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The Governor's budget proposes $11 million in special funds and 82.5 positions, phased in over three years, for the Division of Labor Standards Enforcement to pursue additional investigations of labor standards violations. In this analysis, we provide our assessment of the Governor's proposal and raise several concerns that we believe should be addressed before any funding and staffing are approved.

LAO Contact

Ryan Woolsey

Budget and Policy Post
March 3, 2017

The 2017-18 Budget

Increased Staffing for Labor Standards Enforcement


Background

Labor Code Establishes Various Worker Protections and Other Requirements for Employers. Various provisions of the California Labor Code outline requirements that employers must meet with respect to worker wages, hours, and protections. For example, the Labor Code establishes several “wage and hour” requirements, such as the minimum hourly wage that must be paid to most workers, overtime compensation for time worked in excess of specified limits, and meal and rest periods at specified intervals. Other Labor Code requirements address when minors may be lawfully employed, mandate that employers carry workers’ compensation insurance coverage (or be approved to self-insure), and prohibit employers from retaliating against workers who report that these requirements are not being met. Hereafter, we refer to these various requirements collectively as “labor standards.”

Division of Labor Standards Enforcement (DLSE) Responsible for Enforcing Labor Standards. State law places responsibility for enforcing labor standards on DLSE within the Department of Industrial Relations (DIR). The division is headed by the Labor Commissioner and carries out its enforcement responsibilities through several units:

  • Bureau of Field Enforcement (BOFE). The BOFE carries out investigations of employers to enforce labor standards. Most BOFE investigations are the result of a complaint submitted to DLSE, but BOFE also initiates some investigations proactively. When an investigation identifies noncompliance, BOFE issues citations with penalties plus the amount of unpaid wages due to workers, if any. The BOFE also defends citations when they are appealed.
  • Wage Claims Adjudication (WCA). This unit provides an administrative process for individual workers to pursue unpaid wages and other damages from an employer who has violated wage and hour requirements. The WCA process typically runs as follows. First, a worker submits a wage claim to WCA that alleges that wage and hour requirements were not followed and the worker is due unpaid wages. The WCA then schedules an informal conference with the worker and the employer to explore whether a settlement can be reached. If a settlement is not reached, WCA schedules a formal hearing at which the worker and employer may present evidence to a hearing officer on whether or not the alleged violations took place. The hearing officer then makes a determination of whether violations occurred and what amount of unpaid wages and penalties, if any, are due to the worker. The WCA also hears appeals of citations issued by BOFE.
  • Judgment Enforcement Unit (JEU). The JEU collects unpaid wages and penalties that are assessed against employers. Several strategies are used for collection, including the use of liens (which prevent the employer’s property from being sold until unpaid wages and penalties are paid) and levies (which allow DLSE to seize unpaid wages and penalties from an employer’s bank accounts and other property).
  • Retaliation Complaints Investigations (RCI). The RCI unit investigates complaints from workers who allege that they faced unlawful retaliation—such as dismissal—because they engaged in certain protected activities, such as reporting a labor standards violation to DLSE or threatening to report a violation. Following an investigation, the RCI unit issues a determination that may include requiring the employer to take actions to address the retaliation, such as reinstating the worker. If an employer does not comply with a determination, DLSE may pursue enforcement of its determination in trial court.

DLSE Funding. As shown in Figure 1, DLSE is funded almost entirely from various special funds. The largest of these, the Labor Enforcement and Compliance Fund (LECF), receives revenues from an assessment on all employers that equals a percentage of the workers’ compensation insurance premiums paid by employers. The amount of this assessment is set annually by DIR to cover the amount of spending from the LECF approved in the state budget. Other special funds that support DLSE receive revenues from fees paid by employers in certain industries (such as car washes, garment manufacturers, and public works contractors) to cover the costs of enforcing additional labor standards that are specific to these industries.

