Table of Figures

Chapter 1: Introduction

Chapter 2: Background

Chapter 3: Overview of Carve-outs in California

Chapter 4: Introduction to the Case Studies

Chapter 5: Eastside Reservoir Project Carve-out

Chapter 6: National Electrical Contractors Association–International Brotherhood of Electrical Workers Carve-out

Chapter 7: Interviews with Ombudspersons

Chapter 8: Quantitative Analysis of NECA-IBEW Carve-out

Chapter 9: Conclusions

Appendix 1: Carve-Out Project Advisory Committee 206
Appendix 2: BILL NUMBER: SB 983
Appendix 3: CALIFORNIA CONSTITUTION--ARTICLE 14 LABOR RELATIONS
Appendix 4: Labor Code 3201 & 3201.5
Appendix 5: Model Standards of Conduct For Mediators
Appendix 6: The Ombudsman Code of Ethics
Appendix 7: Preliminary Evaluation of Party Negotiating Strength and Carve-out Agreement Balance

Appendix 8: OMBUDSMAN SURVEY

California’s workers’ compensation reform legislation of 1993 for the first time permitted authorized parties to collectively bargain for alternative workers’ compensation procedures. This provision is known informally as the carve-out, because specified employees and employers are carved out from the state workers’ compensation system.

The carve-out program was modeled on a similar experiment in Massachusetts, where Bechtel and the Pioneer Valley Building and Construction Trades Council had a collective bargaining agreement governing a single construction project. The Bechtel experience was important for its apparent success at reducing reported workers’ compensation costs, largely by lowering injury rates (see Table 1).

California Labor Code Section 3201.5, established by the 1993 Senate Bill 983 authored by Leroy Greene (see Appendix 2), allows unions and employers in the construction industry to agree on, through collective bargaining:

The statute gives the parties considerable leeway to establish the kind of program they want, as long as the agreement does not diminish compensation to injured workers and the final step of the alternative dispute resolution process includes the option of an appeal for reconsideration by the WCAB, and ultimately to the State Courts of Appeal.

At first limited to the construction industry, in 1994 Senate Bill 853 (Greene) (see Appendix 2) expanded the range of eligible employers to include businesses in: rock, sand, gravel, cement and asphalt operations; heavy duty mechanics; surveying; and construction inspection. Subsequent legislative sessions have seen efforts to expand carve-outs even further. These successive efforts have failed, largely due to concerns over protection of workers’ rights and benefits.

Under the original provisions of the construction carve-out statutes, the DWC administrative director reviewed proposed agreements and issued comments, yet the division lacked authority to disallow plans.

The 1994 revision gave the DWC administrative director authority to affirm that parties to a proposed agreement were eligible to participate, and that the union was a legitimate union representing the workers of employers under the agreement. The parties must also submit a copy of the agreement, although they do not need the DWC administrative director’s approval of the agreement itself.

Pursuant to Labor Code Section 3201.5(i), the DWC was required to report to the Legislature by June 30, 1996 and annually thereafter the number of employers and employees covered by carve-out agreements, as well as other data on claims, costs, vocational rehabilitation, and dispute frequency. However, these requirements were very limited in scope and offered a limited view of the impact of carve-outs.

The Commission on Health and Safety and Workers’ Compensation (CHSWC) was established by the same reform legislation that created carve-outs. CHSWC is charged with addressing the workplace health and safety and workers’ compensation systems in California, and recommending administrative or legislative modifications to improve their operation.

During its November 1996 meeting, CHSWC voted unanimously to approve a study of carve-out programs in California. The commission contracted with a multi-disciplinary research team at UC Berkeley’s Survey Research Center and Haas School of Business, and with the Stanford Center on Conflict and Negotiation to perform the research. CHSWC requested that the effort:

• Describe the carve-out programs that have been established.
• Determine the acceptability of these programs by unions, employers, program administrators, injured workers, and service providers.
• Describe the socially useful and less useful incentives of carve-outs for each group (e.g. worker, union, management, ombudsperson, lawyers, doctors, insurers).
• Identify the potential costs and benefits of carve-outs regarding the quality of safety programs, medical care and return-to-work services.
• Perform detailed case studies of two carve-outs.
• Identify the methods of alternative dispute resolution in California, and assess their efficiency, effectiveness and compliance with legal requirements.
• Develop a methodology for making valid estimates of the impact of carve-outs on injury rates, costs and outcomes.
• Implement the methodology for a preliminary quantitative study.

