BILL ANALYSIS
AB 2440
Page 1
Date of Hearing: May 9, 2006
ASSEMBLY COMMITTEE ON JUDICIARY
Dave Jones, Chair
AB 2440 (Klehs) - As Amended: April 17, 2006
SUBJECT : CHILD SUPPORT: THIRD PARTY LIABILITY
KEY ISSUE : IN ORDER TO HELP INCREASE CHILD SUPPORT COLLECTIONS
AND REDUCE THE UNDERGROUND ECONOMY, SHOULD A PERSON WHO
KNOWINGLY HELPS A CHILD SUPPORT OBLIGOR EVADE HIS OR HER CHILD
SUPPORT OBLIGATION BE JOINTLY LIABLE WITH THE OBLIGOR FOR TEN
TIMES THE AMOUNT OF THE ASSISTANCE PROVIDED, UP TO THE AMOUNT OF
THE CHILD SUPPORT DEBT?
SYNOPSIS
This bill seeks to both improve child support collections and
help curtail the underground economy by making any person or
business entity that knowingly assists a child support obligor
evade his or her responsibility jointly and severally liable for
10 times the value of the assistance provided, up to the total
amount of the child support debt. Under the bill, "knowingly
assists" is defined to include: (1) helping to hide or transfer
assets; (2) hiring the child support obligor and failing to
timely report the hire to the California New Hire Directory; or
(3) paying wages to the obligor in cash, via barter or trade or
in any other form not reported to the Employment Development
Department. The author believes this bill is necessary to help
get child support to needy children and help reduce the
underground economy.
The bill sets forth a procedure to join third-party defendants
into an existing child support case and have their liability
decided by the court in an evidentiary hearing. However, it
appears that such defendants would have a right to a jury trial
on the issue of liability. It is therefore recommended that the
family law joinder and hearing procedures in the bill be
eliminated. It is also recommended that the bill be expanded to
include not only employers who fail to report their new hires,
but also those who fail to report, as required, their engagement
of independent contractors.
The bill is supported by the American Federation of State,
County, and Municipal Employees, the National Center for Youth
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Law and the Partnership for Responsibly Parenting who believe it
will be a powerful new tool both to help increase child support
collections and to penalize employers who knowingly participate
in the underground economy. In opposition, the California
Alliance for Families and Children argue that the penalties are
too high and the bill could have unintended consequences. The
Family Law Section of the State Bar opposes the bill, arguing
that it will "inequitably punish inadvertent mistakes, may
discriminate against minority employers and employees, and could
have the unintended result of impeding collection of support."
The California Bankers Association opposes the bill unless it is
amended to remove financial institutions.
SUMMARY : Makes individuals and business entities that
knowingly assist child support obligors evade their child
support debt jointly and severally liable, as specified.
Specifically, this bill :
1)Declares the intent of the Legislature that an estimated $19
billion is owed in unpaid child support and that the failure
to pay support subjects children to poverty.
2)Makes any person or business entity who knowingly assists a
child support obligor escape, evade or avoid paying
court-ordered child support jointly and severally liable for
10 times the value of the assistance provided, up to a maximum
of the entire child support debt. Defines "knowing
assistance" as, among other things:
a) Helping to hide or transfer assets;
b) Hiring the child support obligor and failing to timely
report the new hire to the California New Hire Directory;
or
c) Paying wages to the obligor in cash, via barter or trade
or in any other form not reported to the Employment
Development Department (EDD).
3)Requires that, if there is an existing child support case
against the obligor, the issue of liability under #2, above,
must be heard as part of that child support case. Requires,
upon motion and a sufficient showing that a party may be
liable, that the court join to the action any person who may
be liable under #2, above. Requires that liability be
determined by the court in an evidentiary hearing based on a
preponderance of the evidence.
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EXISTING LAW :
1)Governs the collection of child support. (Family Code Section
4000 et seq . and Family Code Section 17400 et seq .)
2)Requires employers to file with EDD a report, within 20 days
of the hiring, of any new employee hired who works in
California and to whom the employer anticipates paying wages.