Figure 1

Division of Labor Standards Enforcement Budget

(Dollars in Millions)

2015-16
Actual

2016-17
Estimated

2017-18
Proposed

Change From 2016-17

Amount

Percent

Funding

Labor Enforcement and Compliance Fund

$46.1

$54.7

$61.6

$6.9

13%

Other special funds

25.6

29.8

28.5

-1.3

-4

Federal funds

0.5

0.5

0.5

Totals

$72.1

$85.0

$90.6

$5.6

7%

Overview of the Governor’s Proposal

Proposal Seeks to Expand Proactive Enforcement

Proposes Significant Increase to BOFE Investigative Staff, Phased In Over Three Years. The Governor proposes to provide an increase of $4.6 million (LECF) and 31 positions for DLSE in 2017‑18, growing over the following two years to $11 million (LECF) and 82.5 positions. As shown in Figure 2, most of these new positions would increase investigative staff in BOFE—a 66 percent increase by 2019‑20 over authorized positions in 2016‑17—to allow for increased investigations. The remaining proposed staff in BOFE, WCA, RCI, JEU, and the DLSE Legal Unit would complement and support the additional investigative staff.

Figure 2

Governor’s Proposal Significantly Increases Investigative Staff for DLSE

Positions Authorized and Proposed

2016-17
Authorized
Positions

Proposed Additional Positionsa

Percent Change
From 2016‑17
Authorized to
2019‑20 Proposed

2017‑18

2018‑19

2019‑20 and
Ongoing

Bureau of Field Enforcement

Investigative staff

82.0

21.0

38.0

54.0

66%

Other staff

16.5

3.0

5.0

8.0

48

Totals, Bureau of Field Enforcement

98.5

24.0

43.0

62.0

63%

Other Units

Wage Claims Adjudication

201.5

3.5

3.5

2%

Retaliation Complaints Investigation

55.5

2.0

4.0

4.0

7

Judgment Enforcement Unit

17.5

2.0

3.0

5.0

29

Legal

45.0

3.0

5.0

8.0

18

Other

138.4

Totals, Other Units

457.9

7.0

15.5

20.5

4%

Grand Totals, All Units

556.4

31.0

58.5

82.5

15%

aProposed additional positions for each year are cumulative, and include positions proposed for prior years.

DLSE = Division of Labor Standards Enforcement.

Envisions Building on “Strategic Enforcement Approach.” In recent years, BOFE has targeted more of its investigations using what the administration describes as a strategic enforcement approach. Our understanding is that this approach focuses on wage and hour violations, which are relatively complex and time-consuming to investigate, over violations of more easily verified violations like not carrying workers’ compensation coverage. The administration’s strategic enforcement approach also involves collaboration with worker and industry organizations (such as community-based groups, unions, and employer or industry associations) to identify targets for investigation and otherwise facilitate the investigation process. Specifically, the intent of the strategic enforcement approach is to take advantage of worker and industry organizations’ ability to (1) provide information about which employers may have particularly serious or extensive labor standards violations and (2) facilitate the cooperation of workers, who play a significant role in investigations of wage and overtime violations but may be hesitant in some cases to cooperate with DLSE investigations because of distrust toward the agency or fear of retaliation from the employer. (The division reports that assistance from community organizations that had previous relationships with workers led to greater worker cooperation in some past investigations.) The new funding and positions requested in the Governor’s proposal are intended to allow DLSE to increase the number of investigations conducted under the strategic enforcement approach.

Identifies Several Priority Industries. The Governor’s proposal identifies several industries as priorities for additional investigations. The priority industries include janitorial services, garment manufacturing, construction, residential care homes for the elderly and the disabled, car washes, agriculture, food processing, and restaurants. These industries overlap significantly with industries previously identified by the Legislature as warranting an elevated level of oversight. For example, employers in the car wash and garment manufacturing industries and farm labor contractors are currently subject to registration with DLSE and enhanced enforcement activities under state law. Pursuant to Chapter 373 of 2016 (AB 1978, Gonzalez), janitorial services employers will become subject to similar requirements beginning July 2018.

Proposes Trailer Bill Language Related to Various Enforcement Processes. The Governor has proposed various statutory changes in addition to the proposed increased staffing, summarized in the nearby box. These changes relate to general labor standards enforcement processes administered by BOFE and WCA, as well as to RCI processes.

