agency. b) The violation by the small business did not involve willful or criminal conduct. c) The violation by the small business did not pose an imminent health, safety, or environmental threat. d) The violation by the small business was committed inadvertently or without knowledge of the requirements for compliance with the law. e) The small business is unable to pay the penalty or the penalty would impair the ability of the small business to conduct business or compete effectively. f) The small business has a low degree of culpability when its conduct is judged in light of its size, length of operation, and the sophistication of its owners or managers. g) The small business cooperated during any investigation by the state agency. h) The small business engaged in subsequent action to correct the violation. 10)Establishes that a small business shall not be required to meet all of the mitigating factors adopted by a state agency to receive relief under the policy and a state agency shall not require the mitigating factors to be weighed equally when granting relief to a small business under the policy. 11)Allows a court, after administrative remedies are exhausted, to grant equitable relief to a small business from a final order of a state agency in the interest of justice. 12)Provides mitigating factors for the court to consider when granting equitable relief under this section including, but not limited to: a) The small business has not been subject to previous enforcement actions by the state agency. SB 1228 (Runner) Page 5 of ? b) The violation by the small business did not involve willful or criminal conduct. c) The violation by the small business did not pose an imminent health, safety, or environmental threat. d) The violation by the small business was committed inadvertently or without knowledge of the requirements for compliance with the law. e) The small business is unable to pay the penalty or the penalty would impair the ability of the small business to conduct business or compete effectively. f) The small business has a low degree of culpability when its conduct is judged in light of its size, length of operation, and the sophistication of its owners or managers. g) The small business cooperated during any investigation by the state agency. h) The small business engaged in subsequent action to correct the violation. 13)Does not require the courts to weigh the mitigating factors equally. 14)Requires the court to review all evidence and facts de novo and make its own independent decision when granting relief under this section. 15)Allows a small business to seek judicial review and a stay of an order of a state agency without exhausting administrative remedies, notwithstanding any other law, if either of the following apply: a) The small business would suffer irreparable harm in the absence of the court granting a stay on the order of the state agency. b) The state agency issuing the order that is before the court has not established the policy required by Section 11367.4 of the Government Code. SB 1228 (Runner) Page 6 of ? 16)Deems a small business to have exhausted all administrative remedies and requires the case to be heard by the court sitting without a jury, if a court grants relief to a small business under this section. 17)Specifies that the decision of the court to decline review or deny relief under this section is not appealable. FISCAL EFFECT: Unknown. This bill is keyed "fiscal" by Legislative Counsel. COMMENTS: 1.Purpose. The Author is the Sponsor of this bill. According to the Author, California has routinely ranked as last among the states in providing a business friendly environment. Exasperated small business owners are stymied by delays and expenses incurred in trying to comply with a vast array of state and local regulations. Neither state regulatory agencies nor California courts have statutory discretion to waive or lower regulatory penalties based upon mitigating factors or in the interest of justice. While punitive action should be leveled at those who engage in egregious conduct, regulatory agencies often cast a wide net. When a state agency is called upon to enforce a law or regulate an industry, it often relies upon a statutory formula which provides no discretion in the imposition of penalties. Once put into motion a state regulatory agency is not subject to legislative oversight and cannot be restrained by the courts until administrative appeals are exhausted. For some small businesses, fragile by nature, this is too late. SB 1228 would require California state agencies to assist small business in crafting and complying with state regulations. The bill would require each state agency to adopt rules to permit reductions or waivers of small business penalties based upon a variety of mitigating factors. Additionally, SB 1228 would give California courts broader jurisdiction to reduce regulatory penalties based upon principles of equity and in the interest of justice to intervene when disputed regulatory action would do SB 1228 (Runner) Page 7 of ? inappropriate or irreparable harm to a small business. 2.Role of Small Business within the California Economy. California's dominance in many economic areas is based, in part, on the significant role small businesses play in the state's $2.2 trillion economy. Among other advantages, small businesses are crucial to the state's international competitiveness and are an important means for dispersing the positive economic impacts of trade within the California economy. According to a 2015 U.S. Small Business Administration report, California has more than 3.6 million small businesses, over 1.2 million more than any other state. The report also noted that California's small businesses employed half of the state's private workforce in 2012 (6.5 million employees). According to the U.S. Census Bureau, small businesses made up 99.2 percent of all employers in the state for the same year. In difficult economic times, smaller size businesses often function as economic engines. The trend continued in the recession with the number of non-employer firms increasing from 2.6 million firms ($137 billion in revenues) for 2008 to 2.8 million firms ($138 billion in revenues) for 2010. In the post-recession economy, small businesses are expected to become increasingly important due to their ability to be more flexible and better suited to meet niche market needs. Their small size, however, results in certain challenges in meeting regulatory requirements, accessing capital, and marketing their goods and services. California's network of technical assistance providers assist businesses with a range of services, including access to quality training, one-on-one counseling, mentoring, marketing data, and other business development resources. 