Regulating Workplace Risk in California’s Informal Economy

By Jesús Guzman

 

Lost underneath much of the debate about immigration is a related policy question about the informal labor market many immigrants use as a means to provide for their families. Every day, about 40,000 day laborers can be seen standing on urban street corners waiting for work and in more organized spaces such as worker centers across California (Valenzuela, 2006).  Day laborers are usually immigrant men without legal status hoping to find a day’s worth of work doing a variety of jobs like landscaping, construction, moving, or general labor (Theodore, 2006). Standing on a street corner has meant day laborers are constantly in the public eye, making them easy targets of harassment for vigilante groups like the Minutemen.

Though harassment by nativist groups and ICE persists as a very real threat, day laborers face more more frequent danger during the course of their work (Slovic, 2002). The type of work done by day laborers tends to pose significant occupational health and safety risks, especially in industries such as construction and moving. The unregulated nature of the informal economy adds the additional risk of a day laborer going uncompensated when a workplace injury does occur. For day laborers employed by a business, an injury would be covered by either the business’ workers’ compensation policy or the state’s Uninsured Employers Benefits Trust Fund (UEBTF). But what happens if a day laborer suffers a workplace injury and the employer is a homeowner (either owner or renter)? This article attempts to shed light on this matter as new research and legislation has recently emerged to help answer this question.

Proposed Changes in California

Early in the 2017 California legislative session, Assemblywoman Lorena González Fletcher of San Diego introduced Assembly Bill 206 into the conversation about day labor, workplace injuries, and workers’ compensation insurance. The bill would make changes to the existing workers’ compensation insurance scheme that was first developed in the 1970s to account for workplace injuries in a residential setting. Under current state law, a homeowners’ insurance policy is mandated to provide workers’ compensation insurance coverage. Who is eligible for benefits and who is not is the principal problem AB 206 attempts to reform.

Presently, the workers’ compensation coverage in the homeowners’ policy places a minimum hourly and total wage threshold for eligibility. For an injured day laborer to qualify for workers’ compensation coverage in the policy, they would need to have worked a minimum of 52 hours and earned a minimum of $100 within 90-days from the occurrence of the injury [pursuant to California Insurance Code §11590, Labor Code §3351(d), and §3352(h)]. AB 206 would change current law by expanding coverage of workers’ compensation insurance policies held by homeowners in order to more fully insure the day laborers they hire from the informal economy by eliminating the 52-hour minimum requirement while leaving in place the $100 minimum threshold (which this article discusses further on).

History of Insurance Scheme

The original insurance scheme was implemented in the 1970s. Post World-War II California experienced an exponential suburban growth boom and consequently the hiring of domestic employees. In turn, concern about possible homeowner liability during the course of employing a worker grew. What kind of liability would a homeowner face if a worker they hired were to be injured? Standard practice would be to require every individual homeowner to carry workers’ compensation insurance. Legislature in 1975 set out to create a more effective and efficient system by building in workers’ compensation coverage into the homeowners’ insurance policy. Economically, this was a prudent decision that socialized risk and reduced transactions costs (State Farm Fire & Casualty Co. v. Workers’ Comp. Appeals Bd., 1997).  

However, in 1977 the legislature later amended the law by changing the eligibility requirements. The amendment included a 52-hours worked within 90-days of injury requirement as the threshold for eligibility. The rationale was that the prior 1975 law had gone too far in extending workers’ compensation coverage to even the “casual babysitter” (State Farm Fire & Casualty Co. v. Workers’ Comp. Appeals Bd., 1997).  Arguably, this amendment did not strike the right balance as the exclusion has since left present-day California with a policy that is incompatible in addressing the realities faced by day laborers, domestic workers, and their employers in a modern informal economy.

Problems with the Status Quo

There are three principal problems with the status quo. The first, and most obvious, is the exclusion of injured day laborers from accessing the same types of social insurance benefits available to almost every other employee. The second problem is that the exclusion from workers’ compensation, a no-fault system, then opens the door to the only viable option remaining, which is for an injured worker to recover damages in civil court. The third problem rests on the evidence that the informal economy produces a risk-wage premium for day laborers who earn more money by assuming more dangerous and risky types of work.