Summary of Proposed Law Changes

Changes to General Labor Standards Enforcement Processes

  • Specify that the statute of limitations on workers recovering unpaid wages and other penalties (generally two to four years) looks back from the date that an employer is notified of a Bureau of Field Enforcement (BOFE) investigation instead of the date citations are issued, to preserve the ability to recover unpaid wages and penalties that would have moved beyond the statute of limitations by the time a citation is issued.
  • Allow BOFE citations to be served through certified mail. Currently, citations generally must be served in person.
  • With some exceptions, prohibit employers from introducing documents as evidence to appeal a BOFE citation if those documents were previously requested as part of the BOFE investigation but were not provided.
  • Allow certain workers in the car wash, farm labor, and garment manufacturing industries to recover unpaid wages and other damages from existing state special funds, and allow the Division of Labor Standards Enforcement (DLSE) to subsequently recover the unpaid wages and damages from employers to reimburse those special funds. Currently, workers in these industries may only be compensated from the special funds for amounts they are unable to recover from the employer.
  • Require the Department of Alcoholic Beverage Control, the Board of Barbering and Cosmetology, and the Bureau of Automotive Repairs to suspend or revoke licenses for employers if they have not satisfied judgments for unpaid wages and other damages. This is similar to an existing process at the Contractors State License Board.

Changes to Retaliation Investigation Processes

  • Pause the statute of limitations for workers to pursue legal action against an employer for retaliation while a retaliation complaint is investigated by DLSE.
  • Allow DLSE to decline to investigate a retaliation claim if the worker has initiated a parallel claim in another venue, such as challenging the alleged retaliation with the State Personnel Board, through a collective bargaining agreement grievance procedure, or through the courts.
  • Allow DLSE to request a court order to temporarily reinstate a worker while a retaliation complaint investigation is ongoing.
  • Extend the time the Retaliation Complaints Investigations unit has to investigate a retaliation complaint from 60 days to 1 year.
  • Extend the time for employers to comply with DLSE’s determination on a retaliation complaint investigation from 10 days to 30 days.
  • Give the Labor Commissioner the discretion to delegate the approval of reports that are generated from retaliation complaint investigations. Currently, only the Labor Commissioner or a chief deputy may approve the reports.
  • Eliminate the ability for parties to a retaliation complaint investigation to appeal DLSE’s determinations to the Director of DIR, except in certain cases where an administrative appeal is required by federal law.
  • Specify that, if DLSE pursues court action to enforce its determination from a retaliation complaint investigation, it must do so within three years.
  • Require an employer to pay for DLSE’s legal costs when DLSE prevails in an action to enforce its determination on a retaliation complaint investigation.
  • Place penalties on employers that willfully refuse to comply with a court order to enforce DLSE’s determination from a retaliation complaint investigation.
  • Clarify that workers may not be retaliated against for reporting a work-rated fatality, injury, or illness, or other activities protected by the federal Occupational Safety and Health Act.

LAO Assessment and Recommendations

Focus on Strategic Enforcement Has Merit . . .

Effective Targeting of Limited Enforcement Resources Is Critical. In any enforcement effort, it is critical to focus limited resources on investigations that are most likely to improve overall compliance. This includes thoughtfully identifying priority targets for enforcement and then continually adjusting the enforcement approach based on the outcomes of past investigations. The proposal’s emphasis on targeting new inspections on employers with the most serious and extensive labor standards violations is consistent with such an approach.

Targeting of BOFE Inspections Appears to Have Significantly Improved in Recent Years. Our review of legislatively required reports for 2009‑10 through 2013‑14 (the most recent year for which a report has been submitted) indicates that the targeting of BOFE inspections significantly improved over this period. While the number of inspections and citations declined, the average number of citations per inspection increased—suggesting an increasing emphasis on employers with multiple violations over employers with fewer or no violations. We note that this measure does not necessarily indicate whether the violations uncovered through these inspections were the most serious. However, citations for wage and hour requirements, such as the minimum wage, increased as a percentage of total citations over this period, consistent with the Labor Commissioner’s priority of focusing on wage and hour violations. This focus may have contributed to the reduced number of inspections conducted because, as noted previously, investigations into wage and hour violations tend to be relatively time-intensive. Finally, and perhaps most importantly, the average amount of unpaid wages found due per filled staff position in BOFE also increased significantly over the same period, suggesting that resources dedicated to investigations of wage and hour violations became increasingly effective.

