Report on Dual Classification by Wage Level Program

Workers Compensation Insurance Rating Bureau of California Workers Compensation Insurance Rating Bureau of California Report on Dual Classification by Wage Level Program Excerpt from the WCIRB Classification and Rating Committee Minutes June 12, 2007 About this Report The WCIRB prepares and presents reports to the WCIRB s Classification and Rating Committee to assist in the formulation of proposed changes to the Insurance Commissioner s regulations. Once adopted by the Classification and Rating Committee, the recommendations contained in the report are provided to the WCIRB Governing Committee and may be included in a WCIRB regulatory filing that is submitted to the Insurance Commissioner for approval. About the WCIRB The WCIRB is California's trusted, objective provider of actuarially-based information and research, advisory pure premium rates, and educational services integral to a healthy workers' compensation system. Learn more at www.wcirb.com.

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Report on Dual Classification by Wage Level Program Final Report June 12, 2007 EXECUTIVE SUMMARY Objective As part of a broad review of the Dual Classification by Wage Level Program (Program), the Classification and Rating (C & R) Committee directed the WCIRB to study the provisions of the California Workers Compensation Uniform Statistical Reporting Plan 1995 (USRP) applicable to the determination of employees regular hourly wage with regard to construction industry classifications that require the regular hourly wage to equal or exceed a specified amount. The WCIRB was specifically directed to evaluate: (1) The extent to which the rules could be amended to reflect California s record keeping requirements specific to construction industry employees; (2) The feasibility of establishing a per-weekly minimum exposure or hours worked to be eligible for a high wage classification in lieu of clear and unambiguous records detailing hours worked; and (3) Supplementing the USRP with examples to clarify the rule s intent and application. The WCIRB was also instructed to use the Test Audit Program to both improve the WCIRB s validation of the auditing and reporting of dual wage classifications and to begin to benchmark the extent to which employers are maintaining records suitable for the proper administration of dual wage classifications. Findings and Conclusion To fully assess the relevant issues and evaluate potential solutions, WCIRB staff met with key stakeholders including employer associations, the California Department of Industrial Relations, and insurance company auditors. Additional information was collected through test audits performed for approximately 50 employers that utilize dual wage construction classifications. The WCIRB finds the following: (1) California s construction employers are subject to record keeping requirements, contained in Department of Industrial Relations Industrial Welfare Commission Order No. 16-2001. This order requires all employers to maintain precise records of hours worked each day for each employee. (2) The applicable USRP rules should be clarified to specify that the assignment of a high wage classification is contingent upon the availability of records necessary to reconcile the number of hours worked against actual time cards or time sheets documenting the daily start and stop times for each employee. (3) With the exception of salaried employees, determination of an employee s regular hourly wage should require verification of the actual hours worked. Proxies for hours worked should no longer be acceptable. 1

(4) Establishing a per-weekly minimum exposure or hours worked to be eligible for a high wage classification construction classification would create a significant recordkeeping and auditing burden, and would disallow the assignment of high wage payroll to the correct high wage classification in several foreseeable instances. Establishing a per-weekly minimum is not recommended. (5) Examples to clarify the intent and application of the USRP at Part 3, Standard Classification System, Section IV, Special Industry Classification Procedures, Rule 2a, Determination of Dual Wage Construction or Erection Classification, will promote consistency in determination of employees regular hourly wage, and are included in the recommendations. (6) The WCIRB will use its Test Audit Program to help validate that insurers determinations of employees regular hourly wages have been verified against records documenting the actual hours worked. 2

Introduction In his decision on the WCIRB s January 1, 2006 pure premium rate filing, the Insurance Commissioner directed the WCIRB to review the application and propriety of the Dual Classification by Wage Level Program (Program). Pursuant to this directive, at its meeting of August 1, 2006, the C & R Committee adopted a report that provided analysis and background on the Program. (The report, submitted to the California Department of Insurance (CDI) on September 26, 2006, is attached as Exhibit 1.) The report included a finding that while the Program remains an important tool for properly classifying employers in certain construction classifications, issues remain in the insurers ability to accurately audit and report payrolls by dual wage classification. The report noted that: High pure premium rates and a wide differential between the high and low wage rate for a classification create a financial incentive for employers to report hourly wages that equal or exceed the indicated threshold. The ability of insurer auditors to verify the actual hourly wage becomes especially complex when dealing with employees who are paid on a commission or piecework basis. To this end, concerns have been expressed that some employers create payroll records that show a number of hours worked such that the computed hourly wage will meet the applicable wage threshold. To the extent that premium abuse or fraud exists in the construction industry, it threatens the statistical credibility of the dual wage classifications. The C & R Committee report noted the following regarding the WCIRB s role in the Program: The WCIRB s other major responsibility in administering the Program is helping to ensure that payroll and loss data is accurately collected and reported. The WCIRB s primary tools for accomplishing this are administering the relevant regulations included in the USRP and conducting payroll and claims test audits. The C & R Committee report also recommended further analysis as to how the Program can be more equitably administered. Specifically, the report recommended further analysis of the following: (1) The extent to which the USRP rules could be amended to reflect the status of California s record keeping requirements specific to construction industry employees; (2) In lieu of clear and unambiguous records detailing hours worked, the feasibility of establishing a per-weekly minimum exposure or hours worked to be eligible for a high-wage classification; and (3) Supplementing the USRP with examples to clarify the rules intent and application. The C & R Committee report recommended reviewing WCIRB test audit procedures to assess whether those procedures can be modified to improve the WCIRB s validation of insurer auditing and data reporting related to employers with operations in the dual wage classifications. Pursuant to the above, the WCIRB has reviewed various aspects of the administration of the Program. 3

Scope of Current Rules Part 3, Section IV, Rule 2.a., Determination of Dual Wage Construction or Erection Classification, of the USRP, provides that the assignment of the high wage classification requires that employers maintain (c)omplete and accurate records supported by original time cards or time book entries that show by individual employee the operations performed, the hours worked, and remuneration earned by such employees The rule then provides instruction for determining an employee s hourly wage for employees that are paid on basis other than hourly wage such as piecework, production, commissions, or salary. (See Exhibit 2.) Calculating an hourly wage is dependent on two factors: remuneration and hours worked. While the rule s instructions regarding the types of remuneration to be included when calculating the regular hourly wage are specific, the requirements for supporting records to establish the number of hours worked are not as clear. Specifically, the requirement for time book entries showing the number of hours worked can be ostensibly met by recording a number of hours that, when divided into the remuneration earned, appears to produce an hourly rate above the high-wage threshold for a dual wage classification. Insurance company auditors have expressed concern that records provided by employers to support an hourly wage determination sometimes appear suspect due to very low hours worked, hourly wage rates that appear high based on the work performed, numerous corrections to the number of hours worked, and other factors. However, it can be difficult to conclusively establish that such records do not constitute complete and accurate records as required in the rule. These concerns are frequently raised in determining the regular hourly wage for employees paid on a piecework basis. In such circumstances, it is not unusual to be presented with payroll records similar to those in Table 1 below: Table 1 Sample of Employee Payroll Records on Piecework Basis Week Ending 3/1 Employee Gross Pay Hourly Wage Hours Worked John Smith $560.23 $20.00 28.01 Jane Doe $658.35 $20.00 32.92 Jack Washington $425.58 $20.00 21.28 Based upon the indicated hourly wage, all employees would meet a high wage threshold of $20.00 per hour. If the analysis ended here, the payroll and losses for all these employees would be reported in the high wage classification. However, a verification sample taken from the actual time cards might provide information similar to that in Table 2: Table 2 Example of Information Reflected on Employee Time Card Time Card: John Smith Day Start Stop Start Stop Hours 25-Feb 7:30 11:30 12:30 4:30 8.00 26-Feb 7:30 11:30 12:30 4:30 8.00 27-Feb 7:30 11:30 12:30 3:30 7.00 28-Feb 9:00 11:30 12:30 5:30 7.50 1-Mar 7:30 11:30 12:30 3:30 7.00 Total 37.50 4

Table 3 shows the regular hourly wage as a function of the documented remuneration and verified hours worked. Table 3 Regular Hourly Wage Calculation Based on Documented Remuneration and Verified Work Hours Employee Gross Pay Hours Worked Regular Hourly Wage John Smith $560.23 37.50 $14.94 As indicated above, once the number of hours worked is reconciled against the worker s actual time card, the hourly wage determination changes from $20.00 to $14.94 thus falling below the wage threshold. The above notwithstanding, the WCIRB s discussions with insurer auditors found that there is a lack of uniformity with respect to the records used to validate an employee s hourly wage. While some auditors would accept the records as provided in Table 1, other auditors require a validation of actual hours worked. In view of the above, the WCIRB further explored ways to clarify the rule s specifications regarding the records required to verify an employee s regular hour wage. California s Wage and Hour Standards In order to research California s record keeping requirements specific to construction industry employees, WCIRB staff conferred with Deputy Labor Commissioners from the California Department of Industrial Relations, Industrial Welfare Commission (DIR). These representatives confirmed that DIR s responsibilities include (a) verifying that California employers are in compliance with minimum wage and overtime requirements, and (b) publishing regulations that specify the payroll records needed to document compliance with those requirements. Rules that specifically apply to construction industry employers are contained in Industrial Welfare Commission Order No. 16-2001. This order is sent to all new California construction employers and must be posted where employees can read it easily. As such, the DIR considers all construction industry employers to be notified of, and subject to, the recordkeeping requirements contained in Order No. 16-2001. (See Exhibit 3.) Order No. 16-2001 contains numerous wage, hour and working condition requirements. With regard to California s recordkeeping requirements specific to construction industry employees, Section 6, Records, requires that every employer who has control over wages, hours, or working conditions shall keep accurate information with respect to each employee, including: Time records showing when the employee begins and ends work each day including meal periods, split shift intervals, and total daily hours worked; Total wages paid each payroll period, including value of board, lodging, or other compensation actually furnished to the employee; and Total hours worked during the payroll period and applicable rates of pay. 5

In addition, employers are required to keep records on file at the place of employment or at a central location for at least three years. The DIR representatives noted that based on their field enforcement operations some employers in the construction industry, especially small employers that pay piecework or commissions, are regularly found to have records that do not comply with Order No. 16-2001. To further assess the availability of these detailed records, WCIRB test auditors, when conducting test audits of construction risks, requested original time cards or time book entries. Of the 45 audits sampled, while 31 employers (68.9%) provided time cards or time book entries, only 23 employers (51.1%) provided records detailing the start time and end time of each work period. It is important to note, however, that there is a strong correlation between the detail in records, and the hourly wages: employers paying wages above the threshold consistently had complete and accurate records including daily start and stop times for all workers. Conversely, in most cases, the employers unable to provide complete and accurate records paid an hourly wage below the threshold. Put another way, in general, the employers that qualify for the high wage classification already have the required systems in place. (An exception to this correlation may be industries such as the rooter plumbing industry where employees are compensated largely on commissions and billable hours and may effectively receive a regular hourly wage that is above the threshold. This industry, however, has not typically maintained detailed records of hours worked.) Findings and Analysis The WCIRB s review found that while the existing rule requires that determination of an employee s regular hour wage be based upon complete and accurate records supported by original time cards, this requirement is not sufficiently direct with respect to what is needed to verify the number of hours worked. Accordingly, to directly address the recognized weakness in administering the dual wage program, the WCIRB explored the feasibility of revising the rules to: (1) Direct auditors to validate the number of hours worked by sampling an employee s daily time records; and (2) Rather than allowing a proxy for hours worked, absent the employer s ability to provide verification of actual hours, the employees would be assigned to the low-wage classification. In other words, irrespective of whether the employee is paid on an hourly, piecework, production, or commission basis, the regular hourly wage shall be determined essentially by dividing the total remuneration by the hours worked. The sole exception to the hours worked requirement is for employees who are paid on a salary and are exempt from California s wage and hour requirements. Since construction industry employers are currently required to maintain the records specified in Order No. 16-2001, amending the USRP in this manner would not place a new requirement on employers but could create an increased recordkeeping burden on employers not currently in compliance. As Order No. 16-2001 refers to records kept on a daily basis and summarized for each payroll period, the regular hourly wage for classification purposes should generally be verified by sampling hours worked and remuneration earned by payroll period. This is consistent with the existing portion of Part 3, Section IV, Rule 2.a. of the USRP that states, Commissions and incentive payments that are calculated and paid each pay period shall be included with salary, piecework or hourly pay compensation to determine the employee s regular hourly wage. 6