The principal appeal of the 1975 reform was the integration of workers’ compensation coverage into a homeowners’ insurance policy that reduced transactions costs and socialized coverage.  Though the 1977 changes expanded covered parties from homeowners to include renters, it also narrowed the definition of workers’ eligible for benefits by imparting minimum hour and wage thresholds. Therefore, workers who fall outside of this no-fault system could exercise their only remaining option of suing employers in civil court for injuries suffered during their employment.  Such an outcome creates the following difficulties:

  • Inefficient civil litigation to resolve matters best left to insurance
  • Shifting risk onto workers instead of employers who are better situated to manage and control the workplace environment and its hazards
  • Workers would face an inequitable burden of proof by having to prove an employer was negligent in the course of the injury

Making a case for negligence requires is a high burden of proof.   This shifts risk almost exclusively onto a worker and would strongly limit the ability of a worker to make an effective case for recovering the costs of medical care and damages. The employer, after all, is in the best position to manage workplace risk and to protect themselves against it (Baker & Moss, 2008; Baker 1996).  Therefore, in shifting risk from the employer onto the worker, the system creates an inequality of risk and an undue burden.

In a situation where a worker were to be granted the lawsuit, damages could range wildly for the defendant homeowner.  Such an outcome is one of the primary reasons for creating a workers’ compensation system where the employer pays a premium in order to be protected against windfall damages. Without it, an employer could face the risk of a lawsuit that would include exorbitant attorney fees and damages paid to an injured worker (Spieler 1994).  The current system shifts risk from the employer onto the worker but does not completely eliminate risk; in fact, it might actually a create a different type of more precarious risk in the form of a tort judgment that is harder to predict financially for the employer versus the predictability of premiums.

The status quo appears to leave injured day laborers with little resource but to pursue a tort judgment. As standard practice, civil litigation is not an efficient process for deciding questions of liability and indemnification. Instead, the insurance system is better designed to more efficiently decide issues of costs and benefits in regards to workplace injuries. Day laborers excluded from coverage because they worked less than 52 hours would be left to consider civil litigation, a sub-optimal option that is both inefficient and places an unreasonable burden of proof on the worker. The reform proposed in AB 206 would expand coverage to day laborers above the status quo so as to allow workers compensation benefits to injured workers be more efficiently accessed and risk be more equitably spread between worker and employer.

The existence of a risk-wage premium – a wage compensation for assuming risk – in the day labor market strongly suggests that workers are assuming greater risk in pursuit of compensatory wages.  The concern of such evidence is that the unregulated nature of the informal economy exposes day laborers to greater risk and confounding factors like undocumented status may create serious difficulties in reporting unsafe work conditions or pursuing care for workplace injuries (Melendez et al 2013). This evidence does not imply that the expansion of workers’ compensation would result in greater risks and injuries than already exist. Rather, the nature of the day labor market is one where risk is compensated instead of mitigated through occupational health and safety measures. Secondly, the undocumented status poses real difficulties to a worker in pursuing any substantive remedy once in a hazardous workplace situation.

Projected Impact of AB 206

In an effort to fulfill the spirit of the original 1975 law, AB 206 takes aim at expanding workers’ compensation coverage to residential employees. This article asks whether the proposed policy can accomplish the objective of increasing coverage for day laborers, whether it does so efficiently, and whether this policy fairly distributes risk to parties involved.

A recent research report published by the UCLA Labor Occupational Safety & Health program, in partnership with the National Day Laborer Organizing Network, entitled “On-the-Job Injuries and Workers’’ Compensation Eligibility among Day Laborers in Residential Worksites in California” takes a look at the problem and provides insight into the expected impact of AB 206. The research team surveyed day laborers on street corners and worker centers in Northern and Southern California about the experiences of having suffered an injury. Of those who reported an injury suffered while working in a residential setting, the report estimates that an additional 34 percent of the injured day laborers interviewed would be covered under the new proposal. Such a change would mean a significant expansion in workers’ compensation coverage to an otherwise precarious work environment for day laborers.

