As happens this time every year in California, legislators and the governor are crafting a state budget for the upcoming fiscal year. The budget bill currently under consideration in Sacramento contains a startling and momentous provision:  reinstatement of the California Industrial Welfare Commission (IWC), which in the past had regulated the wages, hours and working conditions of employees in California. The reestablishment of the IWC portends new and more burdensome minimum wage, overtime, meal and rest period and related obligations for employers. 

A re-funded IWC could also potentially venture into new areas that have blossomed in the last 20 years in labor and employment law: joint employment, independent contractor status, predictive scheduling, leaves of absence, and the like.   

The re-funding of the IWC suggests a desire on the part of some interests in the legislature to pursue changes through administrative action that would not be palatable in the legislative process. All California businesses will be potentially impacted by this development. Indeed, the California Business Roundtable has already issued a statement expressing its concern about the re-funding of the IWC.

The current pending 2023-2024 California Budget Bill Provides:

… Of the amount appropriated in Schedule (5), $3,000,000 shall be available for the Industrial Welfare Commission to convene industry-specific wage boards and adopt orders specific to wages, hours, and working conditions in such industries, provided that any such orders shall not include any standards that are less protective than existing state law. The commission shall prioritize for consideration industries in which more than 10 percent of workers are at or below the federal poverty level. The Industrial Welfare Commission shall convene by January 1, 2024, with any final recommendations for wages, hours, and working conditions in new wage orders adopted by October 31, 2024.¹

This Insight will provide a brief overview of the IWC, prior legal challenges to the authority of the Commission, and a look at the next steps that would be required to re-constitute the IWC, and will provide practical suggestions for California employers moving forward.

IWC History and Powers – A Brief Overview

The IWC is granted powers and authority in the California Constitution.  Article 14, Section 1, states:  

The Legislature may provide for minimum wages and for the general welfare of employees and for those purposes may confer on a commission legislative, executive, and judicial powers.

In addition, California Labor Code section 1173 sets forth the duties of the IWC:

It is the continuing duty of the Industrial Welfare Commission … to ascertain the wages paid to all employees in this state, to ascertain the hours and conditions of labor and employment in the various occupations, trades, and industries in which employees are employed in this state, and to investigate the health, safety, and welfare of those employees.

The IWC was created in 1913 and for the first 60 years of its existence, its mission was to regulate the wages, hours, and conditions of employment of women and children employed in California, in furtherance of such employees' “health and welfare.” The Commission, beginning in 1916, promulgated a series of industry and occupation-wide “Wage Orders,” prescribing various minimum requirements with respect to wages, hours, and working conditions to protect the health and welfare of women and child laborers.   

In the early 1970s, a number of federal judicial decisions invalidated a substantial portion of the then-prevailing IWC Wage Orders on the grounds that the limited application of such orders to women workers (and children) violated the prohibition on sex discrimination embodied in Title VII of the federal Civil Rights Act of 1964. In response to these federal decisions, the California Legislature in 1972 and 1973 amended the applicable provisions of the Labor Code to authorize the IWC to establish minimum wages, maximum hours, and standard conditions of employment for men as well as women.

The IWC promulgated a series of wage orders in 1976 and 1980.  As discussed below, those orders were challenged in court, but ultimately upheld.

In 1988, appointees of Governor Pete Wilson on the IWC repealed the “daily overtime” provisions in many of the wage orders.  In 1999, Governor Gray Davis signed Assembly Bill 60into law, restoring daily overtime.²  AB 60 also ordered that the IWC be reconvened as follows:

The Industrial Welfare Commission shall, at a public hearing to be concluded by July 1, 2000, adopt wage, hours, and working conditions orders consistent with this chapter without convening wage boards, which orders shall be final and conclusive for all purposes.³

The IWC did just that and issued a series of wage orders in 2000 and 2001, which are still in effect today.  Those orders have remained unchanged, except for the minimum wage order, which has been updated to reflect the increases required under SB 3 (2016).