In its July 1996 report on the activities of calendar year 1995, the Division of Workers’ Compensation reported that seven carve-out agreements were reached:

In 1997 carve-out employers reported 10,372,459 person hours and $242,577,215—which is approximately 5,180 person-years of employment and one percent of construction employment statewide.

Each carve-out established lists of medical, medical-legal and vocational rehabilitation providers who could provide services for injuries and illnesses occurring under the carve-out.

Except for TIMEC Co., each agreement also established an alternative dispute resolution process. Generally the process starts with an ombudsperson, a neutral person available to all parties who attempts to avert or resolve disputes at an early stage. If unsuccessful, the worker may then move the matter to the next step, which typically is formal mediation by an independent, neutral mediator. Two alternative dispute resolution programs used a joint labor-management committee at this point. If mediation is unsuccessful, the parties turn to an outside neutral arbitrator—often a retired workers’ compensation administrative law judge. By statute, the decision of the arbitrator may be appealed to the seven-member Workers’ Compensation Appeals Board [Labor Code Section 3201.5(a)(1)]. Ultimately, a decision of the WCAB can be appealed to the civil courts at the court of appeals level.

While the Division of Workers’ Compensation reports stated that it was too early to evaluate the impact of carve-out programs on the cost of workers’ compensation, preliminary results looked promising.

DWC reported that claims numbering 519 in 1995, 837 in 1996, and 661 in 1997 were filed by employees covered by carve-out agreements. Of these 2017 claims as reported within the calendar year in which the injury occurred, only eight mediations and two arbitrations were recorded. The DWC report suggested that this reflected a virtual elimination of disputes under the alternative dispute resolution process.

In addition, the DWC reported that costs to employers in carve-outs were approximately half of those experienced by employers outside the carve-out arrangement.

Insurers stated that they were offering employers a workers’ compensation premium discount of approximately five to twenty-five percent for participating in a carve-out program. Because workers’ compensation costs are typically 3-15 percent of wages in the construction industry, such premium reductions were potentially substantial.

At the April 1996 National Conference of the Building and Construction Trades Department, AFL-CIO, a workshop was held for representatives of carve-out programs in California and Florida. The presentations were extremely favorable, although anecdotal, and focused on the following results achieved to date:

• Lower injury/claims rates. It was felt that with labor and management working together toward common results, greater awareness of safety had been achieved on carve-out construction projects. This was, however, the area in which anecdotal evidence seemed weakest and most conflicting. On the one hand, it was reported that on construction projects covered by these programs the number of claims filed had declined. On the other hand, none of the presentations could provide specific descriptions of the safety provisions that had been put in place. It was not clear whether reduced claims frequencies could have arisen from favorable selection of employers for these programs, or from injured workers being accommodated in such a way that they did not file claims.

• More effective medical delivery. It was widely reported that the quality of medical care delivered was better under the collectively bargained programs, although there is no health service research data to back up this claim. Anecdotally, two sources of improvement were noted:

• Virtually no friction in dispute resolution. There was unanimous agreement among the programs that the dispute resolution process was working very well, and better than expected. At the time, no disputes had proceeded to the arbitration stage.

• Cost savings. Based in part on the experience from Pioneer Valley (see Table 1), these programs hoped that cost savings of as much as 30 percent could be achieved through fewer claims and greater effectiveness. All of the programs currently in operation reported savings significantly above the expected 30 percent. In addition, Florida’s rate setting authority allows a 15 percent discount off the top of the manual rate in recognition of the special program features, including managed care medical networks.

• Great satisfaction expressed by employers, workers, and union leaders. Union leaders claimed they had not heard a single complaint about these programs from other union leaders or employers, and complete support for the programs from union membership.

Growing criticism and concern about aspects of the program , centered around five areas:

• Inadequate due process. Alternative dispute resolution might weaken the legal rights to due process by denying workers access to legal representation and the ability to collect information through discovery or deposition.

• Reduced benefits. Using limited medical networks might reduce physician choice by workers and might result in reduced quality of medical care.

• Distribution of savings. Employers might not pass anticipated savings on to workers. The distribution of savings is particularly problematic on projects with defined time frames and little opportunity for multiple, consecutive collective bargaining agreements.