Based on the above, the regular hourly wage will generally be an employee s average wage by pay period. Staff notes, however, that when an employee performs more than one separately classifiable operation in a pay period, it should be permissible to separately calculate a regular hourly wage for each classifiable operation, when complete and accurate records exist. Similarly, when an employee works in connection with a prevailing wage job, for which federal, state or local prevailing wage laws stipulate that contractors pay specified minimum wage rates and specified fringe benefit rates, USRP rules should permit that the employee s regular hourly wage be separately calculated for each prevailing wage job. For the purposes of this rule, salaried employees are defined as employees who are principally remunerated at an established level of compensation without regard to hours worked; sales volume; production levels; or similar variables. Since salaried employees are by definition not required to track hours worked, a proxy for hours worked is required in determining a regular hourly wage. It is therefore recommended that the regular hourly wage for salaried employees be determined by dividing the total annual remuneration by 2000 hours. If an employee is salaried for less than 12 months, the regular hourly wage should be calculated for the salaried period on a prorated basis. (2000 hours provides an appropriate proxy of actual hours worked over the course of a year.) WCIRB Test Audit Program: Central to the WCIRB s data quality efforts is the Test Audit Program. As such, should the recommended changes to the Dual Classification by Wage Level Program be adopted, the WCIRB will incorporate the validation of hours worked into its test audit practices. Specifically, the Test Audit Program will be used to validate that insurers determinations of employees regular hourly wages are verified against records documenting the actual hours worked. In other words, the insurer audit will be expected to demonstrate, through an appropriate sampling, that actual time records showing when the employee begins and ends work each day including meal periods, split shift intervals, and total daily hours worked were used to validate the employee s regular hourly wage. It is expected that a test audit difference may be charged if the insurer audit does not include the required validation of hourly wages and either: 1. Assigns the incorrect dual wage classification as determined by the Test Audit s validation of hourly wages; or 2. Assigns the high wage classification when the Test Audit determines that the required hourly wage records are not available. This approach should help to ensure the application of proper auditing procedures. Employer Outreach: In connection with this effort, the WCIRB sent letters to 99 associations of construction industry employers and employees, notifying them of our study and offering to meet and provide a forum for input. Six associations contacted the WCIRB, two of which sought meetings to discuss the issues and implications. All six associations expressed general support for aligning the USRP with the requirements of Order No. 16-2001. Of particular note is the feedback received from an association of rooter plumbers. After discussing the study matter among its members, the association indicated its general support for the proposed changes, and advised the WCIRB that nearly all of its members have adopted recordkeeping practices that comply with the applicable provisions of 16-2001 largely to ensure compliance with overtime 7

regulations. Further, most association members have adopted a system that requires employees to record actual hours worked with start and stop times each day. Each employee s average hourly wage is computed for the week based on the actual hours worked. Any premium overtime pay is based on the computed average hourly wage. In this manner, these employers are prepared to produce verifiable records that reconcile to an original time card demonstrating how each employee s hourly wage was determined, for each weekly pay period. Alternative Options for Qualifying for High Wage Classification: The WCIRB also reviewed the possible establishment of a weekly minimum exposure or hours worked to qualify employees for a high wage classification. As employers are already subject to a California requirement to maintain records detailing hours worked, (for all employees other than Exempt employees), the WCIRB sees no compelling reason to implement a completely new classification procedure. Further, a requirement based on a weekly minimum exposure or hours could result in the reclassification of legitimate high wage employees when, due to weather, vacation or sick days, part-time employment, or other circumstances that may be beyond the employer s control, the worker does not reach the weekly minimum exposure or hours. In summary, the WCIRB believes that a weekly minimum exposure or hours worked to qualify for the high wage classification would not align with existing recordkeeping requirements, may not prove effective in reducing or eliminating the potential for the misreporting of payrolls, and may have unintended consequences. Recommendation In order to clarify the procedure for calculating an employee s regular hourly wage, reduce the potential for the misreporting of payrolls into the high wage/low rate dual wage classification, and help ensure that payroll and loss data is accurately collected and reported, the WCIRB recommends the following: (1) The applicable rules be clarified to explicitly provide that the assignment of a high wage classification to any employee (other than a salaried employee) is contingent upon the ability to reconcile the number of hours worked against actual time cards or time sheets that document the daily start and stop times for each employee. (2) Absent the employer s ability to provide verification of actual hours worked, rather than allowing a proxy for hours worked, the employees should be assigned to the low wage classification. Irrespective of whether the employee is paid on an hourly, piecework, production, or commission basis, the regular hourly wage shall essentially be determined by dividing the total remuneration by the hours worked. (3) The rules should be supplemented with examples to clarify the rule s intent and application. In addition, it is noted that should the above recommendations be adopted, the WCIRB will use its Test Audit Program to validate that insurers determinations of employees regular hourly wages are verified against records documenting the actual hours worked. Accordingly, it is recommended that Part 3, Section IV, Rule 2.a., Determination of Dual Wage Construction or Erection Classification, of the USRP, be amended effective on policies incepting January 1, 2008 to reflect the above recommendations. Following is the complete text of the rule (as amended) to be included at the time of the next pure premium rate filing. 8

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 Study of Dual Classification by Wage Level Program Draft Report to Classification and Rating Committee August 1, 2006 EXECUTIVE SUMMARY Objective Since 1986, certain construction classifications have been segregated based on the hourly wage paid to employees assigned to those classifications. For many years, regular adjustments to the wage thresholds used to segregate each pair of dual wage construction classifications have been adopted based on wage inflation in the construction industry. In the January 1, 2006 pure premium rate filing, the WCIRB recommended one dollar increases in the thresholds for many of the dual wage classifications. However, in the Decision on the January 1, 2006 pure premium rate filing, the California Department of Insurance (CDI) rejected the proposed threshold increases citing several concerns as to the impact of the threshold increases on employers. This report provides the needed background on the dual classification by wage level program, reviews areas of concern with the program including those related to the wage threshold and the need for inflationary adjustments and proposes administrative action and further research on key issues. Findings and Recommendations Based upon the review of the Dual Classification by Wage Level Program (Program) summarized in this report, the WCIRB finds the following: 1. While the Program has significant limitations with respect to the cost of administration, the potential for abuse, and potential inequities at wage levels that are very close to the wage threshold, prior WCIRB analyses have shown that the Program can reduce potential premium inequities for classifications meeting specific criteria. 2. Periodic increases in the dual wage thresholds are necessary in order to maintain relative consistency in the composition of the dual wage classifications by preventing a disproportionate shift in payrolls and losses from the low wage classification to the high wage classification. If the thresholds were never adjusted, the statistical credibility and pure premium rate relativity of the low wage classification would deteriorate as its highest paid and most experienced constituents shifted to the high-wage classification. 3. Relevant sources pertaining to both construction wage inflation and changes to prevailing wages by craft indicate that the thresholds for most dual wage classifications should be increased by at least $1.00 to reflect wage inflation since the last increase. Accordingly, in its January 1, 2007 pure premium rate filing, the WCIRB will propose a $1.00 increase to the wage threshold for most dual wage classifications. 4. In view of the concerns raised over the efficacy of the Program, the WCIRB will continue its broad based study to explore ways in which the current rules could be clarified and strengthened so as to facilitate more equitable administration of the dual classification by wage level program. Included in the scope of this review will be an evaluation of: a. The extent to which the California Workers Compensation Uniform Statistical Reporting Plan 1995 (USRP) rules could be amended to reflect the status of California s record keeping requirements specific to construction industry employees; 9

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 b. In lieu of clear and unambiguous records detailing hours worked, the feasibility of establishing a per-weekly minimum exposure or hours worked to be eligible for a highwage classification; and c. Supplementing the USRP with examples to clarifying the rules intent and application. This study will include using the Test Audit Program to both improve the WCIRB s validation of the auditing and reporting of dual wage classifications and to begin to benchmark the extent to which employers are maintaining records suitable for the proper administration of dual wage classifications. By making the most of the opportunities available through its Test Audit Program, the WCIRB can gather additional information to evaluate the efficacy of the provisions of the USRP related to the dual wage classifications and consider amendments that would improve the accuracy of data reporting for dual wage classifications. 1 5. Concerns have been raised as to the efficacy of the Program in the open rating environment as well as the lack of gradation between pure premium rates and wage levels for employers within the dual wage classifications. A complete analysis of these issues and potential alternatives to the current Program is beyond the scope of this study. 1 Prior to proposing any changes that impact either an employer s record keeping requirements or an insurer s audit practices, the WCIRB will meet with the impacted constituencies to review the nature of the problem and the proposed solutions. 10

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 Introduction Since 1986, certain construction classifications have been segregated based on the hourly wage paid to employees assigned to those classifications. Currently, the California Workers Compensation Uniform Statistical Reporting Plan 1995 (USRP) includes eighteen construction classifications that are bifurcated into two distinct or dual classifications based on the employee s hourly wage. When these dual classifications were established, each wage threshold was set at a level such that (1) both the high and low wage dual classifications had statistically credible experience, (2) there were significant differences in the losses per $100 of payroll of employees paid wages below the threshold compared to those paid wages above the threshold, and (3) relatively few employees were paid an hourly wage that was at or near the threshold. Subsequent to their establishment, the wage thresholds have been periodically updated to reflect wage inflation in the construction industry. Once sufficient experience under the dual wage classifications has been reported, the rate (and later the pure premium rate) for each of the dual wage classifications is determined based only on the loss and payroll experience of employees who were assigned to that dual wage classification. In the January 1, 2006 pure premium rate filing, the WCIRB proposed a one-dollar increase to the threshold applicable to most of the dual wage classifications. 2 These increases were predicated on the WCIRB s review of (1) statewide wage growth and average construction wage level growth as projected by UCLA Anderson School of Business and (2) prevailing wage data published by the Department of Industrial Relations (DIR). In its Decision on the January 1, 2006 pure premium rate filing, the CDI rejected the WCIRB s proposal to adjust the thresholds for the dual wage classifications. Specifically, the Decision provided that: [t]he reason for the rejection of these proposed amendments is due to the concern that these increases have on requiring employers employing these classified workers having to increase the hourly wages of their employees to maintain lower workers compensation premiums. The WCIRB is directed to provide information at the next hearing on the effect such changes have on those industries for which these classifications apply and to determine whether such changes create an artificial need for employers to raise the hourly rate of their employees. In addition, an explanation as to the current need for such splits in hourly wages for similar occupations is needed and a determination as to such splits effectiveness versus the burden to employers in monitoring these wage changes and making adjustments. Following the CDI decision, WCIRB staff met with CDI representatives to clarify the concerns raised in the Decision. Among the items discussed at this meeting were the basis for the adjustments to the wage thresholds, the impact the adjustments may have on employers, and concerns regarding the potential for premium fraud based on policyholder s misrepresentation of employees hourly wages. At the meeting, it was agreed that to the extent that the WCIRB again proposes increases in dual wage thresholds as part of the next annual filing, a full analysis of the history, appropriateness, and statistical support related to such changes would be provided. In addition, to address concerns related to potential abuse of the system, it was agreed that the WCIRB would review the USRP rules regarding the documentation needed to obtain the high wage classification and, to the extent appropriate, propose revisions to those rules contained in the USRP. Finally, it was agreed that the 2 Increases were not proposed for Classifications 5183/5187, 5185/5186, 5474/5482 and 6218/6220. 11

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 WCIRB would also review current test audit procedures to assess whether changes in procedures can be made to better evaluate the payrolls being reported in dual wage classifications. History The Dual Classification by Wage Level Program (Program) was adopted by the Commissioner for six large construction classifications effective January 1, 1986. The Program was adopted following a WCIRB study that was conducted in response to employer and trade union concerns that the large variation in wage levels among construction contractors was resulting in significant premium inequities. The study found that in certain construction trades, employers that paid high wages were, on average, paying more manual premium per loss dollar than employers that paid low wages. To mitigate this imbalance, the Program was established for six construction classifications that survey results showed (1) were large enough to be segregated into two statistically credible classifications; (2) a significant variation in wages paid by employers within the classification and (3) a significant disparity in claim costs per $100 of payroll by wage level. Attached, as Exhibit 1, is the December 16, 1985 Bulletin announcing the Program. The Program was created to produce rates that accurately reflected the cost of insuring certain construction trades. Specifically, because workers compensation insurance is priced based upon payroll, the Program was enacted to help ensure that the cost of insurance was accurately distributed between high and low wage paying employers. The determination as to whether a classification should be segregated into dual classifications was based on the following criteria: 1. Size. The classification must be large enough to divide into two fully credible classifications. 2. Wage Distributions. The classification should have relatively large spread in the hourly wage paid to employees. 3. Loss per $100 of Payroll Differential. Differentials in losses per $100 of payroll for the classification by employer average hourly wage should be significant and generally vary inversely with the average level of wages paid. 4. Wage Thresholds. A threshold dollar amount should exist such that while there are fairly small percentages of employees paid wages very close to the threshold, the amount of payroll above the threshold and the amount of payroll below the threshold are both sufficient to create two credible classes and, in addition, there is a significant difference in indicated pure premium relativity between employers paying average wages below the threshold and those paying average wages above the threshold. Beginning with the January 1, 1991 rate filing, the WCIRB has proposed and the Insurance Commissioner has generally adopted increases in the hourly wage thresholds for the classifications in the Program. These adjustments have been predicated on wage inflation in the construction industry and have been reflected in one-dollar increments. In August 1991, the WCIRB conducted an analysis of payroll as the basis of premium at the request of the Insurance Commissioner. The analysis showed that, for the construction industries studied, the Program enhanced pricing equity over either total payroll or hours worked. However, the report suggested that, given the increased administrative burden on employers and insurers, the Program only be used for classifications meeting certain specified criteria. Attached, as Exhibit 2, is the Executive Summary of the August 1991 report. 3 3 The Report is labeled Final Draft as no final report was issued. 12