Requires each service recipient to file with EDD a report of
any service provider (independent contactor) engaged by the
service recipient within 20 days of either paying them at
least $600 or agreeing to pay them at least $600, whichever
comes first. (Unemployment Insurance Code Sections 1088.5,
1088.8.)
3)Allows EDD to assess a penalty of $24 for each failure to
report a new hire or independent contractor, without good
cause, or $490 if the failure to report is the result of
conspiracy between the employer and employee, or the service
recipient and the service provider. (Unemployment Insurance
Code Sections 1088.5, 1088.8.)
4)Makes fraudulent, under the Uniform Fraudulent Transfer Act, a
transfer by a debtor with intent to hinder, delay or defraud
any creditor of the debtor or without receiving a reasonably
equivalent value in exchange for the transfer. (Civil Code
Section 3439.04.)
5)Makes an employer who willfully fails to withhold child
support pursuant to a valid earnings assignment liable for the
support not withheld and forwarded. (Family Code Section
5241.)
6)Allows a person to be joined in an action (permissive
joinder), whether as plaintiff or defendant, as specified.
Allows a court, when parties have been joined permissively, to
order separate trials or other orders as required by the
interests of justice. Requires a person to be joined in an
action (compulsory joinder) if that person is subject to
service of process, and, in that person's absence, complete
relief or disposition cannot occur. (Code of Civil Procedure
Sections 378-384, 389.)
FISCAL EFFECT : As currently in print, this bill is keyed
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non-fiscal.
COMMENTS : This bill seeks to both improve child support
collections and help curtail the underground economy by making
any person or business entity that knowingly assists a child
support obligor evade his or her responsibility jointly and
severally liable for 10 times the value of the assistance
provided, up to the total amount of the child support debt.
Under the bill, "knowingly assists" is defined to include: (1)
helping to hide or transfer assets; (2) hiring the child support
obligor and failing to timely report the hire to the California
New Hire Directory; or (3) paying wages to the obligor in cash,
via barter or trade or in any other form not reported to the
EDD.
If a party, whether the child support obligee, the obligor or
the local child support agency enforcing the child support
obligation, alleges liability of a third party under this bill
and there is already a child support case, this bill provides
that the liability of the third party can be determined in the
existing family court case. To do so, a party to the existing
action must make a motion to the court, along with a sufficient
showing that the third party may be liable. Upon such a
showing, the court is required to join the party to the action.
When the third party is joined, they become a defendant in the
action. The bill also provides that the matter of liability is
to be determined by the court in an evidentiary hearing based on
a preponderance of the evidence standard. Thus, regardless of
whether there is an existing case or not, under this bill,
liability is determined not by a jury, but by the court in an
evidentiary hearing.
The author believes this bill is necessary to help get child
support to needy children and thus help children avoid poverty.
Additionally, this bill could help reduce the underground
economy:
The underground economy not only is illegal but hurts
California and many Californians in variety of ways;
one such atrocity is evading child support
obligations. According to The National Center for
Policy Analysis, "Economists estimate that as many as
25 million Americans earn a large part of their income
from underground activities". . . . The Employment
Development of California estimates that in California
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the underground economy generates $60 to $140 billion.
In terms of tax revenue this is over $3 billion each
year the State is losing. . . . The underground
economy causes law abiding business to pay higher
taxes and expenses, and puts the employees of
underground employers in danger because their working
conditions may not meet legal standards and they might
not be receiving legally mandated wages and benefits.
Additionally, by not having their earnings reported
parents who owe child support avoid having to pay it,
because it appears to the government they have no
income from which they could pay their child support.