Figure 3

Bureau of Field Enforcement Inspection Results

Inspections

Citations

Average Citations
Per Inspection

Minimum
Wage Citations
as Percent of
Total Citations

Average Unpaid
Wages Found Due
Per Filled Position

2009-10

6,547

3,223

0.49

2%

$111,538

2010-11

7,796

4,380

0.56

3

103,521

2011-12

5,144

3,498

0.68

5

141,244

2012-13

4,802

3,349

0.70

6

362,136

2013-14

3,792

2,664

0.70

7

322,936

. . . But Multiyear Staffing Increase Is Premature

DLSE’s Data Collection and Analysis Capabilities Are Still Developing. The DLSE implemented CalAtlas, an information technology system used to track complaints and investigations statewide, roughly six months ago. Prior to CalAtlas, information about complaints and investigations was not tracked consistently across field offices, limiting DLSE’s ability to assess trends in complaints and analyze the effectiveness of past investigations and use this analysis to refine investigation targeting. The CalAtlas system represents a step forward in DLSE’s ability to track information about complaints and investigations and use this information to improve their effectiveness. However, the Governor’s proposal does not describe how the information that will be collected in CalAtlas will be used to inform strategic targeting of investigation resources going forward. Given how recently the new system was brought online, we are concerned that DLSE’s data collection and analysis capabilities may not have sufficiently developed to ensure the most effective use of the proposed increased staff.

Statutorily Required Report Is Past Due. As mentioned previously, state law requires that DLSE report to the Legislature each March on BOFE operations. Among other things, these reports are required to contain information about the Labor Commissioner’s enforcement plan, the number of investigations conducted and the types of violations found, the amount of wages found to be unlawfully withheld from workers and the amount of such wages collected. The most recent annual report to the Legislature was submitted in 2015, for the 2013‑14 fiscal year. A report for 2014‑15 should have been submitted in March 2016 but, as of the writing of this post, has not yet been submitted. A report for 2015‑16 would be expected in March 2017. The Governor’s proposal suggests that in future years the annual BOFE report would be the primary way that DLSE would update the Legislature about the outcomes and effectiveness of the requested new positions and funding. The delay in issuing the statutorily required report makes it difficult for the Legislature to evaluate the more recent effectiveness of BOFE inspections (that is, after 2013‑14) and raises concerns about whether the annual BOFE report would be an adequate means for DLSE to report to the Legislature on the outcomes of this proposal.

While Progress Is Being Made, Vacancies Are a Concern. In 2015‑16, roughly 18 of the BOFE’s 94 approved positions (about 20 percent) were vacant. The DLSE has identified several issues that have led to this level of vacancies, including problems with administrative challenges that prevented hiring for certain key investigative classifications for a period of time, infrequent examinations and small hiring lists, and increased retirements. The DLSE has taken some steps to reduce the number of vacancies and believes it has sufficient funding to fill previously approved but vacant positions. The 20 percent vacancy rate in 2015‑16 represents an improvement over prior years, but we remain concerned that a significant portion of the positions requested in the Governor’s proposal might not be filled on a timely basis if they are approved.