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 Effective January 1, 1992, the WCIRB proposed and the Insurance Commissioner adopted the creation of nine additional dual classifications by wage level. The Program was expanded following a WCIRB wage survey and study assessing eleven construction classifications as to whether they met the criteria for inclusion in the Program. Effective January 1, 1995, an additional classification pertaining to automatic sprinkler installation was added to the Program. Effective January 1, 1996, two additional classifications pertaining to steel framing were added to the Program. In December of 2000, at the request of the Commission on Health and Safety and Workers Compensation (CHSWC), the WCIRB conducted an analysis of the potential expansion of the Program. The report showed that, for the most part, the classifications best meeting the criteria for inclusion in the Program were already included in the Program. Attached Exhibit 3 is a copy of the WCIRB report to the CHSWC (excluding exhibits). The eighteen construction classifications currently included in the Program are shown in Table 1. As shown, the wage thresholds have been increased over time to reflect wage inflation in the construction industry. Table 1: Abbreviated History of Dual Wage Construction Classifications Trade Codes Year Created Original Threshold 2006 Threshold Plumbing 5183/5187 1986 $17 $23 Electrical Wiring 5190/5140 1986 $18 $25 Carpentry Private Residence 5645/5697 1986 $17 $23 Carpentry Other 5403/5432 1986 $17 $23 Sheet Metal Work 5538/5542 1986 $16 $22 Painting 5474/5482 1986 $17 $21 Masonry 5027/5028 1992 $17 $21 Concrete/Cement 5201/5205 1992 $17 $21 Wallboard 5446/5447 1992 $19 $23 Glaziers 5467/5470 1992 $19 $23 Plastering/Stucco 5484/5485 1992 $18 $22 Roofing 5552/5553 1992 $17 $20 Excavation 6218/6220 1992 $21 $25 Sewer Construction 6307/6308 1992 $19 $23 Water Mains 6315/6316 1992 $19 $23 Automatic Sprinkler 5185/5186 1995 $21 $24 Steel Framing Lt Gauge Residential 5630/5631 1996 $20 $23 Steel Framing Lt Gauge Commercial 5632/5633 1996 $20 $23 Basis for Adjusting Thresholds Underlying Rationale for Adjusting Thresholds: As a result of wage inflation, the wage thresholds for the dual classifications must be periodically increased to prevent a disproportionate shift in payrolls and losses from one classification to another. Put another way, as wages increase, thresholds must be adjusted to maintain the approximate conditions that existed when the wage threshold was initially established. The intended result of the periodic adjustments is to maintain 13

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 the approximate constituency of each classification and to ensure that the experience in both the high and low dual classification provides a credible basis for developing pure premium rates. If the thresholds were never adjusted, the amount of payroll below the threshold would gradually shrink as wages increased and more and more employees would shift to the high wage classification. As a result, not only would the statistical credibility 4 of the lower wage classification decline, but the experience of the low wage classification would deteriorate as its highest paid and most experienced constituents shifted to the high-wage classification. Further, as the experience in the low wage classification deteriorated, there would be greater incentive for employers to move employees into the high wage/low rate classification thus accelerating the deterioration and ultimately compromising the value and relevance of the dual wage approach. The end result would be an increase in the pure premium rate relativity in both the low wage and the high wage classifications. The employers most negatively impacted by a failure to raise thresholds in response to wage inflation are those that pay the highest wages. In that these employers are clearly within the high wage/low rate classification, without inflationary adjustments to the threshold the premiums these employers pay would increase as the scope of their classification shifted towards lower wageworkers. As shown in Table 2, despite regular increases in the wage thresholds since 1991, the percentage of payroll in the low wage classifications has declined somewhat. In a number of classifications, the decline has been significant. 4 The relativity for each classification for the upcoming policy year is determined based on a comparison between that classification s actual losses to $100 of payroll and the ratio of losses per $100 of payroll underlying the current pure premium rate. The credibilities assigned to a classification are the statistical weights assigned to that classification s experience as a predictor of future claim experience relative to the loss per $100 of payroll underlying the classification s current pure premium rate. The predictability or credibilities assigned to a classification s recent historical experience depends on the volume of serious, non-serious and medical claims incurred during the experience period. The WCIRB strives to have classifications with historical experience over five or fewer years that is fully, or 100%, statistically credible, which means that the classification s relativity in the upcoming policy year can be best estimated using only the loss to $100 of payroll experience in the latest two, three, four or five years. Although there is no established minimum acceptable credibility, classifications with credibilities less than one-half have a five-year experience period that is less predictive of future experience in the classification than the loss per $100 of payroll underlying the current pure premium rate. 14

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 Table 2: Percentage of Total Payroll Reported in Low Wage Classification Low Wage as % of Total Payroll 5 Industry Codes Following Inception 6 2003 Plumbing 5183/5187 50% 42% Electrical Wiring 5190/5140 49% 40% Carpentry Private Residence 5645/5697 56% 32% Carpentry Other 5403/5432 38% 15% Sheet Metal Work 5538/5542 47% 36% Painting 5474/5482 65% 55% Masonry 5027/5028 41% 37% Concrete/Cement 5201/5205 49% 43% Wallboard 5446/5447 47% 30% Glaziers 5467/5470 61% 36% Plastering/Stucco 5484/5485 57% 51% Roofing 5552/5553 61% 33% Excavation 6218/6220 50% 33% Sewer Construction 6307/6308 36% 22% Water Mains 6315/6316 40% 28% Automatic Sprinkler 5185/5186 51% 45% Steel Framing Lt Gauge Residential 5630/5631 63% 71% Steel Framing Lt Gauge Commercial 5632/5633 23% 19% Sources of Wage Level Information: In evaluating whether a wage threshold adjustment is warranted, the WCIRB evaluates several alternative sources of wage level information. 1. General wage inflation in California, 2. Changes in average California annual construction wages as published by UCLA Anderson School of Business, and 3. Prevailing wage information published for construction trades by the DIR. Prevailing wages, which are based on collective bargaining agreements and other relevant sources, are used in awarding public contracts. For some dual wage classifications, there is a directly comparable DIR craft. For other classifications, it is more difficult to identify a good proxy from the DIR publications. However, changes in the prevailing wage applicable to many of the employers in a particular classification can be relevant as a measure of wage inflation in that classification. 7 5 It should be emphasized that this represents payrolls and not the portion of employees within these classifications. The population of employees is likely more evenly distributed between the low wage and high wage classifications. 6 Policy year 1989 for 5183/5187, 5190/5140, 5645/5697, 5403/5432 and 5475/5482. Policy year 1994 for 5027/5028, 5201/5205, 5446/5447, 5467/5470, 5484/5485, 5552/5553, 6218/6220, 6307/6308, and 6315/6316. Policy year 1997 for 5185/5186, 5630/5631, and 5632/5633. 7 In assessing wage level shifts, it is noted that the regular hourly wage that is used for classification purposes is generally related to the remuneration used as the basis of premium. Some portions of remuneration, such as group insurance and employers contributions to pension funds, are excluded from the basis of premium and thus not considered as part of an employee s regular hourly wage. Accordingly, wage inflation that is isolated to these excluded forms of remuneration should not be used when establishing the need for a threshold adjustment. The WCIRB has been advised that many employers are currently experiencing large increases in the cost of group health insurance and in required contributions to pension funds. These costs, which are part of employees total compensation and which may therefore contribute to 15

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 The WCIRB proposes increases in dual wage thresholds when strongly indicated by the inflation measures discussed above. Further, in order to minimize the recordkeeping burden on employers, the auditing burden on insurers and potential dislocation issues, proposed increases have been in one-dollar increments. Additional Research: Wage Level Surveys for Select Dual Wage Industries: Periodically the WCIRB has conducted follow-up wage level surveys of construction classifications whose constituents have contended that the current threshold was no longer appropriate. Past surveys have included a 1999 study of Classifications 5474/5482, Painting, a 2003 study of Classifications 5552/5553, Roofing, and a 2006 study of Classifications 6218/6220, Excavation. Below is a summary of the findings for each of these studies: 1999 Study of Painting Contractors: An association of painting contractors, stating that economic conditions in California had eroded the wage level for painters, argued that the $19 threshold was excessive. The association suggested lowering the threshold to $16 per hour, because many painters who previously earned $19.00 per hour and above were accepting lower wages to keep busy. In response to these concerns, the WCIRB conducted wage surveys of approximately 300 painting employers. While the survey data could have supported a threshold as low as $17 per hour, other wage data did not support such lowering of the threshold. 8 In addition, the survey data showed only a very slight spike in the distribution of wages in the industry at the $19 threshold, as only about 5% of the employees in the classification were paid a wage equal to the threshold. In light of the 1999 study, the WCIRB recommended retaining the current threshold of $19.00 for Classifications 5474 and 5482. (Since that time, the wage threshold for painting has been increased twice to its current level of $21 per hour.) 2003 Study of Roofing Contractors: In 2003, an association of roofing contractors requested a study to determine the feasibility of further subdividing the roofing classifications by creating additional wage thresholds. The association stated that, based on the rate disparity between the roofing classifications, the existing $20 threshold created a financial disincentive to pay wages in the range of $12 to below $20 per hour. The WCIRB studied several options including creating additional wage thresholds, lowering the existing threshold, eliminating the threshold altogether, and creating a premium adjustment plan. The study found that none of these alternatives provided a clear advantage over the current threshold structure. The survey also showed a moderately large spike in the distribution of wages in the industry at the $20 threshold with about 13% of the employees in the classification paid a wage equal to the threshold. In light of the 2003 study, the WCIRB recommended no changes to the dual wage approach for the roofing industry and to the $20 threshold. general wage inflation, are not included when analyzing threshold adequacy. DIR information on prevailing wages generally indicates that non-wage components of construction payroll have grown more rapidly than the wage payroll. For this reason, when assessing the need for adjustments to dual wage thresholds, the WCIRB reviews DIR information on changes in the basic hourly rate rather the hourly rate loaded for non-wage components (e.g. health and welfare and pension contributions). 8 Information from the Employment Development Department suggested average wages for the construction industry increased 3.7% in 1997 and 1.2% in 1998, and data obtained from the DIR demonstrated prevailing wage rates for painters had increased on average 3.7% between 1995 and 1999. 16

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 2006 Study of Excavation Contractors: In response to a 2005 WCIRB staff proposal to increase the wage threshold for Classification 6218/6220, an excavating industry association expressed concern that, in recent years, the industry had not experienced increases in average hourly wages; rather, any inflationary increases were reflected in contributions to pension funds and health care. The association asserted that, if the wage threshold were increased, a significant number of employees paid just over the $25 wage threshold would be dislocated. The association also suggested that it is not unusual for an employer to engage in operations using the same employees assignable to both Classifications 6218/6220 and 6307/6308, Sewer Construction, and/or 6315/6316, Water Mains, and questioned why the thresholds differ. The current wage threshold for 6307/6308 and 6315/6316 is $23, while the current threshold for Classification 6218/6220 is $25. In response to industry concerns, in 2006, the WCIRB studied the hourly wage rates paid by 250 surveyed policyholders engaged in grading and/or excavating operations. The study concluded that because (1) the distribution of employees paid $30 and less was fairly evenly spread and (2) the ratio of losses to payroll decreases at a relatively consistent rate with wages, there was no strong evidence that one threshold amount was clearly superior to another. In addition, the study found only a small spike at the current $25 threshold for Classification 6220 (6% of surveyed employees), indicating no major shift of employees to the threshold amount had occurred and minimal dislocation would occur if the threshold were increased. The study also confirmed that, for many employers, recent inflationary increases in wages for grading and excavating were primarily reflected in contributions to pension funds and health care rather than actual wages. In light of the 2006 study, the WCIRB is recommending no change to the $25 threshold for the excavation classifications until such time as the thresholds applicable to both Classifications 6307/6308, Sewer Construction, and 6315/6316, Water Mains, are consistent with the threshold applicable to the excavation classifications. Recommended January 1, 2007 Changes to Wage Thresholds: As part of its January 1, 2007 pure premium rate filing, the WCIRB will recommend $1.00 increases to the thresholds for all dual wage construction classifications except those applicable to the plumbing and excavation industries. These proposed changes are based on the following findings: Since 2004, when all of the thresholds, except the threshold applicable to the painting classification, 9 were last increased, the cumulative increase in statewide wage levels is approximately 8%. 10 This supports at least a $1.00 threshold increase in these classifications. The average change in average California s annual construction wages as published by UCLA Anderson School of Business for 2007 is 2.4%. For the latest two-year period (2006-2007), the UCLA projection is 5.9%. For the latest three-year period (2005-2007), the UCLA projection is 10.6%. This index suggests that at least a $1.00 to $2.00 increase in the wage threshold is supported for all classifications. The average prevailing wages, published by the DIR for the construction classifications studied, with the exception of plumbing, have increased by $1.00 to $2.00 or more since the thresholds were last increased. The average prevailing wages for plumbing has not increased over the last three years since the threshold for this classification was increased. (Based on this information, the WCIRB is not recommending an increase in the threshold applicable to the plumbing dual wage classifications.) 9 The threshold for the painting classification was last increased in 2005. 10 For painting, the cumulative increase in wage level since its last threshold increase in 2005 is approximately 5%. 17