Does a third party have a right to a jury trial on the issue of
liability ? Under the procedure set forth in this bill, the
third party defendant would not have the right to a jury trial,
just an evidentiary hearing before the court. However, the
action proposed by this bill against the third party is not, in
reality, a family court action, but rather more equivalent to a
tort action, with a statutory civil penalty. The California
Constitution provides that "trial by jury is an inviolate right
and shall be secured to all." (Cal. Constitution, Art. I,
Section 16.) The right to a jury trial does not attach to all
actions, but to those actions where, at common law, there was a
right to a jury trial:
Our state Constitution essentially preserves the right
to a jury in those actions in which there was a right
to a jury trial at common law at the time the
Constitution was first adopted. . . . Thus, the scope
of the constitutional right to jury trial depends on
the provisions for jury trial at common law. The
historical analysis of the common law right to jury
often relies on the traditional distinction between
courts at law, in which a jury sat, and courts of
equity, in which there was no jury.
( Crouchman v. Superior Court (1988) 45 Cal.3d 1167, 1175.)
Tort actions, such as actions for fraud and deceit, fraudulent
transfer and tortuous interference with contractual obligations,
are historically legal actions for which the right to a jury
trial attaches. Therefore, it appears that a third-party
defendant brought into a family court action would have the
right to a jury trial on the issue of liability. Since it would
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be impracticable to do this in a family law action, where there
is no right to a jury trial, the action against the third-party
defendant would have to be bifurcated and sent to a general
civil court calendar. This would make the process far more
complex than necessary. Therefore, it is recommended that this
bill be amended to eliminate the joinder and evidentiary hearing
procedures set forth in section 1714.4(b) of the bill .
Should those who hire independent contractors and fail to comply
with the EDD reporting requirements be included under this bill ?
In an effort to help collect child support, most of which is
collected by wage withholding, employers must report all new
employees to the state's New Hire Registry within 20 days of
employment. Similarly, those who engage independent contractors
must report them to the statewide registry within 20 days of
paying them at least $600 or agreeing to pay them at least $600,
whichever comes first. These requirements are designed to
assist with the collection of child support, by allowing local
child support agencies to learn of and collect the income of
support obligors.
As currently drafted, this bill provides that employers who fail
to report their new hires to the California New Employee
Registry as required are determined to have knowingly assisted
their employees, who owe child support, in avoiding their child
support obligations. However, there is no similar provision for
those who fail to report the independent contractors they engage
to EDD. Therefore, in order to further the goals of the bill by
improving the collection of child support and helping avoid the
underground economy, this Committee may wish to discuss with the
author extending the bill to include not only employers who fail
to report their new hires, but also those who fail to report, as
required, their engagement of independent contractors.
Other Technical Amendments : Two other technical amendments will
help clarify the bill:
1. Eliminate "the" on page 2, line 14.
2. Change "party" on page 3, line 6 to "person or business
entity," since that is who may be joined into the action. A
party is already a part of the action.
ARGUMENTS IN SUPPORT : The Partnership for Responsibly Parenting
writes that this bill will give the state's child support
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program "a powerful new tool to help increase the economic well
being of our children . . . ." The bill will make the acts of
family members, employers or others who help shield the assets
and income of child support obligors not only immoral, but also
illegal.
American Federation of State, County, and Municipal Employees
(AFSCME), AFL-CIO, also writing in support, is particularly
concerned that when parents are paid under the table by their
employers to avoid their child support obligations, they not
only deprive their children of support, but they deprive the
government of billions of dollars in lost tax revenue. This
bill penalizes employers for knowingly assisting parents in
avoiding their child support obligations and should help deter
"the practice of paying workers 'under the table.'"
The National Center for Youth Law notes that most child support
enforcement tools focus on the legitimate economy and therefore
have little effect on child support obligors employed in the
underground economy: "AB 2440 will establish a significant new
tool for reaching earnings generated in the underground economy
by penalizing those who actually make the underground economy
work: employers and business who fail to report income. . . .
This penalty should serve to deter assisting another to avoid a
child support debt. That will mean more child support
collections going to children who depend upon those
collections."
ARGUMENTS IN OPPOSITION : The California Alliance for Families
and Children state in opposition: "We believe the penalties in
this bill could have the unintended consequence of making
businesses hesitant to even hire obligors who have child support
orders. Making them liable for the entire obligation due or
even a large fiscal penalty is overkill to say the least?"