• Continuity of treatment and adjudication. Perhaps the most important and least considered concern regards continued coverage for long-term disabilities. Collective bargaining agreements are time-limited, while partial or total permanent disabilities and certain temporary disabilities might extend well beyond the limits of these agreements. Further, the disabled worker might cease to be a member of the bargaining unit covered by the agreement. Finally, many disabilities result from cumulative exposures over long periods of time, where many employers inside or outside a particular agreement retain partial responsibility for these cases.

• Unnecessary risk to unions and employers. These programs might place unions at risk of legal liability for failure to provide fair representation to each member—for instance, by denying the current system’s right to due process or by limiting benefits. These programs might also jeopardize the employer’s immunity from civil action filed by employees provided for in the current system.

This study used a number of methods to evaluate carve-outs. We reviewed the collective bargaining agreements for all existing carve-outs. The dimensions of these agreements are summarized in Chapter 3.

For intensive case study we chose two carve-outs that were very different models. The NECA-IBEW carve-out is a multi-employer carve-out with a single union covering electricians throughout the state (see Chapter 4). The Eastside Reservoir Project carve-out involves an owner, Metropolitan Water District, and more than 200 contractors and subcontractors and all crafts unions (see Chapter 4). For these case studies we interviewed a number of participants in the founding and continued operation of the carve-outs, including representatives of labor and management and the ombudspersons most directly involved in the carve-out. We also interviewed a small number of employees who had experienced difficult compensation claims.

We surveyed the ombudspersons on all California carve-outs. The survey covered their background, training and duties, and other issues (see Chapter 6).

Finally, we performed a quantitative analysis of the first two-plus years of experience of one of the study carve-outs. We examined a number of important outcomes, including incurred and paid indemnity and medical costs, paid legal and medical-legal costs, injury rates, and dispute frequency.

We will begin by giving background information on the reasoning behind the development of carve-outs and how the carve-out structure fits within the framework of current institutions. First, we will describe characteristics of the workers’ compensation system. Second, we will describe characteristics of the construction industry, and the unique institutions and needs that explain why carve-outs were first introduced in that arena.

We will present an overview of the current carve-out programs. This includes the participants and key structural elements of dispute resolution as well as medical and medical-legal provision. This is followed by detailed case studies of two carve-outs: Eastside Reservoir in Southern California and the NECA-IBEW agreement that covers the whole state. The early results from the NECA-IBEW carve-out will be evaluated using insurer cost and dispute data from the carve-outs and the statutory system.

In the last section we will present the conclusions of our work regarding carve-outs and recommendations for their operation and future study.

Carve-outs in California involve modifying the workers’ compensation system in the construction industry in ways that affect provider services, use alternative dispute resolution, and may improve safety programs. This chapter gives background information on the workers’ compensation system, the construction industry, workers’ compensation issues in construction, alternative dispute resolution, and safety programs.

Workers’ compensation systems are set up to provide compensation to employees for work-related injuries or illnesses—including medical treatment costs, temporary payment for lost wages, and permanent disability payments that compensate the injured worker for residual impairment/disability.

Workers’ compensation in California dates back to the 1911 formation of the Industrial Accident Board. In today’s workers’ compensation system, the employee exchanges the tort process of pursuing awards in civil court for a process that provides prompt delivery of benefits and legal protection against discrimination. The employer provides workers’ compensation benefits regardless of fault in exchange for protection against civil action by the employee.

In summary, this compromise:

• Requires the employer to pay benefits no matter who caused the injury as long as the injury arose out of employment.
• Assures injured workers of fixed benefits, though they might be less than benefits that could be obtained through a civil suit.
• Establishes the workers’ compensation system as the exclusive remedy for workplace injuries and illnesses.