3.Governor's Office of Business and Economic Development (GO-Biz) Small Business Assistance. Since its inception, GO-Biz has served thousands of businesses, 95 percent of which are small. The most frequent types of assistance include help with permit streamlining, starting a business, relocation and expansion of businesses, and regulatory challenges. In addition to economic development programs, GO-Biz is responsible for specialized assistance to small businesses through the Office of Small Business Advocate (OSBA). OSBA has four primary focus areas: Advocacy, Information SB 1228 (Runner) Page 8 of ? Gathering/Dissemination, Agency Coordination, and Business Assistance. OSBA directly engages with the small business community through email communication, the GO-Biz website, social media, live events, webinars, radio shows, and teleconferences, among other methods. OSBA also manages an Interagency Working Group, in partnership with the Permit Assistance Unit at GO-Biz, which convenes small business officers and advocates from various state agencies to discuss new or changed regulations or to discuss small business programmatic concerns. OSBA oversees the Capital Infusion Program, which enables the California Small Business Development Center (SBDC) Networks to expand their one-to-one, no-cost, confidential consulting to small business owners. In its first year, the Capital Infusion Program resulted in roughly $202.6 million in documented capital infusion and served just over 9,700 small business owners across the state. In 2015, GO-Biz launched a new California Business Portal; the site includes a Business Navigator feature, which provides custom information regarding permits, licenses, and incentives that relate specifically to the user's business. 4.Current Administrative Penalty Appeal Process. Generally, before a court is authorized to inquire into the validity of any final administrative order or decision, a business must first exhaust the entire appeal process at the agency that took the original action. Only after that can a court issue a stay of an order of a state agency. The petitioner, in this case a business, bears the cost of preparing the court records and filing a petition. Currently, a court's inquiry in these cases extends only to the questions of whether the agency proceeded without or in excess of its jurisdiction, whether the agency appeal process was executed correctly, and whether there was any prejudicial abuse of discretion. Neither state regulatory agencies nor California courts have statutory discretion to waive or lower regulatory penalties based upon mitigating factors or in the interest of justice. 5.Prior Related Legislation. SB 606 (Nielsen) of 2015 would have established the Small Business Appeals Board and authorized the board to grant a hearing and review the order, ruling, action, or failure to act of any state agency upon petition of any small business affected and to grant any remedy or impose any penalty authorized under existing law governing administrative procedures. ( Status: This bill died in the SB 1228 (Runner) Page 9 of ? Senate Committee on Governmental Organization.) AB 19 (Chang) of 2015 would have required GO-Biz to review regulations affecting small businesses to determine whether the regulations need to be amended in order to become more effective, less burdensome, or to decrease the cost impact to affected sectors. ( Status: This bill died in Assembly Appropriations.) AB 1711 (Cooley, Chapter 779, Statutes of 2014) required an economic impact assessment to be included in the Initial Statement of Reasons that a state agency submits to the Office of Administrative Law when adopting, amending, or repealing a non-major regulation. AB 2723 (Medina) of 2014 would have added statutory protections to ensure that the costs of major regulations on the state's smallest size businesses are considered when state agencies undertake their economic impact assessment for major regulations. ( Status: This bill was vetoed by the Governor.) SB 1099 (Wright, Chapter 295, Statutes of 2012) revised the dates in which a regulation or order of appeal becomes effective and requires the Office of Administrative Law (OAL) to post certain information in its website for at least six months. AB 1409 (Pérez) of 2012 would have clarified the nature of the reasonable alternatives to be considered by an agency when they are preparing their Initial Statement of Reasons a regulatory change and would have required the Initial Statement of Reasons to also include any reasonable alternative submitted by the public of the Office of the Small Business Advocate. ( Status: This bill died in the Senate Rules Committee.) SB 828 (Runner) of 2011 was nearly identical to SB 606 (Nielsen) of 2015 above. ( Status: This bill died in the Senate Committee on Business, Professions and Economic Development.) AB 29 (Pérez, Chapter 475, Statutes of 2011) established GO-Biz within the Governor's Office for the purpose of serving as the lead entity for economic strategy and marketing of California on issues relating to business development, private SB 1228 (Runner) Page 10 of ? sector investment, and economic growth. SB 560 (Wright) of 2011 would have required an agency, if it does not or is unable to consult with impacted businesses during the process of considering a regulatory change, to inform the Office of Small Business Advocate and the Department of Finance in writing of the reasons for not consulting the impacted businesses. ( Status: This bill died in the Senate Committee on Environmental Quality.) SB 688 (Wright) of 2011 would have required an economic impact statement for a proposed regulation to include a detailed estimate of the total actual costs of compliance for affected businesses and individuals and would have required the adopting agency to postpone the effective date and notify specified committees of the Legislature if the estimated total costs of compliance exceed $10 million. ( Status: This bill died in the Senate Committee on Environmental Quality.) SB 356 (Wright) of 2009 would have required state agencies subject to the APA to make additional findings and determinations regarding the impact their regulations may have on small businesses, to consult with small businesses during the regulatory process and provide additional information, statements and justification for the adoption, amendment or repeal of regulations which may have an impact on small businesses. ( Status: This bill died in the Assembly Committee on Rules.) SB 1505 (McClintock) of 2004 would have amended the Administrative Procedure Act to require a small business impact statement and written 30 day notice to the California Small Business Advocate before adopting, amending, or repealing regulation. ( Status: This bill failed passage in the Senate Judiciary Committee.) 6.Arguments in Support. Small Business California and other small business advocacy groups support SB 1228, arguing that California law does not allow much discretion to agencies and courts when levying fines against a small business. They believe that imposing penalties on business owners for a minor violation is too harsh a penalty for minor cases where noncompliance was unintended. SB 1228, they state, creates flexibility by allowing courts to reduce penalties and SB 1228 (Runner) Page 11 of ? requiring agencies to adopt rules allowing for penalty reduction based on mitigating factors. SUPPORT AND OPPOSITION: Support: California Association of Health Services at Home California Manufacturers and Technology Association Industrial Environmental Association National Federation of Independent Business Small Business California Opposition: None on file as of April 5, 2016. -- END --