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California: How Should Labor Code Section 3301(b) Be Interpreted? Velasquez Puts That Question in the Spotlight

December 08, 2023 (17 min read)

By Hon. Susan V. Hamilton, Former Assistant Secretary and Deputy Commissioner, California Workers’ Compensation Appeals Board

The existence of an employment relationship is the lynchpin of workers’ compensation programs. California’s workers’ compensation act, which must be liberally construed to protect injured workers, presumes that persons rendering services for another are employees (Lab. Code § 3357). At the same time, California law also excludes some entities from the definition of “employer.” Lab. Code § 3301(b) is an example of one of those exclusions. That statute is at the heart of a recent appellate court decision, Velasquez v. Workers’ Comp. Appeals Bd. (2023) __Cal. App. 5th __, 88 Cal. Comp. Cases __, 2023 Cal. App. LEXIS 940. In Velasquez, the majority simultaneously acknowledges the constitutionality of Lab. Code § 3301(b) and interprets it to exclude the Salvation Army as the employer of Velasquez (applicant), who was injured while working in a warehouse in conjunction with the Salvation Army’s residential treatment program, which applicant entered as a condition of probation to avoid serving a prison sentence for a felony conviction. What makes the appellate court’s opinion even more captivating is the vociferous opposition shown by the dissenting justice to the majority’s interpretation of the statute as applied to the facts of the case.

The Facts

Applicant pled guilty in Santa Barbara Superior Court to a felony count. The court suspended entry of the judgment and placed applicant on supervised probation for three years with terms, including that he attend and complete a residential treatment program as directed by the county’s Probation Department. Applicant entered a residential adult rehabilitation center for substance abuse treatment. The center was operated by The Salvation Army, a private, non-profit organization. The Salvation Army’s residential program is a six-month program with requirements, and it was provided to applicant at no charge. The program’s requirements included 12 hours per week of counseling, attendance at weekly religious services, meditation, and a work therapy component. The work therapy component required applicant to work in The Salvation Army’s warehouse, and the purpose of this component of the program was to help participants become productive members of society.

Applicant worked in the warehouse five to six days per week under the direction of the warehouse supervisor. He worked alongside other program participants as well as regular warehouse employees. Although applicant did not receive a paycheck, he received a weekly cash gratuity between $12 and $14 dollars per week that he could use to purchase items in The Salvation Army store. Applicant was injured moving furniture at the warehouse and filed a claim for workers’ compensation benefits against The Salvation Army and County, both of whom denied the claim.

The dispute was tried before a WCJ, and the minutes of hearing identified the issues as (1) employment; (2) whether applicant was an employee of The Salvation Army since he was a beneficiary of a Court-mandated residential treatment program per Lab. Code § 3352; (3) the applicability of Lab. Code § 3351; and (4) the applicability of Lab. Code § 3301.

At trial applicant, both a probation department officer and an employee of The Salvation Army testified. The manager of the county’s probation department testified that the Salvation Army residential treatment program applicant attended was on the list of programs approved by the county. According to the manager’s testimony, applicant was allowed to choose among different residential treatment programs approved by the county, and he freely chose The Salvation Army residential treatment program. During participation in that program, applicant sustained an injury.

The Salvation Army’s intake coordinator also testified, and he discussed the intake paperwork that applicant agreed to as a participant in the program. That paperwork stated that the work therapy component of the program was mandatory and advised applicant that he would be required to perform manual labor, lifting, bending stooping, carrying, loading, unloading, and that he might be exposed to potentially dangerous instrumentalities and equipment. The intake paperwork also included a written waiver that applicant was required to sign, in which he agreed that he was not an employee entitled to workers’ compensation benefits, nor would he be permitted to sue for personal injury disability or death, even if caused by the negligence of The Salvation Army. Applicant signed the waiver.

Applicant disputed the probation officer’s testimony and testified that he was only offered The Salvation Army’s residential treatment program as an alternative to serving time in prison. Applicant also testified that the probation officer told him that The Salvation Army’s residential treatment program was free, and that he would receive counseling, attend alcohol anonymous meetings, and would likely do some work in The Salvation Army’s warehouse. Applicant further testified that he agreed to enter the program because he didn’t want to go to prison. Applicant did not have contact with the county’s probation department while participating in The Salvation Army’s program, although there was direct reporting by The Salvation Army to applicant’s probation officer.