As part of the 2004-2005 fiscal year budget, the IWC was defunded.  A note on the California Department of Industrial Relations webpage states:

The California Legislature de-funded the Industrial Welfare Commission (IWC), effective July 1, 2004. However, the IWC wage orders, which govern wages, hours and working conditions in California, are still in effect and must be posted by all employers in an area frequented by employees, where they may be easily read during the workday.

The Division of Labor Standards Enforcement will continue to enforce the provisions of the wage orders.

The IWC has been de-funded since July 1, 2004. During that time, the Division of Labor Standards Enforcement enforced the provisions of the wage orders.

Is the IWC Constitutional?

The IWC’s sweeping authority has been challenged in the past.  Both the 1976 and the 1980 wage orders were challenged in court by numerous employer associations and individual employers.  A tangled and complex series of lawsuits ensued until the California Supreme Court weighed in.  Industrial Welfare Commission v. Superior Court 27 Cal 3d 690 (1980) resolved all of these challenges.

First, the court declared that it had the authority to review all challenged IWC orders using its original jurisdiction:

In view of the large number of employees affected by the challenged orders, and the tortuous litigation history which had prevented the implementation of the majority of IWC wage orders in recent years, we concluded that this was an appropriate instance for the exercise of our original jurisdiction, and accordingly we issued an alternative writ of mandate.

The court then went on to uphold all of the IWC’s wage orders:

We are aware of the vexation that the managements of many regulated corporations must feel as to the multiple controls an administrative society is compelled to impose upon them. Perhaps this extensive regulation is the price we pay for the very life of a society based upon the conglomerate and the mass producer. Yet the incidence of such control hopefully should not endanger the very continuance of those fundamental protections of the workers that trace back over a half century and that the Legislature and responsible administrative officials have determined to be necessary to the workers' welfare. The likely chagrin of the regulated should not obscure the underlying social need that prompts the regulation. 

For the reasons discussed at length above, we conclude that none of the employers' challenges to the IWC's 1980 wage orders has merit.

Judicial authorities have repeatedly emphasized that in fulfilling its broad constitutional and statutory mandate, the IWC engages in a quasi-legislative endeavor, a task which necessarily and properly requires the Commission's exercise of a considerable degree of policy-making judgment and discretion.⁴ Courts have concluded that the actions of the IWC will not be disturbed absent any arbitrary action.

IWC:  The Basics

The IWC’s Authority

As noted above, California Labor Code section 1173 describes the IWC’s authority: 

… to ascertain the wages paid to all employees in this state, to ascertain the hours and conditions of labor and employment in the various occupations, trades, and industries in which employees are employed in this state, and to investigate the health, safety, and welfare of those employees.

Before adopting any new rules, regulations, or policies, however, the IWC is required to consult with the California Occupational Safety and Health Standards Board to determine those areas and subject matters where the respective jurisdictions of the Commission and the Occupational Safety and Health Standards Board overlap. In the case of an overlap, the Occupational Safety and Health Standards Board shall have exclusive jurisdiction over safety and health issues.

Composition of the IWC

The five members of the IWC are appointed by the governor, with the consent of the state senate.⁵  The Commission is required to be composed of two representatives of organized labor who are members of recognized labor organizations, two representatives of employers, and one representative of the general public.  By statute, the Commission must include members of both sexes.⁶  Members serve four-year terms.⁷ 

The IWC Can Employ Staff and Is Permitted to Have an Exempt Employee who Reports to the Governor

The Industrial Welfare Commission may employ necessary assistants, officers, experts, and such other employees as it deems necessary. All such personnel of the Commission shall be under the supervision of the chairman or an executive officer to whom the chairman delegates such responsibility. All such personnel shall be appointed pursuant to the State Civil Service Act, except for the one exempt deputy or employee.⁸

The governor’s appointment of the IWC deputy director is exempt from the Civil Service Act hiring process.  The IWC deputy director is a Career Executive Assignment (CEA), which means they serve at the pleasure of the governor and can be terminated from their assignment at any time.