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 The wage threshold for Classification 6218/6220 was the subject of the earlier referenced 2006 WCIRB study. Based upon the results of the study, the WCIRB will not be recommending an increase to the threshold for Classification 6218/6220. While the wage inflation measures reviewed in many cases support greater than a $1.00 increase to mitigate the potential dislocation, the WCIRB is recommending only a $1.00 increase in the hourly wage threshold at this time. Concerns about the Program Since its advent in 1986, there have been concerns raised about the efficacy of the Program. Presented below is a summary of the primary concerns. Equity of Application Lack of Gradation between Pure Premium Rates and Wage Levels: While most industries have a single rate applicable to all employees assigned to that classification, the dual classification approach segregates the experience of employees assigned to the classification based upon whether the employee is paid wages above or below a specified wage level. As a result, rather than producing a single rate applicable to an entire industry, the Program produces separate rates for low and high wage employees. As indicated in Table 3, there is currently a significant difference between in the pure premium rates for the high and low wage classifications ranging from $1.02 per $100 of payroll for the electrical wiring classifications to $14.07 for the roofing classifications. Table 3: Current Pure Premium Rates Industry Codes July 1, 2006 Pure Premium Rate Low wage High wage Plumbing 5183/5187 5.24 2.97 Electrical Wiring 5190/5140 3.75 2.73 Carpentry Private Residence 5645/5697 13.19 4.61 Carpentry Other 5403/5432 13.19 4.61 Sheet Metal Work 5538/5542 7.82 3.33 Painting 5474/5482 6.55 3.47 Masonry 5027/5028 8.10 5.58 Concrete/Cement 5201/5205 5.99 3.67 Wallboard 5446/5447 6.90 3.54 Glaziers 5467/5470 8.74 4.92 Plastering/Stucco 5484/5485 10.89 6.81 Roofing 5552/5553 22.73 8.66 Excavation 6218/6220 5.94 2.33 Sewer Construction 6307/6308 11.15 4.31 Water Mains 6315/6316 5.92 3.69 Automatic Sprinkler 5185/5186 6.48 1.85 Steel Framing Lt Gauge Residential 5630/5631 13.19 4.61 Steel Framing Lt Gauge Commercial 5632/5633 13.19 4.61 Under the Program, a relatively small differential in hourly wages could produce a dramatically different pure premium rate level. This differential creates concerns over the equity of the Program. While WCIRB analyses have shown (see Exhibit 2) that experience rating and other rating plans might reduce this differential, the application of these plans may not eliminate it.. 18

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 More graduated approaches to addressing potential inequities in payroll as the basis of premium for the construction industry have been considered. For example, as previously discussed, in 2003 the WCIRB reviewed the feasibility of establishing multiple thresholds for the roofing classification. Also, rating plans used in many other jurisdictions apply a sliding schedule of premium credits based upon the average hourly wage paid by the construction employer. While this plan will not produce as large a change in pure premium resulting from a small change in wage levels as the Program, it: (a) is difficult to maintain on an actuarially sound basis; (b) causes many of the similar administrative burdens as does the Program; and (c) could, if adopted in California as a replacement to the Program, create considerable dislocations during a transitional period. As discussed in prior WCIRB analyses, for appropriate classifications, the Program generally produces greater pricing equity than systems based on either total payroll or hours worked. As shown in Table 4, basing premium rates upon the payroll and loss experience of employers with wages above or below the specified threshold has produced a differential between the two classifications that has, for most dual classifications, been relatively consistent. Table 4: Change in Differential in High and Low Wage Classification Rates Industry Codes Low Wage Rate as Percentage of High Wage Rate 11 Following Inception 12 2006 Plumbing 5183/5187 207% 176% Electrical Wiring 5190/5140 227% 137% Carpentry Private Residence 5645/5697 242% 286% Carpentry Other 5403/5432 242% 286% Sheet Metal Work 5538/5542 231% 235% Painting 5474/5482 222% 189% Masonry 5027/5028 181% 145% Concrete/Cement 5201/5205 193% 163% Wallboard 5446/5447 258% 195% Glaziers 5467/5470 209% 178% Plastering/Stucco 5484/5485 208% 160% Roofing 5552/5553 271% 262% Excavation 6218/6220 207% 255% Sewer Construction 6307/6308 175% 259% Water Mains 6315/6316 149% 160% Automatic Sprinkler 5185/5186 161% 350% Steel Framing Lt Gauge Residential 5630/5631 294% 286% Steel Framing Lt Gauge Commercial 5632/5633 294% 286% High-Wage Creep: Over time, the distribution of payroll has shifted from the low wage/high rate classification to the high wage/low rate classification. As shown in Table 2 above, virtually all classifications have shown significant movement out of the low wage classification. However, it is not clear how much of this shift is due to: (1) hourly wage thresholds not increasing as quickly as 11 It should be emphasized that this represents payrolls and not the portion of employees within these classifications. The population of employees is likely more evenly distributed between the low wage and high wage classifications. 12 Policy year 1992 for 5183/5187, 5190/5140, 5645/5697, 5403/5432 and 5475/5482. Policy year 1997 for 5027/5028, 5201/5205, 5446/5447, 5467/5470, 5484/5485, 5552/5553, 6218/6220, 6307/6308, and 6315/6316. Policy year 2000 for 5185/5186, 5630/5631, and 5632/5633. 19

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 has wage inflation in the construction industry; (2) fundamental economic changes in the construction industry; and/or (3) potential underreporting of low wage experience. Nevertheless, given the volume of experience in these construction classifications and the relatively high classification relativities for the low wage classifications, the volume of experience in the low wage classifications has remained credible. Wage Threshold Bubble : To minimize both dislocation and any incentive to adjust wage levels just to attain the high-wage classification, the threshold for all dual wage classifications was originally set at a wage level at which relatively few employees were earning wages. There are anecdotal and empirical indications that some employers increase the hourly wage of workers for the sole purpose of qualifying the employee for assignment to the high wage, low rate classification. This may create a bubble of employees whose wages are right at the threshold. As the rate disparities increase, so too does the incentive to raise wages to meet the threshold. The wage level surveys cited herein for the painting, excavation and roofing industries, which were conducted well after the classifications were segregated by wage level, found the wage bubble to be a significant phenomenon only with respect to the roofing industry. While the WCIRB found negligible spikes at the hourly wage threshold for the painting and excavation classifications, the study results for the roofing industry showed a moderately large spike at the $20.00 wage threshold. According to the study surveys, 13% of roofing workers earned $20.00 per hour while only 3% earned $19.00 per hour and 6% earned $21.00 per hour. Administrative Costs of Program: Since the Program s inception, concerns have been raised as to the administrative burden of the Program. The Program may require employers to maintain additional payroll records on each employee on each job. Insurers are also required to conduct more detailed payroll audits. Verification of payroll records for dual wage classification purposes becomes additionally complex in instances when employees are compensated on a piecework or commission basis. Due to the administrative burden, in prior analyses, the WCIRB has recommended that a classification be segregated based on wage level only in limited specified circumstances. Efficacy of Program in Open Rating Environment: Most dual wage classifications were created during the Minimum Rate Law period. Under the Minimum Rate Law, for the most part, the Insurance Commissioner uniformly set rates and rating plans and insurers had little prospective pricing flexibility to reflect wage level differentials within a classification. As a result, while recognizing the increased administrative burden and the potential for abuse under the dual wage classification system, given the indicated classification relativity differentials by wage level and the lack of pricing flexibility under the Minimum Rate Law, the WCIRB recommended and the Insurance Commissioner adopted segregations to certain construction classifications based on wage level. Concerns have been raised as to whether the Program with its inherent increased administrative costs to insurers and employers and potential for abuse is warranted in the competitive rating environment in which insurers have great flexibility in rates and rating plans. A full analysis of the efficacy of the Program in the competitive rating environment is beyond the scope of this report. Potential for Abuse: High pure premium rates and a wide differential between the high and low wage rate for a classification create a financial incentive for employers to report hourly wages that equal or exceed the indicated threshold. The ability of insurer auditors to verify the actual hourly wage becomes especially complex when dealing with employees who are paid on a commission or piecework basis. To this end, concerns have been expressed that some employers create payroll records that show a number of hours worked such that the computed hourly wage will meet the 20

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 applicable wage threshold. To the extent that premium abuse or fraud exists in the construction industry, it threatens the statistical credibility of the dual wage classifications. 13 WCIRB Role in Administering the Program After reviewing the basis for adjusting the wage thresholds and the concerns over the Program, it is clear that the WCIRB s focus with respect to the Program is twofold: 1. Monitoring applicable wage inflation factors to ensure that the wage threshold for each classification is set appropriately; and 2. Administering the USRP s provisions regarding the Determination of Dual Wage Construction or Erection Classification. With respect to setting the appropriate wage threshold, as detailed herein, the WCIRB routinely studies the available data to determine the proprietary of the existing thresholds. In addition, the WCIRB periodically conducts special wage level surveys to focus on thresholds applicable to specific industries. The WCIRB s other major responsibility in administering the Program is helping to ensure that payroll and loss data is accurately collected and reported. The WCIRB s primary tools for accomplishing this is administering the relevant regulations included in the USRP and conducting payroll and claims test audits. Scope of the Current USRP Rules: The administration of the USRP s rules pertaining to the dual wage classifications poses a particular challenge. Determination of the regular wage is explained in the USRP at Part 3, Section IV, Rule 2, Construction or Erection Work, paragraph (a), Determination of Dual Wage Construction or Erection Classification: A classification that requires the regular hourly wage to equal or exceed a specified amount may be used only in connection with payroll developed by employees engaged in the activity described by the classification and who are paid an hourly wage which equals or exceeds the specified amount, provided separate records of payroll are maintained. Complete and accurate records supported by original time cards or time book entries that show by individual employee the operations performed, the hours worked, and remuneration earned by such employees are required. (Emphasis added.) While Rule 2(a) specifies the need for employers to provide complete and accurate records that document the actual hours worked and rates of pay, in practice, insurers have indicated that it is frequently difficult and excessively time consuming to obtain such evidence from employers. 14 With respect to determining the hourly wage when workers are paid on piecework or commission basis, Part 3, Section IV, Rule 2(a) (1) of the USRP provides: If an employee is paid on a piecework or commission basis, the regular hourly wage for such employee shall be determined by dividing the total remuneration of such employee by the number of hours worked. The total remuneration used to calculate an hourly wage is determined as follows: 13 The WCIRB has also received reports of schemes wherein the employee is paid the prevailing wage only to be required by the employer to repay a portion of the monies. 14 Exhibit 4 is the DIR, Industrial Welfare Commission Order 16-2001, which outlines wage and hour recordkeeping requirements for construction employers. 21