The WCJ found that applicant was not an employee of either The Salvation Army or the county. As to The Salvation Army, the WCJ reasoned that it was statutorily excluded by the terms of Lab. Code § 3301(b), since The Salvation Army was sponsoring applicant as a condition of his program to help him maintain sobriety. The WCJ’s decision expressed his opinion that the societal interest in having non-profit organizations provide substance abuse programs to individuals such as applicant outweighs the workers’ compensation general interest of finding persons like applicant to be employees.

Applicant sought reconsideration, and the Appeals Board granted reconsideration but deferred a decision on the merits pending a further study. Later it issued an opinion and decision after reconsideration in which it affirmed the WCJ’s Findings and Order. The Appeals Board panel (panel) found The Salvation Army was exempt from providing workers’ compensation benefits to applicant since it was a non-profit sponsor of applicant’s court-ordered residential treatment program and therefore excluded as an employer under Lab. Code § 3301(b). Additionally, the panel found that county did not employ applicant because it did not exercise control over his working conditions.

Applicant filed a petition for writ of review, which was granted. In its response to the petition, the Appeals Board requested that the court’s decision be annulled, and the matter be remanded back to the Appeals Board for further consideration as to whether applicant was an employee of the county and whether The Salvation Army was applicant’s employer.

The Majority’s Analysis

On review, the court issued a split decision. The majority begins its analysis with an overview of California’s workers’ compensation act and, specifically, the statutes that define “employer” and “employee” as well as those that provide exceptions to both definitions. It acknowledges that California’s workers’ compensation act must be liberally construed by the courts to protect persons injured in the course of their employment. (Lab. Code § 3202). The definition of employer, the majority notes, includes a county and other public agency that has any natural person in service. (Lab. Code § 3300) The majority then references Lab. Code § 3301(b), which expressly excludes from the definition of employer a private, non-profit organization while acting solely as the sponsor of a person who, as a condition of sentencing by a superior or municipal court is performing services for the organization.

Next, the majority addresses the statutory definition of an employee by reviewing Lab. Code §§ 3351 and 3357. It then looks to those provisions in which an individual is statutorily excluded from the definition of employee—specifically, Lab. Code §§ 3352(a)(2), 3352(a)(9).

The majority wastes no time in finding that Lab. Code § 3301(b) applies and excludes The Salvation Army as applicant’s employer because it is a private, non-profit organization that was acting solely as applicant’s sponsor when applicant was directed by the court to perform services for it and was injured while performing those services. The majority looked to the history of Lab. Code § 3301b) and concludes the legislative intent supports its applicability to the facts of the case. It quotes analyses by the Finance, Insurance and Commerce Committee that the purpose of subdivision (b) of the statute was to clarify that those persons convicted of a crime who are given an opportunity of performing certain public services in lieu of serving time under the sponsorship of a private non-profit organization are not employees of the sponsoring private non-profit organization. It finds that applicant came squarely within the purpose of Lab. Code § 3301(b) when, in lieu of serving time in prison, he performed services under the sponsorship of The Salvation Army.

Then the majority addresses Arriaga v. County of Alameda (Arriaga) (1995) 9 Cal. 4th 1055, 60 Cal. Comp. Cases 316, relied on by the panel in affirming the WCJ’s conclusion that The Salvation Army was statutorily excluded as applicant’s employer. In Arriaga, the worker was assigned by a county sheriff’s department to work for the California State Department of Transportation (CALTRANS) as part of a sentence to work off an unpaid speeding ticket. CALTRANS assigned the worker to perform work duties on a weekend, and she claimed an injury while performing those work duties. Both the county and CALTRANS were found to be the worker’s employers for her community service work. As the Arriaga court held, subdivision (b) is only applicable where the county assigns a person to work for a private, non-profit organization as a condition of sentencing. Because the county assigned Arriaga to work for another governmental entity in lieu of sentencing, subdivision (b) was inapplicable.

The majority also looks to Arriaga’s discussion of the underlying basis of subdivision (b) and points out that the Supreme Court found it to be rational because it encourages private, non-profit entities to provide community service programs as an alternative to incarceration, which purpose is served by relieving the organization of the expense of workers’ compensation insurance. It also references Dominguez v. County of Orange (Dominguez) (April 8, 2016, ADJ8945451) 2016 Cal. Wrk. Comp. P.D. LEXIS 180, a panel decision cited in support of the Appeals Board’s decision affirming the WCJ’s finding that The Salvation Army was statutorily excluded as applicant’s employer.