Tradeoffs

Any policy debate about insurance, especially workers’ compensation, typically includes a discussion on moral hazard. In this context, the question asks if expanding workers’ compensation insurance to a greater pool of day laborers would incentivize them to be less careful to avoid or prevent a workplace injury. The challenge of addressing the question of moral hazard in workers’ compensation is that it so clearly impugns the moral character of workers by directly calling into question their ethical constitution.  The not so subtle implication is that workers have caused their own injuries due to their risky behavior in pursuit of benefits, and that unless there is a change to those generous benefits, workers will continue to be careless in their behavior (Dembe & Boden, 2000). The UCLA study previously mentioned found that about half of day laborers who were injured were eligible for workers’ compensation, yet only 5 percent indicated that workers’ compensation paid for their medical bills or lost wages. Study after study has shown that a significant percentage of workers often suffer injuries without pursuing workers’ compensation benefits. Instead of experiencing an increase in claims due to insurance coverage, evidence demonstrates that workers, especially immigrant workers, submit far fewer claims than for which they are eligible.

The moral hazard allegation reeks of the same nineteenth century common law practice that existed prior to workers’ compensation, placing blame squarely on workers for their own injuries. That workers would willingly injure themselves so as to seek indemnification assumes that monetary compensation would replace their losses (Baker 1996). While money might replace lost wages, it would not replace a limb or, worse yet, a worker’s life, especially when many day laborers are the primary providers for families who depend on their physical ability to work (Malpica, 2002). In this regard, moral hazard should not be a major factor when deliberating on the expansion of workers’ compensation to day laborers.

Reform

AB 206 would be a positive incremental reform to the status quo for day laborers and domestic workers in California. Though the $100 minimum threshold would remain a barrier to some, the proposed changes would effectively increase coverage for day laborers working in residential settings in California above existing levels. The bill would also create a more efficient system to limiting the potential for civil litigation as a means for resolving workplace injuries by instead opting to streamline claims through a more efficient insurance system. Lastly, AB 206 would be more equitable in the distribution of risk by expanding the pool of eligible workers who could remedy their workplace injuries through insurance rather than civil litigation.

Jesús Guzmán is a Master in Public Policy candidate at the Goldman School of Public Policy and has spent much of his career organizing with day laborers and domestic workers in California.

 

References

  • Baker, T. (1996) On the Genealogy of Moral Hazard. Texas Law Review.
  • Baker, T., & Moss, D. (2008). Government as Risk Manager. Chapter 4 in New Perspectives in Regulation, edited by David Moss and John Cisternino. Book.
  • Dembe, A. E., & Boden, L. I. (2000). MORAL HAZARD: A QUESTION OF MORALITY? NEW SOLUTIONS, 10(3), 257–279. Retrieved from http://journals.sagepub.com/doi/pdf/10.2190/1GU8-EQN8-02J6-2RXK
  • Malpica, D. (2002). Making a Living in the Streets of Los Angeles: An Ethnographic Study of Day Laborers. Migraciones Internacionales, 1(3), 124-148.
  • Melendez, E., Visser, M. A., Valenzuela Jr., A., & Theodore, N. (2013). Day Labourers’ Work Related Injuries: An Assessment of Risks, Choices, and Policies. International Migration.
  • Slovic, P. & Weber, E. U. (2002). Perception of Risk Posed by Extreme Events. Columbia University.
  • State Farm Fire & Casualty Co. v. Workers’ Comp. Appeals Bd. (1997) California Supreme Court.
  • Riley, K. & Guzmán, J. (2017). On-the-Job Injuries and Workers’ Compensation Eligibility among Day Laborers in Residential Worksites in California. UCLA Labor Occupational Safety & Health.
  • Spieler, E. (1994). Perpetuating Risk? Workers’ Compensation and the Persistence of Occupational Injuries. Houston Law Review. Vol. 31, Issue 119.

Valenzuela, A. (2006) On the Corner: Day Labor in the United States. UCLA Center for the Study of Urban Poverty. Los Angeles, CA.