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 Commissions and incentive payments that are calculated and paid each pay period shall be included with salary, piecework or hourly pay compensation to determine the employee s regular hourly wage. It is especially difficult to determine the exact number of hours worked in those instances where employees are paid on a piecework or commission basis. It is under these conditions that assertions often arise that some employers divide an employee s total wages by the applicable threshold to reach the reported number of hours worked. In consideration of these auditing difficulties, some have suggested establishing minimum hours worked or payroll threshold as a means to ensure that reports of hours worked are not subject to blatant manipulation. While acknowledging the need to review these rules for possible revision and clarification, the WCIRB recognizes that any changes may significantly impact not only the audit practices of insurers, but also recordkeeping requirements of employers. As such, any changes must be preceded by, and predicted upon, significant outreach to, and input from, the insurer and employer communities. The WCIRB Test Audit Program: A key WCIRB resource in validating payroll and loss reporting is the Test Audit Program. In fact, the claims component of the Test Audit Program was originally created specifically to verify the assignment of claims to the appropriate dual classification. With respect to dual wage classifications, in conducting a test audit, the WCIRB has the opportunity to validate that the policyholder s original time and payroll records support payrolls assigned to a high wage classification. The WCIRB s current internal test audit procedures require that the test auditor confirm that the auditor for the insurer did an hourly wage sample to verify the appropriate dual wage classification. The test auditor is not required to review the employer s original time cards to independently determine that the wage has been accurately determined. Thus, the Test Audit Program does not currently measure the extent to which the insurer s audit findings are supported by complete and accurate records supported by original time cards or time book entries that show by individual employee the operations performed, the hours worked, and remuneration earned. Rather, the test audit verifies only that the insurer audit provided a sample of payroll divided by reported hours worked and not that the reported hours worked was supported by original timecards. By requiring test auditors not only to verify that the insurer audit includes an hourly wage sample, but to require that the test auditor independently validate the payroll allocations by reviewing the insured s original time cards or time book entries, the WCIRB can (1) improve its validation of the auditing and reporting of dual wage classifications and (2) begin to benchmark the extent to which employers are maintaining records suitable for the proper administration of dual wage classifications. Conclusion and Recommendations Based upon its review of the Program, the WCIRB has concluded the following: 1. The Program has significant limitations with respect to the cost of administration, the potential for abuse, and potential inequities at wage levels that are very close to the wage threshold. However, prior WCIRB analyses have shown that the Program can reduce potential premium inequities for classifications meeting specific criteria. 2. Periodic increases in the dual wage thresholds are necessary in order to maintain relative consistency in the composition of the dual wage classifications by preventing a 22

Classification and Rating Committee Meeting Agenda for August 1, 2006 Exhibit 1 disproportionate shift in payrolls and losses from the low wage classification to the high wage classification. If the thresholds were never adjusted, the statistical credibility and pure premium rate relativity of the low wage classification would deteriorate as its highest paid and most experienced constituents shifted to the high wage classification. 3. Relevant sources pertaining to both construction wage inflation and changes to prevailing wages by craft indicate that the thresholds for most dual wage classifications should be increased by at least $1.00 to reflect wage inflation since the last increase. Accordingly, in its January 1, 2007 pure premium rate filing, the WCIRB will propose a $1.00 increase to the wage threshold for most dual wage classifications. 4. In view of numerous concerns raised over the efficacy of the Program, the WCIRB will continue its broad based study to explore ways in which the current rules could be clarified and strengthened so as to facilitate administration of the Program. Included in the scope of this review will be an evaluation of: a. The extent to which the USRP rules could be amended to reflect the status of California s recordkeeping requirements specific to construction industry employees, b. In lieu of clear and unambiguous records detailing hours worked, the feasibility of establishing a per-weekly minimum exposure or hours worked to be eligible for a high wage classification, and c. Supplementing the USRP with examples to clarifying the rules intent and application. This study will include using the Test Audit Program to both improve the WCIRB s validation of the auditing and reporting of dual wage classifications and to begin to benchmark the extent to which employers are maintaining records suitable for the proper administration of dual wage classifications. By making the most of the opportunities available through its Test Audit Program, the WCIRB can gather additional information to evaluate the efficacy of the provisions of the USRP related to the Program and consider amendments to those provisions that would improve the accuracy of data reporting for dual wage classifications. 15 5. Concerns have been raised as to the efficacy of the Program in the open rating environment as well as the lack of gradation between pure premium rates and wage levels for employers within the dual wage classifications. A complete analysis of these issues and potential alternatives to the current Program is beyond the scope of this study. 15 Prior to proposing any changes that impact either an employer's record keeping requirements or an insurer s audit practices, the WCIRB will meet with the impacted constituencies to review the nature of the problem and the proposed solutions. 23

Manual Subcommittee Meeting Agenda for April 3, 2007 Exhibit 2 Part 3 Standard Classification System Section IV Special Industry Classification Procedures 2. Construction or Erection Work a. Determination of Dual Wage Construction or Erection Classification A classification that requires the regular hourly wage to equal or exceed a specified amount may be used only in connection with payroll developed by employees engaged in the activity described by the classification and who are paid an hourly wage which equals or exceeds the specified amount, provided separate records of payroll are maintained. Complete and accurate records supported by original time cards or time book entries that show by individual employee the operations performed, the hours worked, and remuneration earned by such employees are required. (1) If an employee is paid on a piecework or commission basis, the regular hourly wage for such employee shall be determined by dividing the total remuneration of such employee by the number of hours worked. The total remuneration used to calculate an hourly wage is determined as follows: Commissions and incentive payments that are calculated and paid each pay period shall be included with salary, piecework or hourly pay compensation to determine the employee s regular hourly wage. Fringe benefit payments, when excludable from payroll, shall be excluded from the hourly wage calculation. (See Section V, Payroll Remuneration.) The following payments shall not be used to determine the hourly wage, without regard to whether such payments are included as payroll: (a) Allowances. (b) Reimbursed business expenses. (c) Premium portion of overtime pay. (d) Compensation, such as quarterly or annual bonuses, that is not calculated and paid each pay period. (2) If an employee is paid a salary for a weekly, monthly or other fixed period, the regular hourly wage shall be determined by dividing the employee s total remuneration by the number of hours in the salary period. If the number of hours worked is not documented, the number of hours worked shall be determined by multiplying the number of days during which the employee worked by eight (8). If the number of days worked is not documented, the number of hours shall be calculated using the number of workdays (not necessarily days worked) in the pay period multiplied by eight (8). 24

Released: July Exhibit 12, 2007 3 OFFICIAL NOTICE INDUSTRIAL WELFARE COMMISSION ORDER NO. 16-2001 REGULATING WAGES, HOURS AND WORKING CONDITIONS IN THE CERTAIN ON-SITE OCCUPATIONS IN THE CONSTRUCTION, DRILLING, LOGGING AND MINING INDUSTRIES Effective January 1, 2001 as amended Sections 4(A) and 10(C) amended and republished by the Department of Industrial Relations, effective January 1, 2007, pursuant to AB 1835, Chapter 230, Statutes of 2006 This Order Must Be Posted Where Employees Can Read It Easily IWC FORM 1114 (Rev. 10-2006) OSP 06 98774 25

Please Post With This Side Showing OFFICIAL NOTICE Effective January 1, 2001 as amended Released: July Exhibit 12, 2007 3 Sections 4(A) and 10(C) amended and republished by the Department of Industrial Relations, effective January 1, 2007, pursuant to AB 1835, Chapter 230, Statutes of 2006 INDUSTRIAL WELFARE COMMISSION ORDER NO. 16-2001 REGULATING WAGES, HOURS AND WORKING CONDITIONS IN THE CERTAIN ON-SITE OCCUPATIONS IN THE CONSTRUCTION, DRILLING, LOGGING, AND MINING INDUSTRIES TAKE NOTICE: To employers and representatives of persons working in industries and occupations in the State of California: The Department of Industrial Relations amends and republishes the minimum wage and meals and lodging credits in the Industrial Welfare Commission s Orders as a result of legislation enacted (AB 1835, Ch. 230, Stats of 2006, adding sections 1182.12 and 1182.13 to the California Labor Code.) The amendments and republishing make no other changes to the IWC s Orders. 1. Applicability of Order This order shall apply to all persons employed in the on-site occupations of construction, including but not limited to work involving alteration, demolition, building, excavating, renovation, remodeling, maintenance, improvement, and repair work, and work for which a contractor s license is required by the California Business and Professions Code, Division 3, Chapter 9, Sections 7025 et seq.; drilling, including but not limited to all work required to drill, establish, repair, and rework wells for the exploration or extraction of oil, gas, or water resources; logging work for which a timber operator s license is required pursuant to California Public Resources Code Sections 4571 through 4586; and mining (not covered by Labor Code Section 750 et seq.), including all work required to mine and/or establish pits, quarries, and surface or underground mines for the purposes of exploration or extraction of nonmetallic minerals and ores, coal, and building materials such as stone and gravel, whether paid on a time, piece rate, commission, or other basis, except that: (A) The provisions of Sections 3 through 11 shall not apply to persons employed in administrative, executive, or professional capacities. No person shall be considered to be employed in an administrative, executive, or professional capacity unless the person is primarily engaged in the duties which meet the test of the exemption, and earns a monthly salary equivalent to not less than (2) two times the state minimum wage for full-time employment. The duties that meet the test of the exemption are one of the following set of conditions: (1) The employee is engaged in work which is primarily intellectual, managerial, or creative, and which requires exercise of discretion and independent judgment; or (2) The employee is licensed or certified by the State of California, and is engaged in the practice of one of the following recognized professions: law, medicine, dentistry, optometry, architecture, engineering, teaching, or accounting, or the employee is engaged in an occupation that is commonly recognized as a learned or artistic profession; provided, however, that pharmacists employed to engage in the practice of pharmacy, and registered nurses employed to engage in the practice of nursing, shall not be considered exempt professional employees, nor shall they be considered exempt from coverage for the purposes of this section unless they individually meet the criteria established for exemption as executive or administrative employees. (3) To the extent that there is no conflict with California law (Labor Code Section 515(e) requires than an employee be primarily engaged in exempt work, which means more than one-half of the employee s work time. Thus the primary duty test set forth in federal regulations does not apply.), the duties that meet the test of the administrative and executive exemptions are defined as set forth in the following sections of the Code of Federal Regulations as they existed as of the date of this wage order: 29 C.F.R. Sections 541.1 (a)-(c), 541.102, 541.104, 541.105, 541.106, 541.108, 541.109, 541.111, 541.115, and 541.116 (defining executive duties); 29 C.F.R. Sections 541.2 (a)-(c), 541.201, 541.205, 541.208, and 541.210 (defining administrative duties). (4) For the purposes of this section, full-time employment means employment in which an employee is employed for 40 hours per week. (B) Except as provided in Sections 1, Applicability; 2, Definitions; 4, Minimum Wages; 9, Meals and Lodging; and 18, Penalties, the provisions of this order shall not apply to any employees directly employed by the State or any political subdivision thereof, including any city, county, or special district. (C) The provisions of this order shall not apply to outside salespersons. (D) The provisions of this order shall not apply to any individual who is the parent, spouse, child, or legally adopted child of the employer. (E) The provisions of this order shall not apply to any individual participating in a national service program, such as Ameri- Corps, carried out using assistance provided under Section 12571 of Title 42 of the United States Code. (See Stats. 2000, ch. 365, amending Labor Code Section 1171.) (F) This order supersedes any industry or occupational order for those employees employed in occupations covered by this order. 26 1