The Family Law Section of the State Bar (Flexcom) opposes the
bill, arguing that it would "inequitably punish inadvertent
mistakes, may discriminate against minority employers and
employees, and could have the unintended result of impeding
collection of support." First, Flexcom believes that the bill
seeks to punish not just knowingly actions, but also unknowing,
inadvertent errors, by making an employer liable for ten times
the value of assistance provided simply if they fail to file a
new hire form or pay an employee under the table. The employer
may do this inadvertently, or, at the very least, with no
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intention of helping their employees avoid paying child support,
but could still be liable for ten times the assistance provided.
Flexcom is also concerned about making a business entity liable
for the acts of its employees, if done without the employer's
knowledge. It is important to keep in mind, however, that
employers are often liable for the acts of their employees
through the doctrine of respondeat superior. Under that
doctrine, an innocent employer may be liable for the torts of
the employee, committed while acting within the scope of
employment, even if the employee acts in excess of authority or
contrary to instructions. The California Supreme Court has
explained the rational behind the doctrine of respondeat
superior:
Although earlier authorities sought to justify the
respondeat superior doctrine on such theories as
"control" by the master of the servant, the master's
"privilege" in being permitted to employ another, the
third party's innocence in comparison to the master's
selection of the servant, or the master's "deep
pocket" to pay for the loss, "the modern justification
for vicarious liability is a rule of policy, a
deliberate allocation of a risk. The losses caused by
the torts of employees, which as a practical matter
are sure to occur in the conduct of the employer's
enterprise, are placed upon that enterprise itself, as
a required cost of doing business. They are placed
upon the employer because, having engaged in an
enterprise which will, on the basis of past
experience, involve harm to others through the torts
of employees, and sought to profit by it, it is just
that he, rather than the innocent injured plaintiff,
should bear them; and because he is better able to
absorb them, and to distribute them, through prices,
rates or liability insurance, to the public, and so to
shift them to society, to the community at large.
( Hinman v. Westinghouse Electric Co. (1970) 2 Cal.3d 956, 959
(citations omitted).)
Finally, Flexcom argues that the bill could have the unintended
consequence of keeping employers from hiring "low-income,
undocumented or minority workers" for fear that those
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individuals may owe child support. Failure to hire such child
support obligors could have an adverse impact of the obligors'
ability to pay child support. However, while there is
statistical information showing that low-income individuals
disproportionably owe child support, it is not clear from
Flexcom's letter why this bill would have an adverse effect on
undocumented and minority employees, as opposed to the larger
group of employees who may owe child support. Committee staff
is unaware of statistical data that support the notion that
there is a correlation between having a child support obligation
and the obligor's legal status, race or ethnic background.
The California Bankers Association (CBA) is concerned about
individuals who purposefully evade their child support
obligations. However, CBA opposes the bill, unless it is
amended to exclude banks from the definition of business
entities. They argue that, as currently worded, a bank who
merely assists a customer by cashing a paycheck or transferring
funds from a checking account to a savings account could be
liable for 10 times the value of the assistance, even if the
bank had no idea that the customer was a child support obligor
who was attempting, by the transaction, to avoid his or her
obligation to their children.
While CBA raises a reasonable point with respect to bank
transactions, it would be inappropriate to completely remove
financial institutions from the purview of this bill. If that
were done, banks could knowingly fail to report new hires, or
even pay them under the table, without incurring the liability
proposed by this legislation. It is therefore recommended that
any amendment for CBA be narrowly tailored. This could be
accomplished by limiting the language in Section 1714.4(b)(1) of
the bill to exempt actions by financial institutions that
occurred in the ordinary course of business and where there was
no actual knowing assistance on the part of the institution to
help the obligor avoid his or her child support obligation.
REGISTERED SUPPORT / OPPOSITION :
Support
American Federation of State, County, and Municipal Employees
(AFSCME), AFL-CIO
California Labor Federation
National Center for Youth Law
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Partnership for Responsible Parenting
Opposition
California Alliance for Families and Children
California Banker's Association (unless amended)
Family Law Section of the State Bar
Analysis Prepared by : Leora Gershenzon / JUD. / (916)
319-2334