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Other Budget Issues

Last Updated: 3/5/2012
Budget Issue: Expansion of State Labor Enforcement Activities
Program: Department of Industrial Relations
Finding or Recommendation: Postpone consideration of the three proposals by the Governor to create a total of 21 new positions, for a total cost of $4.5 million ($2.2 million from the Labor Enforcement and Compliance Fund), within the Department of Industrial Relations, Division of Labor Standards Enforcement until the issue of reauthorization of the Labor Enforcement and Compliance Fund has been resolved.
Further Detail


The Division of Labor Standards Enforcement (DLSE) within the Department of Industrial Relations (DIR) is responsible for adjudicating claims of wage violations (such as  nonpayment or underpayment of wages), enforcing prevailing wage rates for public works projects, investigating specific cases of discrimination against employees, and administering licensing and registration processes for various occupations and industries. Prior to 2009, DLSE operations were funded primarily from the General Fund. The 2009 Budget Act created the Labor Enforcement and Compliance Fund (LECF) and an associated employer surcharge to be used primarily to fund the operations of the DLSE, resulting in General Fund savings. The surcharge is levied as a percentage of employers’ workers’ compensation insurance premiums and varies by the size of the employer. Statute limits total annual revenues from the surcharge to $37 million. Under current law, authorization for the LECF and associated surcharge will sunset at the end of the budget year. The administration has indicated that it is currently considering a proposal to extend authorization for the LECF beyond June 2013. It is anticipated that this proposal will put forward as part of the spring budget process.

Governor’s Proposal

The Governor’s proposed 2012-13 budget includes two proposals to establish 17 new permanent positions within the DLSE, for a total cost of $2.2 million, to be funded from the LECF. These positions would carry out new responsibilities created for the DLSE by recently enacted legislation—Chapter 677, Statutes of 2011 (AB 551, Campos), and Chapter 706, Statutes of 2011 (SB 459, Corbett). Chapter 677 increases DLSE responsibilities related to enforcement of prevailing wages requirements on public works contracts. Chapter 706 assigns DLSE the new responsibility of determining if an employer has willfully misclassified an employee and an independent contractor. In addition to these proposals, the Governor’s budget also proposes a $2.3 million augmentation of DIR’s budget to support 4 new positions within the DLSE and expanded employer and employee education and outreach activities. This proposal would be funded from the Labor and Workforce Development Fund (LWDF), which receives a portion of penalties collected form employers due to specific violations of the Labor Code.

LAO Assessment

LECF is an Appropriate Funding Source to Implement Chapter 677 and Chapter 706 in 2012-13, but Issues Exist In Out Years. In general, we find that the LECF is an appropriate funding source for implementation of Chapter 677 and Chapter 706, as proposed by the Governor. However, as noted above, authorization for the LECF is scheduled to expire at the end of 2012-13. Given that there is currently no plan for reauthorization of the LECF, it is premature for the Legislature to consider establishing new permanent positions supported by this fund. Therefore, we recommend the Legislature consider the administration’s forthcoming proposal on reauthorization of the LECF prior to considering the Governor’s proposal to establish these positions.

Requested Positions for Implementation of Chapter 677 and Chapter 706 Are Justified, but Should Be Authorized Only for Two Years. We concur with the administration’s finding that implementation of Chapter 677 and Chapter 706 will result in increased workload for DLSE. Little empirical workload data currently exists  to inform a precise calculation of this increased workload. Accordingly, the administration has estimated the increased workload based on limited available data, institutional knowledge, and experience. In light of this, we recommend that should and when the Legislature approves the requested positions to implement Chapters 677 and 706, it approves them as two-year limited term to provide time for collection of better workload data.

Employer and Employee Education and Outreach Activities Are Consistent With DIR’s Mission, but LWDF Funding May Need to Be Prioritized for Other Activities. The Governor’s proposed education and outreach activities are consistent with DIR’s mission to protect California’s workforce, improve working conditions, and enhance opportunities for profitable employment. Additionally, these activities are an appropriate use of LWDF funding. However, uncertainty regarding the availability of future funding from the LECF may necessitating prioritization of limited funding available to DIR—including LWDF funds—to meet its current obligations, which include implementation of recent legislation. Therefore, we recommend the Legislature also postpone consideration of the Governor’s proposal to fund $2.3 million in expanded education and outreach activities from the LWDF until it has considered the administration’s proposal to reauthorize the LECF.