Both parties are provided with an administrative law procedure for dispute resolution that aims to resolve disputes quickly. By constitutional mandate:

Faced in 1993 with workers’ compensation costs at historic highs—and the perceived success of an experiment in labor-management negotiation that reduced such costs, the Pioneer Valley Project in Massachusetts—the California Legislature enacted Senate Bill 983 (Greene). This legislation allowed collective bargaining agreements between a private employer or groups of employers engaged in construction, construction maintenance, or activities limited to rock, sand, gravel, cement and asphalt operations, heavy-duty mechanics, surveying, and construction inspection, and a union that is the recognized or certified exclusive bargaining representative. Under these agreements, called carve-outs, the parties can negotiate the following:

• An alternative dispute resolution procedure for disputes between employees and employers or their insurers that supplements or replaces all or part of the dispute resolution procedure contained in this division [Labor Code Division 4: Workers’ Compensation and Insurance], including but not limited to mediation and arbitration. Any system of arbitration shall provide that the decision of the arbitrator or board of arbitration is subject to review by the appeals board in the same manner as provided for reconsideration of a final order, decision or award made and filed by a workers’ compensation judge pursuant to the procedures set forth in Article 1 [commencing with Section 5900, Chapter 7 of Part 4, Division 4], and the court of appeal pursuant to the procedures set forth in Article 2 [commencing with Section 5950, Chapter 7 of Part 4, Division 4] governing orders, decisions or awards of the appeals board. The findings of fact, awards, order or decision of the arbitrator shall have the same force and effect as awards, order or decision of a workers’ compensation judge. Any provision for arbitration established pursuant to these sections shall not be subject to Sections 5270, 5270.5, 5271, 5272, 5273, 5275, 5277.
• The use of an agreed list of providers of medical treatment that may be the exclusive source of all medical treatment provided under this division.
• The use of an agreed, limited list of qualified medical evaluators and agreed medical evaluators that may be the exclusive source of qualified medical evaluators and agreed medical evaluators under this division.
• Joint labor-management safety committees.
• A light-duty, modified job or return-to-work program.
• A vocational rehabilitation or retraining program using an agreed list of providers of rehabilitation services that may be the exclusive source of providers of rehabilitation services under this division.

However, the parties were not allowed to collectively bargain an "agreement that diminishes the entitlement of an employee to compensation payments for total or partial disability, temporary disability, vocational rehabilitation, or medical treatment fully paid by the employer as otherwise provided in this division."

Within carve-outs the dispute resolution process is controlled by parties to the agreement. Employers and/or unions employ and compensate the ombudspersons, mediators and arbitrators. In some cases, employers and/or union members act as ombudspersons and mediators. Consequently, unlike the state administrative law system, the decision maker in dispute process is not necessarily neutral about the outcome. In addition, that outcome may affect third parties such as the insurer, employers outside the carve-out, and the state. Collective bargaining may also leave one side with greater control over alternative dispute resolution. We will carefully define the parties and the workers’ compensation roles they play.

Workers: Nearly all workers in California are covered by the workers’ compensation system. Exceptions are independent contractors—although the definition is very narrowly drawn for the purposes of workers’ compensation, federal employees, railroad workers, and longshore and harbor workers. Foreigners, including illegal aliens, are entitled to benefits if they are injured on the job. If the worker is unable to recover from the employer because the employer was illegally uninsured and unable to pay, the state steps in and pays compensation from the Uninsured Employers Fund.

Employers: While the terms employer and insurer are often used interchangeably when the system is discussed, these terms need more careful definition. The employer component of the workers’ compensation system has these qualities:

All of these qualities can reside in a single party, the self insured/self administered employer, or exist in different combinations. The incentives of these parties are not always coincidental, nor is the communication among these parties and with the worker always similar across different arrangements. This has important consequences for how alternative arrangements affect outcomes.

Insurers: Insurance for workers’ compensation takes several forms, each of which can have important implications for safety oversight and incentives to control some or all of the costs. In addition, the adjudication process can determine awards that fall outside the coverage supplied by the insurer, either directly on the employer or on another insurer.

Approximately eight percent of California’s workers suffer a workplace injury or illness in a year. Fortunately, most are minor injures, about two-thirds of them requiring only medical treatment and, at most, one or two days off work. Though these injuries/illnesses result in opening a claim and filing a report with the Department of Industrial Relations, most are quickly resolved with all medical care paid for by the employer or the employer’s insurer.

The remaining third of claims involve indemnity payments and are more complex to resolve. While events in a case often overlap and timing varies, the basic events follow a pattern similar to Figure 1. When a worker is injured, or in the instance of a cumulative injury becomes aware that an injury or illness is work-related, that worker is required to notify the employer. Notifying the employer in turn requires notifying the insurer or claims administrator, who as noted above can also be the employer. Notifying the insurer in turn starts the clock on numerous statutory and regulatory requirements for delivery of benefits and legal decisions.