2. Definitions Released: July Exhibit 12, 2007 3 (A) Alternative workweek schedule means any regularly scheduled workweek proposed by an employer who has control over the wages, hours, and working conditions of the employees, and ratified by an employee work unit in a neutral secret ballot election, that requires an employee to work more than eight (8) hours in a 24-hour period. (B) Commission means the Industrial Welfare Commission of the State of California. (C) Construction occupations mean all job classifications associated with construction, including but not limited to work involving alteration, demolition, building, excavation, renovation, remodeling, maintenance, improvement, and repair work, by the California Business and Professions Code, Division 3, Chapter 9, Sections 7025 et seq., and any other similar or related occupations or trades. (D) Division means the Division of Labor Standards Enforcement of the State of California. (E) Drilling occupations mean all job classifications associated with the exploration or extraction of oil, gas, or water resources work, including but not limited to the installation, establishment, reworking, maintenance or repair of wells and pumps by boring, drilling, excavating, casting, cementing and cleaning for the extraction or conveyance of fluids such as water, steam, gases, or petroleum. (F) Emergency means an unpredictable or unavoidable occurrence at unscheduled intervals requiring immediate action. (G) Employ means to engage, suffer, or permit to work. (H) Employee means any person employed by an employer. (I) Employer means any person as defined in Section 18 of the Labor Code, who directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person. (J) Hours worked means the time during which an employee is subject to the control of an employer, and includes all the time the employee is suffered or permitted to work, whether or not required to do so. (K) Logging occupations mean any work for which a timber operator s license is required pursuant to California Public Resources Code Sections 4571-4586, including the cutting or removal or both of timber or other solid wood forest products, including Christmas trees, from timberlands for commercial purposes, together with all the work that is incidental thereto, including but not limited to construction and maintenance of roads, fuel breaks, fire breaks, stream crossings, landings, skid trails, beds for the falling of trees, and fire hazard abatement. (L) Mining occupations mean miners and other associated and related occupations (not covered by Labor Code Sections 750 et seq.) required to engage in excavation or operations above or below ground including work in mines, quarries, or open pits, used for the purposes of exploration or extraction of nonmetallic minerals and ores, coal, and building materials such as stone, gravel, and rock, or other materials intended for manufacture or sale, whether paid on a time, piece rate, commission, or other basis. (M) Minor means, for the purpose of this order, any person under the age of 18 years as defined by Labor Code Sections 1285-1312 and 1390-1399. (N) Outside salesperson means any person, 18 years of age or over, who customarily and regularly works more than half the working time away from the employer s place of business selling tangible or intangible items or obtaining orders or contracts for products, services or use of facilities. An outside salesperson does not include an employee who makes deliveries or service calls for the purpose of installing, replacing, repairing, removing, or servicing a product. (O) Primarily means more than one-half the employee s work time. (P) Regularly scheduled workweek means a schedule where the length of the shift and the number of days of work are predesignated pursuant to an alternative workweek schedule. (Q) Split shift means a work schedule, which is interrupted by non-paid non-working periods established by the employer, other than bona fide rest or meal periods. (R) Wages are as defined by California Labor Code Section 200. (S) Workday and day mean any consecutive 24-hour period beginning at the same time each calendar day. (T) Workweek and week mean any seven (7) consecutive days, starting with the same calendar day each week. Workweek is a fixed and regularly recurring period of 168 hours, seven (7) consecutive 24-hour periods. (U) Work unit means all nonexempt employees of a single employer within a given craft who share a common work site. A work unit may consist of an individual employee as long as the criteria for an identifiable work unit in this subsection are met. 3. Hours and Days of Work (A) Daily Overtime - General Provisions (1) The following overtime provisions are applicable to employees 18 years of age or over and to employees 16 or 17 years of age who are not required by law to attend school and are not otherwise prohibited by law from engaging in the subject work. Such employees shall not be employed more than eight (8) hours in any workday or more than 40 hours in any workweek unless the employee receives one and one-half (1 1 /2) times such employee s regular rate of pay for all hours worked over 40 hours in the workweek. Employment beyond eight (8) hours in any workday or more than six (6) days in any workweek is permissible provided the employee is compensated for such overtime at not less than: (a) One and one-half (1 1 /2) times the employee s regular rate of pay for all hours worked in excess of eight (8) hours up to and including 12 hours in any workday, and for the first eight (8) hours worked on the seventh (7th) consecutive day of work in a workweek; and (b) Double the employee s regular rate of pay for all hours worked in excess of 12 hours in any workday and for all hours worked in excess of eight (8) hours on the seventh (7th) consecutive day of work in a workweek. (c) The overtime rate of compensation to be paid to a nonexempt full-time salaried employee shall be computed by using one-fortieth (1/40) of the employee s weekly salary as the employee s regular hourly rate of pay. 27 2

(B) Alternative Workweek Schedules (1) No employer, who has control over the wages, hours, and working conditions of employees, Released: shall July be Exhibit 12, deemed 2007 3 to have violated the provisions of Section 3, Hours and Days of Work, by instituting, pursuant to the election procedures set forth in this order, a regularly scheduled alternative workweek pursuant to the following conditions: (a) The alternative workweek schedule shall provide for work by the affected employees of no longer than ten (10) hours per day within a 40 hour workweek without the payment to the affected employees of an overtime rate of compensation pursuant to this section. (b) An affected employee working longer than eight (8) hours but no more than ten (10) hours in a day pursuant to an alternative workweek schedule adopted pursuant to this section shall be paid an overtime rate of compensation of not less than one and one-half (1 1 /2) times the regular rate of pay of the employee for any work in excess of the regularly scheduled hours established by the alternative workweek agreement and for any work in excess of 40 hours per week. (c) An overtime rate of compensation of not less than double the employee s regular rate of pay shall be paid for any work in excess of 12 hours per day and for any work in excess of eight (8) hours on those days worked beyond the regularly scheduled workdays established by the alternative workweek agreement. (d) An employer shall not reduce an employee s regular rate of hourly pay as a result of the adoption, repeal or nullification of an alternative workweek schedule. (e) An employer shall make a reasonable effort to find a work schedule not to exceed eight (8) hours in a workday to accommodate any affected employee who was eligible to vote in an election authorized by this section and who is unable to work the alternative schedule established as the result of that election. Employees affected by a change in work hours resulting from the adoption of an alternative workweek schedule shall not be required to work those new work hours for at least 30 days after the announcement of the final results of the election. (f) An employer shall be permitted, but not required, to provide a work schedule not to exceed eight (8) hours in a workday to accommodate any employee who was hired after the date of the election and who is unable to work the alternative schedule established as the result of that election. (g) An employer shall explore any available reasonable alternative means of accommodating the religious belief or observance of an affected employee that conflicts with an adopted alternative workweek schedule, in the manner provided by Government Code Section 12940(j). (h) Notwithstanding paragraph (B)(1), subparagraphs (a)-(c), for employees working in offshore oil and gas production, drilling, and servicing occupations, as well as for employees working in onshore oil and gas separation occupations directly servicing offshore operations, an alternative workweek schedule may authorize work by the affected employees of no longer than 12 hours per day within a 40 hour workweek without the payment to the affected employees of an overtime rate of compensation. Employees working pursuant to an alternative workweek schedule adopted pursuant to this section shall be paid an overtime rate of compensation of no less than two (2) times their regular rate of pay in excess of the regularly scheduled hours established by the alternative workweek agreement, and for one and one-half (1 1 /2) times their regular rate of pay for any work in excess of 40 hours per week. The other provisions of this section, including those governing elections, shall apply to these occupations. (i) In no case shall an alternative workweek requiring more than eight (8) hours of work in a day be utilized on a public works contract in violation of Labor Code Sections 1810-1815. (C) Election Procedures Election procedures for the adoption and repeal of alternative workweek schedules require the following: (1) Each proposal for an alternative workweek schedule shall be in the form of a written agreement proposed by the employer who has control over wages, hours, and working conditions of the affected employees, and adopted in a secret ballot election, held before the performance of work, by at least a two-thirds (2/3) vote of the affected employees in the work unit. The proposed agreement must designate a regularly scheduled alternative workweek in which the specified number of work days and work hours are regularly recurring. The employer may propose a single work schedule that would become the standard schedule for workers in the unit, or a menu of work schedule options, from which each employee in the unit would be entitled to choose. If the employer proposes a menu of work schedule options, the employee may, with the approval of the employer, move from one menu option to another. (2) The election shall be held during regular working hours at the employees work site. Ballots shall be mailed to the last known address of all employees in the work unit who are not present at the work site on the day of the election but have been employed by the employer within the last 30 calendar days immediately preceding the day of the election. (3) Prior to the secret ballot vote, any employer who proposes to institute an alternative workweek schedule shall make a disclosure in writing to the affected employees, including the effects of the proposed arrangement on the employees wages, hours, and benefits. Such a disclosure shall include meeting(s), duly noticed, held at least 14 days prior to voting, for the specific purpose of discussing the effects of the alternative workweek schedule. An employer shall provide the disclosure in a non-english language, as well as in English, if at least five (5) percent of the affected employees primarily speak that non-english language. Notices shall be mailed to the last known address of all employees in the work unit in accordance with provision (2) above. Failure to comply with this paragraph shall make the election null and void. (4) Any election to establish or repeal an alternative workweek schedule shall be held during regular working hours at the work site of the affected employees. The employer shall bear the costs of conducting any election held pursuant to this section. Upon a complaint by an affected employee, and after an investigation by the labor commissioner, the labor commissioner may require the employer to select a neutral third party to conduct the election. (5) Any type of alternative workweek schedule that is authorized by the Labor Code may be repealed by the affected employees. Upon a petition of one-third (1/3) of the affected employees, a new secret ballot election shall be held, provided six (6) months have passed since the election authorizing the alternative workweek. A two-thirds (2/3) vote of the affected employees shall be required to reverse the alternative workweek schedule. The election to repeal the alternative workweek schedule shall be 28 3

held not more than 30 days after the petition is submitted to the employer. (6) If the number of employees who are employed for at least 30 days in the work unit that adopted Released: an July alternative Exhibit 12, 2007 workweek 3 schedule increases by 50 percent above the number who voted to ratify the employer-proposed alternative workweek schedule, the employer must conduct a new ratification election pursuant to the rules contained in subsection (C). (7) The results of any election conducted pursuant to this order shall be a public document and shall be reported by the employer to the Division of Labor Statistics and Research within 30 days after the results are final. The report of the election results shall also be posted at the job site in an area frequented by employees where it may easily be read during the workday. The report shall include the final tally of the vote, the size of the unit, and the nature of the business of the employer. Employees participating in the election shall be free from intimidation and coercion. However, nothing in this section shall prohibit an employer from expressing its position concerning that alternative workweek to the affected employees. No employees shall be discharged or discriminated against for expressing opinions concerning the alternative workweek election or for opposing or supporting its adoption or repeal. The labor commissioner shall investigate any alleged violation of this section and shall upon finding a serious violation render the alternative workweek schedule null and void. (D) Combination of Overtime Rates. Nothing in this section requires an employer to combine more than one rate of overtime compensation in order to calculate the amount to be paid to an employee for any hour of overtime work. (E) Nondiscrimination. No employee shall be terminated, disciplined or otherwise discriminated against for refusing to work more than 72 hours in any workweek, except in an emergency as defined in Section 2 (F) above. (F) Makeup Time. If an employer approves a written request of an employee to make up work time that is or would be lost as a result of a personal obligation of the employee, the hours of that makeup work time, if performed in the same workweek in which the work time was lost, may not be counted toward computing the total number of hours worked in a day for purposes of the overtime requirements, except for hours in excess of 11 hours of work in one (1) day or 40 hours of work in one (1) workweek. If an employee knows in advance that he/she will be requesting makeup time for a personal obligation that will recur at a fixed time over a succession of weeks, the employee may request to make up work time for up to four (4) weeks in advance; provided, however, that the makeup work must be performed in the same week that the work time was lost. An employee shall provide a signed written request for each occasion that the employee makes a request to make up work time pursuant to this subsection. While an employer may inform an employee of this makeup time option, the employer is prohibited from encouraging or otherwise soliciting an employee to request the employer s approval to take personal time off and make up the work hours within the same workweek pursuant to this subsection. (See Labor Code Section 513.) (G) One Day s Rest in Seven. The provisions of Labor Code Sections 551 and 552 regarding one (1) day s rest in seven (7) shall not be construed to prevent an accumulation of days of rest when the nature of the employment reasonably requires the employee to work seven (7) or more consecutive days; provided, however, that in each calendar month, the employee shall receive the equivalent of one (1) day s rest in seven (7). (H) Collective Bargaining Agreements (1) Subsections (A), (B), (C), (D), and (E) of Section 3, Hours and Days of Work, shall not apply to any employee covered by a valid collective bargaining agreement if the agreement expressly provides for the wages, hours of work, and working conditions of the employees, and if the agreement provides premium wage rates for all overtime hours worked and a regular hourly rate of pay for those employees of not less than 30 percent more than the state minimum wage. (See Labor Code Section 514). (2) Subsection (F) of Section 3, Hours and Days of Work, shall apply to any employee covered by a valid collective bargaining agreement unless the collective bargaining agreement expressly provides otherwise. 4. Minimum Wages (A) Every employer shall pay to each employee wages not less than seven dollars and fifty cents ($7.50) per hour for all hours worked, effective January 1, 2007, and not less than eight dollars ($8.00) per hour for all hours worked, effective January 1, 2008. (B) Every employer shall pay to each employee, on the established payday for the period involved, not less than the applicable minimum wage for all hours worked in the payroll period, whether the remuneration is measured by time, piece, commission, or otherwise. 5. Reporting Time Pay (A) All employer-mandated travel that occurs after the first location where the employee s presence is required by the employer shall be compensated at the employee s regular rate of pay or, if applicable, the premium rate that may be required by the provisions of Labor Code Section 510 and Section 3, Hours and Days of Work, above. (B) Each workday that an employee is required to report to the work site and does report, but is not put to work or is furnished less than half of his/her usual or scheduled day s work, the employer shall pay him/her for half the usual or scheduled day s work, but in no event for less than two (2) hours nor more than four (4) hours at the employee s regular rate of pay, which shall not be less than the minimum wage. (C) The foregoing reporting time pay provisions are not applicable when: (1) Operations cannot commence or continue due to threats to employees or property; or when recommended by civil authorities; or (2) Public utilities fail to supply electricity, water, or gas, or there is a failure in the public utilities, or sewer system; or (3) The interruption of work is caused by an Act of God or other cause not within the employer s control. (D) Collective Bargaining Agreements. This section shall apply to any employees covered by a valid collective bargaining agreement unless the collective bargaining agreement expressly provides otherwise. 29 4