The IWC Is Not Subject to the Administrative Procedure Act

The Administrative Procedure Act (APA) establishes rulemaking procedures and standards for state agencies in California. The requirements set forth in the APA are designed to provide the public with a meaningful opportunity to participate in the adoption of state regulations and to ensure that regulations are clear, necessary, and legally valid.  The APA sets up detailed steps that must be taken by a state regulatory agency before it exercises its authority.  The APA does not apply to the IWC.  Rather, the IWC is subject to its own set of procedural rules identified in the Labor Code and the California Code of Regulations.  This is significant.  Most state agencies and departments are permitted to enact regulations only if they are approved by the Office of Administrative Law (OAL), which undertakes a comprehensive and rigorous review of proposed regulations for APA compliance and conformance with statutory authority.  The IWC does not have the burden of OAL scrutiny and is relatively free to enact its regulations so long as it comports with an abbreviated hearing process.⁹   

The IWC May Issue Subpoenas, Compel Document Production and Examine Witnesses Under Oath

The chief of the Division of Labor Standards Enforcement (DLSE), for the purpose of enforcing IWC orders and provisions of the Labor Code, may issue subpoenas to compel the attendance of witnesses and production of books, papers, and records. Obedience to subpoenas issued by the chief of the DLSE is enforceable in court. The chief and enforcement deputies of the DLSE may administer oaths and examine witnesses under oath for the purpose of enforcing Industrial Welfare Commission orders and provisions of the Labor Code.¹⁰

Interested Persons May Petition the IWC

California Labor Code section 1176.1 provides that any “interested person” may petition the IWC requesting the adoption, amendment, or repeal of a regulation. 

The IWC May Convene “Wage Boards”

The IWC has authority to convene “Wage Boards.”  California Labor Code section 1178 provides:

If after investigation the commission finds that in any occupation, trade, or industry, the wages paid to employees may be inadequate to supply the cost of proper living, or that the hours or conditions of labor may be prejudicial to the health, morals, or welfare of employees, the commission shall select a wage board to consider any of such matters and transmit to such wage board the information supporting its findings gathered in the investigation. Such investigation shall include at least one public hearing.

The IWC itself defines the scope of the industry, trade, or occupation to be considered by each Wage Board, and the scope of the matters to be deliberated.¹¹  Wage Boards are composed of equal numbers of representatives of employers and employees, and one non-voting representative of the Commission.¹²  The Wage Boards, after considering the matters submitted to it, makes recommendations back to the full IWC.

What Could Come Next?

Should the IWC be re-funded, the governor will need to evaluate candidates and make appointments.  All five will be subject to confirmation hearings in the California Senate.  This will take time.  Also, the Commission will need to be “staffed up,” and those staff members will need to be hired pursuant to the state Civil Service Act examination and selection procedures.  These procedures require an open, competitive process and can take a great deal of time.  The process will not unfold overnight, so it may be quite a few months before a re-funded IWC actually gets down to business.

This development is vitally important to virtually every business in the Golden State.  Interested employers should consider taking steps now to:

• Become familiar with the process by which the IWC conducts its business.  These procedures have been dormant for 20 years.  The business community is going to need to take advantage of the opportunity to have its voice heard in future IWC and Wage Board hearings.
• Understand the difference between the legislative process and the regulatory process, which will be employed by the IWC.  Each forum presents its own challenges and opportunities. The IWC enacts rules and regulations through a quasi-legislative process which is a blend of legislative and regulatory processes and procedures.  Great deference is given to the IWC rules from the state’s courts because it is a quasi-legislative entity.
• Coordinate efforts with those who practice before the California Occupational Safety and Health Standards Board.  Their experience and knowledge of the process of working with a state agency focused on workplace regulations likely will be invaluable as options and strategies are developed for dealing with the IWC.

Littler Workplace Policy Institute will continue to engage as the re-funding of the IWC evolves and inform our clients accordingly. Check back at Littler.com for future updates.