Withhold Recommendation on Proposed Staffing Increases

In light of these concerns, we withhold our recommendation at this time on whether the Legislature should approve the requested multiyear funding and positions increase and suggest that DLSE provide additional information at budget hearings on the following issues relative to the proposal:

  • How Would Improved Tracking of Complaints and Investigations Be Used to Maximize Increased Compliance From Additional Investigations? The DLSE should report on how its practices for evaluating the effectiveness of past investigations has changed or will change with the implementation of the new CalAtlas system. The DLSE should also describe how it uses information about complaints and the outcomes of investigations to identify trends in compliance by industries, types of violations, size and ownership of business establishments, and other factors that would allow DLSE to dynamically adjust its enforcement approach going forward to maximize improved compliance.
  • How Has DLSE’s Effectiveness Changed Since 2013‑14? The DLSE should provide to the Legislature its report on BOFE activities for both 2014‑15 and 2015‑16, and describe whether trends of improved targeting of investigations have been maintained.
  • How Might Ongoing Challenges With Vacancies Affect DLSE’s Ability to Implement the Proposal? The DLSE should report on what steps are being taken to continue to reduce unfilled positions and, in light of these steps, how many of the requested positions could reasonably be expected to be filled and over what time frame.

Additional Funding and Staffing Should Be Provided Only to the Extent That DLSE Addresses Concerns. We suggest that the Legislature wait to approve any additional funding or staffing for labor standards enforcement until DLSE has provided additional information that addresses the above questions and concerns. Based on how DLSE addresses these concerns, the Legislature may ultimately wish to provide some or all of the funding and positions requested for 2017‑18. However, we recommend that the Legislature not approve further increases requested for 2018‑19 and later years, instead requiring DLSE to return with a follow-up proposal as part of the Governor’s 2018‑19 budget. This approach would allow the Legislature to receive additional information on the implementation of any funding and positions approved for 2017‑18, prior to approving any additional funding or positions.

Proposed Trailer Bill Is Multifaceted and Warrants Careful Deliberation

Some Proposed Law Changes More Directly Related to Budget Proposal Than Others. The Governor’s proposed trailer bill touches on many aspects of DLSE enforcement. Some of the proposed changes, such as allowing BOFE to serve citations through the mail, are directly related to creating efficiencies in enforcement processes and merit the Legislature’s serious consideration. Other proposed changes are less related to the budget proposal, such as imposing new penalties on employers that fail to comply with a court’s order to enforce DLSE’s determination from a retaliation complaint investigation. These proposed changes may have merit, but should be carefully deliberated to fully understand their implications.

Legislature Should Invite Stakeholders to Comment on Implications of Proposed Law Changes. In order to fully understand the effects of the Governor’s proposed trailer bill, we recommend that the Legislature invite stakeholders, including workers, worker representatives, and employers, to comment on the various proposals’ implications.

Key Questions for Consideration. To assist the Legislature’s review of the proposed trailer bill, below we lay out a few key questions for consideration:

  • Would Any of the Proposed Changes Be Better Suited for Review Through a Separate Policy Bill Process? The Legislature could consider deferring the portions of the trailer bill that are less directly linked to the Governor’s proposal to increase funding and staffing for BOFE investigations to a separate policy bill process. This could allow for discussion of these provisions to take place outside the constraints of budget deadlines.
  • How Would the Proposed Changes Affect Workers’ Ability to Pursue Remedies for Labor Standards Violations? For example, the outcome of a retaliation claim investigation may determine whether a worker is reinstated in a position from which they were unlawfully discharged. Is the one-year time frame proposed in the trailer bill for the RCI to complete an investigation too long to be beneficial to workers pursuing the complaint?
  • Are Additional Restrictions on Employers Defined Narrowly Enough to Avoid Negatively Affecting Compliant Employers? For example, employers would no longer be allowed to present documents as evidence when appealing a BOFE citation if those documents were not provided when requested by BOFE during the investigation. Does the proposed restriction make sufficient allowance for employers that failed to produce documents during an investigation through unintentional omission?
  • How Would the Proposed Changes Affect Workload in Other State Agencies? For example, the trailer bill proposes to require the Department of Alcoholic Beverage Control, the Board of Barbering and Cosmetology, and the Bureau of Automotive Repairs to take disciplinary action against an employer licensed by these agencies if DLSE notifies these agencies that the employer has an unpaid wage judgment. How would the processing of disciplinary actions based on this proposed change affect the workload of these regulatory agencies?