6. Records Released: July Exhibit 12, 2007 3 (A) Every employer who has control over wages, hours, or working conditions shall keep accurate information with respect to each employee, including the following: (1) The employee s full name, home address, occupation, and social security number. The employee s date of birth, if under 18 years of age, and designation as a minor. Time records showing when the employee begins and ends each work period. Meal periods, split shift intervals, and total daily hours worked shall also be recorded. Meal periods during which operations cease and authorized rest periods need not be recorded. (2) Total wages paid each payroll period, including value of board, lodging, or other compensation actually furnished to the employee. (3) Total hours worked during the payroll period and applicable rates of pay. This information shall be made readily available to the employee upon reasonable request. When a piece rate or incentive plan is in operation, piece rates or an explanation of the incentive plan formula shall be provided to employees. An accurate production record shall be maintained by the employer. (B) Every employer who has control over wages, hours, or working conditions shall semimonthly or at the time of each payment of wages furnish each employee an itemized statement in writing showing: (1) all deductions; (2) the inclusive dates of the period for which the employee is paid; (3) the name of the employee or the employee s social security number; and (4) the name of the employer, provided all deductions made on written orders of the employee may be aggregated and shown as one item. (See Labor Code Section 226.) This information shall be furnished either separately or as a detachable part of the check, draft, or voucher paying the employee s wages. (C) All required records shall be in the English language and in ink or other indelible form, dated properly, showing month, day and year. The employer who has control over wages, hours, or working conditions shall also keep said records on file at the place of employment or at a central location for at least three years. An employee s records shall be available for inspection by the employee upon reasonable request. (D) Employers performing work on public works projects should refer to Labor Code Section 1776 for additional payroll reporting requirements. 7. Deductions from Pay No employer shall collect or deduct from any employee any part of the wages that are paid unless such deductions are allowed by law. (See Labor Code Sections 220-226.) No fee shall be charged by the employer or agent of the employer for cashing a payroll check. 8. Uniforms and Equipment (A) When the employer requires uniforms to be worn by the employee as a condition of employment, such uniforms shall be provided and maintained by the employer. The term uniform includes wearing apparel and accessories of distinctive design or color. (B) When the employer requires the use of tools or equipment or they are necessary for the performance of a job, such tools and equipment shall be provided and maintained by the employer, except that an employee whose wages are at least two (2) times the minimum wage may provide and maintain hand tools and equipment customarily required by the particular trade or craft in conformity with Labor Code Section 2802. 9. Meals and Lodging (A) Meal means an adequate, well-balanced serving of a variety of wholesome, nutritious foods. (B) Lodging means living accommodations available to the employee for full-time occupancy which are adequate, decent, and sanitary according to usual and customary standards. Employees shall not be required to share a bed. (C) Meals or lodging may not be credited against the minimum wage without a voluntary written agreement between the employer and the employee. When credit for meals or lodging is used to meet part of the employer s minimum wage obligation, the amounts so credited may not be more than the following: (D) Meals evaluated as part of the minimum wage must be bona fide meals consistent with the employee s work shift. Deductions shall not be made for meals not received or lodging not used. (E) If, as a condition of employment, the employee must live at the place of employment or occupy quarters owned or under Effective Effective January 1, 2007 January 1, 2008 Lodging: Room occupied alone... $35.27 per week $37.63 per week Room shared... $29.11 per week $31.06 per week Apartment two-thirds (2/3) of the ordinary rental value, and in no event more than... $423.51 per month $451.89 per month Where a couple are both employed by the employer, two-thirds (2/3) of the ordinary rental value, and in no event more than... $626.49 per month $668.46 per month 30 5

Meals: Released: July Exhibit 12, 2007 3 Breakfast... $2.72 $2.90 Lunch... $3.72 $3.97 Dinner... $5.00 $5.34 the control of the employer, then the employer may not charge rent in excess of the values listed herein. 10. Meal Periods (A) No employer shall employ any person for a work period of more than five (5) hours without a meal period of not less than 30 minutes, except that when a work period of not more than six (6) hours will complete the day s work the meal period may be waived by mutual consent of employer and employee. (See Labor Code Section 512.) (B) An employer may not employ an employee for a work period of more than ten (10) hours per day without providing the employee with a second meal period of not less than 30 minutes, except that if the total hours worked is no more than 12 hours, the second meal period may be waived by mutual consent of employer and employee only if the first meal period was not waived. (See Labor Code Section 512.) (C) In all places of employment the employer shall provide an adequate supply of potable water, soap, or other suitable cleansing agent and single use towels for hand washing. (D) Unless the employee is relieved of all duty during a 30 minute meal period, the meal period shall be considered an on duty meal period and counted as time worked. An on duty meal period shall be permitted only when the nature of the work prevents employee from being relieved of all duty and when by written agreement between the parties an on-the-job paid meal period is agreed to and complies with Labor Code Section 512. (E) Collective Bargaining Agreements. Subsections (A), (B), and (D) of Section 10, Meal Periods, shall not apply to any employee covered by a valid collective bargaining agreement if the agreement expressly provides for the wages, hours of work, and working conditions of the employees, and if the agreement provides premium wage rates for all overtime hours worked and a regular hourly rate of pay for those employees of not less than 30 percent more than the state minimum wage. (F) If an employer fails to provide an employee a meal period in accordance with the applicable provisions of this order, the employer shall pay the employee one (1) hour of pay at the employee s regular rate of compensation for each workday that the meal period is not provided. In cases where a valid collective bargaining agreement provides final and binding mechanism for resolving disputes regarding enforcement of the meal period provisions, the collective bargaining agreement will prevail. 11. Rest Periods (A) Every employer shall authorize and permit all employees to take rest periods, which insofar as practicable shall be in the middle of each work period. Nothing in this provision shall prevent an employer from staggering rest periods to avoid interruption in the flow of work and to maintain continuous operations, or from scheduling rest periods to coincide with breaks in the flow of work that occur in the course of the workday. The authorized rest period time shall be based on the total hours worked daily at the rate of ten (10) minutes net rest time for every four (4) hours worked, or major fraction thereof. Rest periods shall take place at employer designated areas, which may include or be limited to the employees immediate work area. (B) Rest periods need not be authorized in limited circumstances when the disruption of continuous operations would jeopardize the product or process of the work. However, the employer shall make up the missed rest period within the same workday or compensate the employee for the missed ten (10) minutes of rest time at his/her regular rate of pay within the same pay period. (C) A rest period need not be authorized for employees whose total daily work time is less than three and one-half (3 1 / 2 ) hours. Authorized rest period time shall be counted as hours worked for which there shall be no deduction from wages. (D) If an employer fails to provide an employee a rest period in accordance with the applicable provisions of this order, the employer shall pay the employee one (1) hour of pay at the employee s regular rate of compensation for each workday that the rest period is not provided. In cases where a valid collective bargaining agreement provides final and binding mechanism for resolving disputes regarding enforcement of the rest period provisions, the collective bargaining agreement will prevail. (E) This section shall not apply to any employee covered by a valid collective bargaining agreement if the collective bargaining agreement provides equivalent protection. 12. Seats Where practicable and consistent with applicable industry-wide standards, all working employees shall be provided with suitable seats when the nature of the process and the work performed reasonably permits the use of seats. This section shall not exceed regulations promulgated by the Occupational Safety and Health Standards Board. 13. Temperature The temperature maintained in each interior work area shall provide reasonable comfort consistent with industry-wide standards for the nature of the process and the work performed. This section shall not exceed regulations promulgated by the Occupational Safety and Health Standards Board. 14. Elevators Where practicable and consistent with applicable industry-wide standards, adequate elevators, escalators, or similar service consistent with industry-wide standards for the nature of the process and the work performed, shall be provided when employees 31 6

are employed 60 feet or more above or below ground level. This section shall not exceed regulations promulgated by the Occupational Safety and Health Standards Board. Released: July Exhibit 12, 2007 3 15. Exemptions If, in the opinion of the Division after due investigation, it is found that the enforcement of any provision contained in Section 6, Records; Section 11, Rest Periods; Section 12, Seats; Section 13, Temperature; or Section 14, Elevators, would not materially affect the welfare or comfort of employees and would work an undue hardship on the employer, exemption may be made at the discretion of the Division. Such exemptions shall be in writing to be effective and may be revoked after reasonable notice is given in writing. Application for exemption shall be made by the employer or by the employee and/or the employee s representative to the Division in writing. A copy of the application shall be posted at the place of employment at the time the application is filed with the Division. 16. Filing Reports (See California Labor Code, Section 1174(a)) 17. Inspection (See California Labor Code, Section 1174) 18. Penalties (A) Penalties for Violations of the Provisions of this Order. Any employer or any other person acting on behalf of the employer who violates, or causes to be violated, the provisions of this order, shall be subject to civil and criminal penalties as provided by law. In addition, violation of any provision of this order shall be subject to a civil penalty as follows: (1) Initial Violation - $50.00 for each underpaid employee for each pay period during which the employee was underpaid in addition to the amount which is sufficient to recover unpaid wages. (2) Subsequent Violations - $100.00 for each underpaid employee for each pay period during which the employee was underpaid in addition to an amount which is sufficient to recover unpaid wages. (3) The affected employee shall receive payment of all wages recovered. The labor commissioner may also issue citations pursuant to California Labor Code Section 1197.1 for non-payment of wages for overtime work in violation of this order. (B) Penalties for Violations of Child Labor Laws. Any employer or other person acting on behalf of the employer is subject to civil penalties of from $500 to $10,000 as well as to criminal penalties for violation of child labor laws. (See Labor Code Sections 1285 to 1312 and 1390 to 1399 for additional restrictions on the employment of minors and for descriptions of criminal and civil penalties for violation of the child labor laws.) Employers should inquire at local school districts about any required work permits required for minors attending school. (In addition, see California Labor Code, Section 1199) 19. Separability If the application of any provision of this order, or any section, subsection, subdivision, sentence, clause, phase, word, or portion of this order should be held invalid or unconstitutional or unauthorized or prohibited by statute, the remaining provisions thereof shall not be affected thereby, but shall continue to be given full force and effect as if the part is held to be invalid or unconstitutional had not been included herein. 20. Posting of Order Every employer shall keep a copy of this order posted in an area frequented by employees where it may be easily read during the workday. Where the location of work or other conditions make this impractical, every employer shall keep a copy of this order, and make it available to every employee upon request. OUT ENFORCEMENT of the Industrial Welfare Commission orders and reports of violations should be directed to the Division QUESTIONS of Labor Standards AB Enforcement. A listing of the DLSE offices is on the back of this wage order. Look in the white pages of your telephone directory under CALIFORNIA, State of, Industrial Relations for the address and telephone number of the office nearest you. The Division has offices in the following cities: Bakersfield, El Centro, Eureka, Fresno, Long Beach, Los Angeles, Oakland, Redding, Sacramento, Salinas, San Bernardino, San Diego, San Francisco, San Jose, Santa Ana, Santa Barbara, Santa Rosa, Stockton, Van Nuys. SUMMARIES IN OTHER LANGUAGES The Department of Industrial Relations will make summaries of wage and hour requirements in this Order available in Spanish, Chinese and certain other languages when it is feasible to do so. Mail your request for such summaries to the Department at: P.O. Box 420603, San Francisco, CA 94142-0603. RESUMEN EN OTROS IDIOMAS El Departamento de Relaciones Industriales confeccionara un resumen sobre los requisitos de salario y horario de esta Disposicion en español, chino y algunos otros idiomas cuando sea posible hacerlo. Envie por correo su pedido por dichos resumenes al Departamento a: P.O. Box 420603, San Francisco, CA 94142-0603. 32 7 Department of Industrial Relations P.O. Box 420603 San Francisco, CA 94142-0603