As to applicant’s contention that Lab. Code § 3301(b) is inapplicable because the superior court only ordered him to complete a residential treatment program in lieu of serving time and did not order him to perform public or community service, the majority dismisses that argument, noting that subdivision (b) does not require public or community service—only that as a condition of sentencing, the person performs services for the organization sponsoring them. The majority points out that The Salvation Army’s residential treatment program was approved by the county probation department, and when the superior court ordered applicant to attend and complete a residential treatment program in lieu of serving time in prison, that order “necessarily included all aspects of the program, including the ‘work therapy’ component.” Thus, applicant’s work in The Salvation Army’s warehouse was a required component of the superior court’s sentencing order.

Since the majority concludes that Lab. Code § 3301(b) exempts The Salvation Army from being applicant’s employer, it declines to address the other contentions raised by The Salvation Army; specifically, whether applicant is statutorily excluded from being its employee under Lab. Code §§ 3352(a)(2) and (a)(9).

The majority also disagrees with applicant’s argument that Lab. Code § 3301(b) is unconstitutional as applied since it precludes him from workers’ compensation benefits. In dismissing applicant’s constitutional challenge, the majority acknowledges that California Constitution, art. XIV, § 4, vests the Legislature with plenary power to create and enforce a complete system of workers’ compensation. That power, the majority points out, is broad and includes the power to limit benefits, citing Facundo-Guerrero v Workers’ Comp. Appeals Bd. (2008) 163 Cal. App. 4th 640, 73 Cal. Comp. Cases 785. The majority chooses not to second-guess the wisdom of the Legislature’s policy determination that social public policy goals are best served by exempting private non-profit organizations from the status of an employer when sponsoring a criminal defendant in a substance abuse program as an alternative to incarceration.

Finally, the majority agrees that the underlying administrative record lacks sufficient factual findings and analysis as to whether the county was applicant’s employee. It acknowledges the Appeals Board’s confession of error and request for remand, and grants that request for further development of the record and consideration of applicant’s status vis-à-vis the county.

The Concurrence and Dissent

At the outset, the justice concurs that it is appropriate to remand the case to the Appeals Board to develop an adequate record as to whether the county was applicant’s employer but disagrees with the majority’s conclusion that The Salvation Army was not an employer for workers’ compensation purposes.

The dissent first looks to the wording of the superior court’s sentencing order. It points out that applicant was ordered to attend and complete a residential treatment program in lieu of a prison sentence but was not specifically ordered to perform work for The Salvation Army.

The dissent then looks to the wording of Lab. Code § 3301(b) and concludes that the subdivision is susceptible to two interpretations. Under the first interpretation, the work component of The Salvation Army’s residential treatment program was not a condition of sentencing, since applicant was ordered only to attend and complete a residential treatment program, not to perform services for a non-profit organization. Thus, under this interpretation, The Salvation Army would not be excluded as applicant’s employer and applicant would qualify as an employee.

Under the second interpretation, because completion of a rehabilitation program was a condition of sentencing and applicant performed services while participating in the program and fulfilling that condition, The Salvation Army would be exempt as applicant’s employer notwithstanding the fact that the work applicant performed was not imposed by the superior court. This interpretation was accepted and applied by the majority.

The dissenting justice argues that the first interpretation of subdivision (b) is more appropriate, is supported by the plain language of the statute, is consistent with the presumption in favor of workers’ compensation coverage, is consistent with the statute’s history, and is consistent with public policy. As to the plain language of Lab. Code § 3301(b), the dissent notes that subdivision (b) only applies when services are performed for a private, non-profit organization as a condition of sentencing. Here, the superior court did not impose a court order requiring applicant to perform services for The Salvation Army, but only to attend and complete a residential treatment program. The Salvation Army imposed the “work therapy” requirement upon applicant. Since applicant did not perform services for The Salvation Army as a condition of sentencing, the dissenting justice would find the exemption in subdivision (b) inapplicable.

The dissent goes on to emphasize that the superior court did not order applicant to attend The Salvation Army’s residential treatment program or order him to perform work for organization. Rather, the superior court’s order provided only that applicant attend and complete a residential treatment program as directed by the county probation department. Thus, applicant could have satisfied this requirement by attending any residential treatment program, including one that did not require him to work. It was The Salvation Army, not the superior court, who dictated the required components of the program but, the dissent points out, those conditions are not the equivalent of court-ordered sentencing conditions.

