A California Labor Agency Returns, and Employers Will Feel the Impact

By Toni Vranjes July 20, 2023

​California has re-established the Industrial Welfare Commission (IWC), an agency that can develop strict industry-specific rules that may affect wages, working conditions and workers' rights.

This move could help the Legislature get around obstacles it has faced in regulating certain areas, such as the fast-food sector and gig workers. The IWC revival is part of the 2023 budget bill, which was signed by Gov. Gavin Newsom on July 10.

Employers should take the time to understand the new development and how it could affect their operations.

The IWC was established in 1913 with the goal of improving working conditions for employees. The agency closed down in 2004, when the state Legislature stopped funding it. Nevertheless, the commission's wage orders remain in effect. There are 17 wage orders covering a variety of industries and occupations.

Under the new budget bill, the IWC will convene by January 2024, and it will adopt final recommendations by October 2024. The state has allocated $3 million for the agency.

The IWC can select wage boards to make recommendations on pay, hours and other working conditions. The IWC also can adopt wage orders to expand workers' rights. The commission will prioritize industries with many low-income workers. Specifically, the focus will be industries with more than 10 percent of employees at or below the federal poverty level.

California Employers

The return of the IWC is very significant, according to Michael Lotito, an attorney in Littler's San Francisco and Washington, D.C., offices. The agency can wield tremendous power in California, helping the Democratic-controlled Legislature advance its goals. It's also easier for lawmakers to let the IWC handle controversial issues, Lotito noted.

There are two big issues that lawmakers probably are trying to address, said Morgan Forsey, a Los Angeles-based attorney at Sheppard Mullin. These are fast-food industry regulations and gig-worker classification.

The fast-food industry has been fighting efforts to regulate it more strictly. A law signed by Gov. Gavin Newsom last year, AB 257, would establish a council to boost pay rates and working conditions in the industry. The bill was sponsored by a prominent labor union, Service Employees International Union (SEIU).

Business groups oppose AB 257, claiming that it's burdensome and overreaching. A ballot measure to repeal the law has qualified for the November 2024 election, and the law is on hold until then.

Another bill that could shake up the fast-food industry is AB 1228. It would create joint liability for a franchisor and franchisee in situations where the franchisee violates the law.

Meanwhile, a long-standing dispute between the Legislature and employers over how to classify gig workers is ongoing. A bill, AB 5, imposed strict requirements for designating workers as independent contractors, which would force many companies to reclassify them as employees. In response, several companies supported a 2020 ballot initiative to exempt themselves from the new requirements. Proposition 22 was approved by voters, but a legal battle over the measure is headed to the California Supreme Court.

The return of the IWC will have major ramifications in both the short term and the long term. According to Lotito, the agency's initial focus likely will be industries regulated by Wage Order 5, such as restaurants and hotels. If the agency receives more funding in future years, many more sectors could feel the impact.

Other states could eventually form their own IWCs, according to Lotito.

The IWC's work will affect other California state agencies. One is the Division of Labor Standards Enforcement (DLSE), also called the California Labor Commissioner's Office. Another is the Division of Occupational Safety and Health (Cal/OSHA).

Forsey expects that both agencies will stay intact. The DLSE probably will continue enforcing wage laws, and the IWC will communicate with the office about its activities, she said.

Meanwhile, the IWC will need to consult with Cal/OSHA on certain matters, Forsey noted.

Employer Concerns

The labor group SEIU has praised the idea of reviving the agency, saying that it can help combat poverty and inequality. However, employment lawyers worry about the scope of the IWC's power.

The IWC has a different rulemaking process than other state agencies, said David Cheng, a Los Angeles attorney at FordHarrison.

The agency isn't subject to the Administrative Procedure Act, which gives the public an opportunity to comment and also allows for judicial review of proposed rules. Instead, the IWC has its own rulemaking procedures, which involve less scrutiny, Cheng said.

Under the California Labor Code, the IWC will have five members appointed by the governor. This will include two representatives of labor groups, two representatives of the employer community and one member of the general public.

The concern is that a small number of people will have vast powers, according to Cheng. He advises employers to pay close attention.

"They should be concerned about what a newly constituted commission can do," Cheng said.

Toni Vranjes is a freelance business writer in San Pedro, Calif.



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