All complaints are handled confidentially. For further information or to file your complaints, contact the State of California at the following department offices: Released: July Exhibit 12, 2007 3 Division of Labor Standards Enforcement (DLSE) For labor law information and assistance for your area call the pre-recorded information lines in bold below. If the information you need is not provided in the pre-recorded message, please call the general office number listed. BAKERSFIELD Division of Labor Standards Enforcement 5555 California Ave., Suite 200 Bakersfield, CA 93309 661-395-2710 661-859-2462 EL CENTRO Division of Labor Standards Enforcement 1550 W. Main St. El Centro, CA 92643 760-353-0607 760-353-2544 EUREKA Division of Labor Standards Enforcement 619 Second Street, Room 109 Eureka, CA 95501 707-445-6613 707-441-4604 FRESNO Division of Labor Standards Enforcement 770 E. Shaw Ave., Suite 315 Fresno, CA 93710 559-244-5340 559-248-8398 LONG BEACH Division of Labor Standards Enforcement 300 Oceangate, 3 rd Floor Long Beach, CA 90802 562-590-5048 562-491-0160 LOS ANGELES Division of Labor Standards Enforcement 320 W. Fourth St, Suite 450 Los Angeles, CA 90013 213-620-6330 213-576-6227 OAKLAND Division of Labor Standards Enforcement 1515 Clay Street, Room 801 Oakland, CA 94612 510-622-3273 510-622-2660 REDDING Division of Labor Standards Enforcement 2115 Civic Center Drive, Room 17 Redding, CA 96001 530-225-2655 530-229-0565 SACRAMENTO Division of Labor Standards Enforcement 2031 Howe Ave, Suite 100 Sacramento, CA 95825 916-263-1811 916-263-5378 SALINAS Division of Labor Standards Enforcement 1870 N. Main Street, Suite 150 Salinas, CA 93906 831-443-3041 831-443-3029 SAN BERNARDINO Division of Labor Standards Enforcement 464 West 4 th Street, Room 348 San Bernardino, CA 92401 909-383-4334 909-889-8120 SAN DIEGO Division of Labor Standards Enforcement 7575 Metropolitan, Room 210 San Diego, CA 92108 619-220-5451 619-682-7221 SAN FRANCISCO Division of Labor Standards Enforcement 455 Golden Gate Ave. 10 th Floor San Francisco, CA 94102 415-703-5300 415-703-5444 SAN FRANCISCO HEADQUARTERS Division of Labor Standards Enforcement 455 Golden Gate Ave. 9 th Floor San Francisco, CA 94102 415-703-4810 SAN JOSE Division of Labor Standards Enforcement 100 Paseo De San Antonio, Room 120 San Jose, CA 95113 408-277-1266 408-277-3711 SANTA ANA Division of Labor Standards Enforcement 28 Civic Center Plaza, Room 625 Santa Ana, CA 92701 714-558-4910 714-558-4574 SANTA BARBARA Division of Labor Standards Enforcement 411 E. Canon Perdido, Room 3 Santa Barbara, CA 93101 805-568-1222 805-965-7214 SANTA ROSA Division of Labor Standards Enforcement 50 D Street, Suite 360 Santa Rosa, CA 95404 707-576-2362 707-576-2459 STOCKTON Division of Labor Standards Enforcement 31 E. Channel Street, Room 317 Stockton, CA 95202 209-948-7771 209-941-1906 VAN NUYS Division of Labor Standards Enforcement 6150 Van Nuys Boulevard, Room 206 Van Nuys, CA 91401 818-901-5315 818-908-4556 EMPLOYERS: Do not send copies of your alternative workweek election ballots or election procedures. Only the results of the alternative workweek election shall be mailed to: Prevailing Wage Hotline (415) 703-4774 Department of Industrial Relations Division of Labor Statistics and Research P.O. Box 420603 San Francisco, CA 94142-0603 (415) 703-4780 33 8

WCIRBCalifornia December 22, 2006 525 Market Street, Suite 800 San Francisco, CA 94105-2767 Voice 415.778.7028 Fax 415.778.7212 www.wcirbonline.org wcirb@wcirbonline.org Robert G. Mike President Eric Riley Vice President, Classification and Test Audit RE: WCIRB Study of Determination of Hourly Wage for Dual Wage Classifications In response to numerous concerns raised by employers and insurers, the Workers Compensation Insurance Rating Bureau (WCIRB) is undertaking a review of the current rules applicable to the determining a worker s hourly wage for the purpose of assigning the appropriate dual wage classifications. The exist rules are set forth in the California Workers Compensations Uniform Statistical Reporting Plan (USRP) at Part 3, Section IV, Rule 2. Enclosed is a copy of this rule. The WCIRB recognizes that this matter is of great importance to employers within the construction industry. Accordingly, as with all studies that may significantly impact policyholders, we will make every effort to make the process as transparent as possible to the affected stakeholders. Towards this end, the next critical step in the process is for the WCIRB to meet with representatives of the construction industries. The purpose of this outreach is to gain a better understanding of the manner in which the relevant payroll records are kept and to answer any questions regarding the scope of the current dual wage by classification program. It is anticipated that as a result of this effort the WCIRB will include within the January 1, 2008 pure premium rating filing a proposal to amend the applicable rule in such a way as to clarify its application and remove any ambiguities. If you are interested in meeting with the WCIRB to provide your input on this matter, please contact Mr. Brian Gray, Quality Assurance Director, no later than January 12, 2007. Brian can be reached by telephone, 415.778.7177, or via e-mail at bgray@wcirbonline.org. Based upon the level of interest, we will determine the best course of action to obtain the industry s input.. Thank you for your attention to this important effort. Sincerely, Eric Riley Vice President, Classification and Test Audit 34

Proposed Changes to the California Workers Compensation Uniform Statistical Reporting Plan 1995, Part 3, Standard Classification System, Section IV, Special Industry Classification Procedures, Rule 2, Construction or Erection Work Recommendation Amend Part 3, Standard Classification System, Section IV, Special Industry Classification Procedures, Rule 2, Construction or Erection Work, to specify that the assignment of a high wage construction classification is contingent upon the availability of records necessary to reconcile the number of hours worked against actual time cards or time sheets documenting the daily start and stop times for each employee. This change is consistent with California s wage and hour laws. PROPOSED Part 3 Standard Classification System Section IV Special Industry Classification Procedures 2. Construction or Erection Work a. Determination of Dual Wage Construction or Erection Classification A classification that requires the regular hourly wage to equal or exceed a specified amount may be used only in connection with payroll developed by employees engaged in the activity described by the classification and who are upon verification that the employee is paid an hourly wage which that equals or exceeds the specified amount,. provided separate records of payroll are maintained. Complete and accurate records supported by original time cards or time book entries that show by individual employee the operations performed, the hours worked, and remuneration earned by such employees are required. (1) If an employee is paid on a piecework or commission basis, the regular hourly wage for such employee shall be determined by dividing the total remuneration of such employee by the number of hours worked. The total remuneration used to calculate an hourly wage is determined as follows: Commissions and incentive payments that are calculated and paid each pay period shall be included with salary, piecework or hourly pay compensation to determine the employee s regular hourly wage. Fringe benefit payments, when excludable from payroll, shall be excluded from the hourly wage calculation. (See Section V, Payroll Remuneration.) (1) Records of Payroll For all employees, other than salaried employees, determination of the regular hourly wage must be supported by original time cards or time book entries for each employee indicating the operations performed, the time the employee started and ended each work period throughout the workday, and the total hours worked each day. For all employees, other than salaried employees, the payroll for which an hourly wage determination cannot be reconciled to time cards or time book entries as specified above shall 35

not be assigned to a classification that requires the regular hourly wage to equal or exceed a specified amount. For the purpose of administering this rule, a salaried employee is an employee who is remunerated at an established level of compensation on a weekly, monthly or annual basis, without regard to hours worked, sales volume, production levels or similar variables. (In addition to a base salary, salaried employees may also receive bonuses or commissions.) (2) If an employee is paid a salary for a weekly, monthly or other fixed period, the regular hourly wage shall be determined by dividing the employee s total remuneration by the number of hours in the salary period. If the number of hours worked is not documented, the number of hours worked shall be determined by multiplying the number of days during which the employee worked by eight (8). If the number of days worked is not documented, the number of hours shall be calculated using the number of workdays (not necessarily days worked) in the pay period multiplied by eight (8). (2) Total Remuneration for Regular Hourly Wage Calculation The remuneration used to calculate a regular hourly wage shall be determined as follows: (a) The following remuneration shall be used to determine the hourly wage, without regard to whether such payments are included as payroll: (i) Hourly wages (ii) Piecework (iii) Salary (iv) Commissions and incentive payments that are calculated and paid each pay period (i)(v) Fringe benefit payments made by the employer. However, when such payments are excludable from payroll, they shall be excluded from the hourly wage calculation. (See Section V, Payroll Remuneration.) (b) The following payments remuneration shall not be used to determine the hourly wage, without regard to whether such payments are included as payroll: (i) (a) Allowances. (ii) (b) Reimbursed business expenses. (iii) (c) Premium portion of overtime pay. (iv) (d) Compensation, such as quarterly or annual bonuses, that is not calculated and paid each pay period. (3) Regular Hourly Wage Calculation (a) Except as provided below, an employee s regular hourly wage shall be calculated by dividing each employee s total remuneration by the number of hours worked. As necessary, the number of hours worked for one or more pay periods shall be verified by reconciling the indicated hours worked with original time cards or time book entries that record the time the employee started and ended each work period throughout the workday, and the total hours worked each day. (b) An employee s regular hourly wage may be separately calculated and payroll separately classified for work performed in connection with: (i) Each job that is subject to federal, state, or local prevailing wage laws; and, (ii) Each separate and distinct type of construction or erection operation that is specifically described by a classification. 36

(c) For salaried employees, the regular hourly wage shall be determined by dividing the total annual remuneration by 2000 hours. If an employee is salaried for less than 12 months, the regular hourly wage shall be calculated for the salaried period on a prorated basis. Example 1 Combination Hourly Pay and Piecework An employee of a roofing contractor is paid as follows: $15.00 per hour for work performed at the contractor s equipment yard; $25.00 per hour tearing off old roofs; and piecework rates when installing or repairing roofing. The employer maintains time cards for each employee indicating the operations performed, the time the employee started and ended each work period throughout the workday, the total daily hours worked, and remuneration earned by each employee. During the pay period the employee worked 16 hours in the yard, 4 hours performing roofing tear off, and 20 hours installing or repairing roofs. The roofing piecework totaled $585. Weekly Payroll Journal: J. Smith Day Activity Hours Hourly Rate Piece Units Piece Rate Earnings 25-Feb Yard 8 15.00 N/A N/A 120.00 26-Feb Yard 8 15.00 N/A N/A 120.00 27-Feb Tear-off 4 25.00 N/A N/A 100.00 Roof - bitumen 4 n/a 4 50 200.00 28-Feb Roof - tile 8 n/a 4 55 220.00 1-Mar Roof - shingle 3 n/a 1 65 65.00 Roof - patch 5 n/a 4 25 100.00 Total 40 $925.00 Determination of the regular hourly wage: Employee Gross Pay Hours Worked Regular Hourly Wage J. Smith $925.00 40 $23.13 37

Example 2 Commission An employee of a plumbing repair company is paid commissions based on billed hours and product sales. The employee earns 20% of the billed hours (hourly rate charged the customer) for each repair completed. The employer s labor rate billed to customers is $80 per hour. The employee earns 40% commission on the sale of water heaters and plumbing fixtures. The employer maintains time cards for each employee indicating the operations performed, the time the employee started and ended each work period throughout the workday, the total daily hours worked, and remuneration earned by each employee. During the pay period the employee worked 65 hours, although only 43 hours were billed to customers. The employee also sold plumbing fixtures totaling $1500. Bi-Weekly Payroll Journal: M. Jackson Day Hours worked 18-Mar 0 Billed hours Commission on Billed hours Fixture Sales Commission on Sales Earnings 19-Mar 8 5 80.00 100 40.00 120.00 20-Mar 6 3 48.00 45 18.00 66.00 21-Mar 7 5 80.00 350 140.00 220.00 22-Mar 8 9 144.00 50 20.00 164.00 23-Mar 8 4 64.00 50 20.00 84.00 24-Mar 3 3 48.00 600 240.00 288.00 25-Mar 0 26-Mar 7 5 80.00 75 30.00 110.00 27-Mar 7 4 64.00 85 34.00 98.00 28-Mar 6 3 48.00 85 34.00 82.00 29-Mar 5 2 32.00 60 24.00 56.00 30-Mar 0 31-Mar 0 Total 65 43 $688.00 1500 $600.00 $1288.00 Determination of the regular hourly wage: Regular Hourly Employee Gross Pay Hours Worked Wage M. Jackson $1288.00 65 $19.82 Note that in the above example, if the hourly wage calculation were based, incorrectly, on billable hours, the regular hourly wage would be overstated. Therefore, if time cards or time book entries to verify the hours worked are not available, the payroll shall not be assigned to a classification that requires the regular hourly wage to equal or exceed a specified amount. It is incorrect to base the regular hourly wage calculation on billed hours. 38

Example 3 Salary An employee of a sheet metal contractor is retained as project supervisor at an annual salary of $60,000. The employee was retained for only three months during the policy period. As the employee was salaried for 3 of 12 months or 25% of the annual salary period, the regular hourly wage is calculated based on the prorated salary ($60,000 x 25% = $15,000), divided by the prorated number of hours (2000 x 25% = 500). The regular hourly wage calculation is $15,000 / 500 = $30.00 per hour. 39

1221 Broadway, Suite 900 Oakland, CA 94612 Voice 415.777.0777 Fax 415.778.7007 www.wcirb.com wcirb@wcirb.com