Next, the dissent discusses Arriaga, supra. It focuses on footnote 8 in the decision, which observes that the exemption in Lab. Code § 3301(b) would apply if the county assigns a person to work for a private non-profit organization, noting the purpose of the subdivision was to encourage organizations to provide community service programs by relieving such organizations of the expense of workers’ compensation insurance. Again, the dissent emphasizes that applicant was not assigned to work for The Salvation Army—only to attend and complete a residential treatment program. Also, the dissent compares the underlying facts here with those in Arriaga, supra. In this case, applicant was required to work 40 to 48 hours per week in the warehouse along with regular employees. In Arriaga, the worker was given a weekend community service assignment to pay off a speeding ticket. The dissent characterizes applicant’s work duties for The Salvation Army as a far cry from the weekend community service in Arriaga.

Further, since California’s workers’ compensation laws must be liberally construed to protect individuals from the risks inherent in employment, the dissent asserts that finding The Salvation Army applicant’s employer in this case is consistent with the principle of workers’ compensation coverage and is a reasonable statutory interpretation.

The dissent also disputes the majority’s claim that subdivision (b) was intended to encourage organizations like The Salvation Army to provide substance abuse programs at no cost to convicted defendants. The dissent reviews analyses of the bill that led to the adoption of subdivision (b) and emphasizes that non-profit organizations would only be excluded from the definition of employer to the extent that they use the labor of persons sentenced by municipal or superior courts to perform services for them. Thus, it is the performance of service for the sponsoring nonprofit organization that is critical to entitlement to the exclusion from employer status.

The dissent asserts that public policy is served by providing workers’ compensation coverage to applicant. It discusses State Compensation Ins. Fund v. Workmen’s Comp. Appeals Bd. (Childs) (1970) 8 Cal. App. 3d 978, 35 Cal. Comp. Cases 295, in which the court found a county jail inmate injured while working on a road crew entitled to workers’ compensation benefits. The court reasoned that policies underlying penology emphasize rehabilitation and view voluntary work projects as an important means of accomplishing that objective. Consistent with that view, the dissenting justice contends that public policy supports workers’ compensation coverage when a non-profit organization orders a probationer to work as part of a rehabilitation program.

The dissenting justice is also concerned that depriving applicant of workers’ compensation coverage leaves him with no remedy or recourse for the injuries he sustained while performing services for The Salvation Army. Applicant was required as a condition of participation in The Salvation Army’s residential treatment program to sign a waiver that shields The Salvation Army from any liability, even if its negligence causes injury. The dissent characterizes The Salvation Army’s waiver as contrary to public policy.

As to Dominguez, supra, the dissent argues that it is similarly premised on an erroneous application of Lab. Code § 3301(b) because the court did not order Dominguez to perform services for a non-profit organization. Just as in this case, Dominguez was ordered to complete a residential rehabilitation program, and the non-profit organization—not the court—required work as part of its program.

Finally, although the majority did not discuss two alternative theories offered by The Salvation Army as exemptions from employer status, the dissent discusses both theories briefly. First, the dissent addresses the exclusion from the definition of employee under Lab. Code § 3352(a)(2), where a person is performing services in return for aid or sustenance only, received from any religious, charitable or relief organization. As the dissent observes, the record contains no evidence that applicant performed services in return for sustenance or aid, so this exception is inapplicable.

Next is Lab. Code § 3352(a)(9), which excludes from the definition of employment a person performing voluntary service for a public agency or a private, non-profit organization who does not receive remuneration for the services other than meals, lodging, transportation, or reimbursement for incidental expenses. The dissent points out that work compelled in lieu of a prison sentence is neither voluntary, nor charitable, nor was the cash applicant received remuneration for his services. The dissent finds this exception inapplicable as well.

In summary, and consistent with Lab. Code § 3202, the dissent would conclude that The Salvation Army was applicant’s employer.

What Is to Come

The majority’s opinion is not the end of the road in Velasquez’s quest to obtain workers’ compensation benefits for the injuries he claims to have sustained while working in The Salvation Army’s warehouse. The case has been remanded for further development of the record as to whether Santa Barbara County was applicant’s employer. However, it is not a certainty that the majority’s conclusion that The Salvation Army is excluded from the definition of employer under Lab. Code § 3301(b), is the final word on that topic. The dissenting justice provides a strong argument that under facts like those in this case and the plain wording of the statute, Lab. Code § 3301(b) would not apply because the superior court’s sentencing order did not specifically direct applicant to perform services to a private, non-profit entity in lieu of imposing a prison term. Rather, it was the non-profit organization, here, The Salvation Army, that imposed work requirements upon applicant. Of course the majority’s conclusion that the superior court’s imposition of residential treatment in lieu of a prison term necessarily encompasses all aspects of such a program, including work requirements, deserves strong weight. A safe wager is that Velasquez is not the final word on the subject.

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