Most workers receive medical treatment and return to work with no lost time or within a few days. If the worker misses more than three days work, temporary disability payments are made. These payments continue until the injured worker is released to return to work or is declared permanent and stationary, which means that the worker has reached maximum medical improvement. This may be complete recovery, which occurs 80-85 percent of the time, or residual impairment as in 15-20 percent of the claims.

About one-third of the claims result in temporary disability with the worker missing three or more days work. For this lost work time the injured worker receives temporary total disability payments equal to approximately two-thirds of the worker’s wage at injury, up to the current maximum of $490 per week.

While most temporarily disabled workers, 50-60 percent, return to work after a short time on temporary total disability and without residual impairment, a substantial number suffer injuries that result in permanent partial disability. Such workers have suffered a permanent impairment resulting from their injury even after their condition has reached maximum improvement, and they receive payments meant to compensate them for their "lost ability to compete in the open labor market."

If a worker’s permanent disability makes return to the former job impossible and the worker’s employer is unable to offer an alternate or modified job meeting certain requirements, then the worker is eligible for vocational rehabilitation benefits. These benefits include resources for temporary support, vocational rehabilitation maintenance allowance, training, and job search assistance.

Minimum indemnity benefit levels are set by statute. Nothing precludes an employer or insurer from increasing the level of benefits. However, even in unionized workplaces where wage replacement rates for more highly paid workers may be low, negotiation over the level of disability benefits as part of the compensation package is uncommon.

Medical treatment in the workers’ compensation system is paid for by the employer/insurer. Medical treatment costs are approximately 40 percent of the benefits paid out to injured workers, $2.0 billion for insured employers in 1997. Statutes establish several conditions governing medical treatment that bear directly on the motivation for carve-out arrangements:

• Coverage is "first dollar coverage," no deductibles or co-payments by the employee.
• The employer is required to pay for all treatment that is reasonably required to cure or relieve the effects of the injury, and remains liable for any medical treatment necessary for the particular work-related injury for the life of the worker.
• The employer under nearly all circumstances can determine the choice of medical provider only during the first 30 days of treatment.
• The employee has the option after the first 30 days to select any doctor, chiropractor, psychiatrist, acupuncturist, and the like. If the employee notifies the employer prior to an injury, the employee can predesignate a treating physician for all treatment, including the first 30 days.

Medical treatment costs are governed by the state Official Medical Fee Schedule, which establishes "reasonable maximum fees paid for medical services" with workers’ compensation.

Disputes between medical providers and insurers concerning medical treatment are common. The disputes involve the length, intensity or appropriateness of treatment and the charge for treatment. Medical treatment disputes between the provider and payer frequently result in medical liens being filed against a case. The liens require the intervention of the Workers’ Compensation Appeals Board (WCAB). Currently, lien resolution accounts for 25 percent of conferences and hearings scheduled by the WCAB.

Cost containment is a major issue because co-pay or deductible requirements are forbidden by statute and medical costs run 40-45 percent of all benefit costs. Group health models that have successfully controlled health benefits paid by employers are not easily transferable to workers’ compensation. That is because the models involve contracting between payer and provider, shifting cost control responsibility and sometimes risk to the provider. However, the employer controls medical care for only the first 30 days. While a large number of claims involve no treatment after 30 days, the majority of medical costs accrue on treatment delivered after the first 30 days.

The issue of controlling the primary treating physician became even more important when the WCAB issued a decision in Minniear v. Mt. San Antonio Community College District extending the presumption in favor of the treating physician to treatment as well as evaluation. Medical treatment costs show very skewed distributions. For example, low back injuries are the most common injury category in the compensation system, between 20 and 30 percent of claims depending on the definition of low back. For 90 percent of these claims medical treatment ends in less than 30 days, which is within the period of employer medical control. However, the majority of costs are incurred on claims lasting more than 30 days. Similarly, physical therapy accounts for 30 percent of the cost of low back treatment. Seventy-five percent of low back claims have fewer than four physical therapy treatments, but ninety percent of the physical therapy dollars are spent on claims with more than four visits.

In a decade that saw virtually flat costs on the health benefit side due to managed care, employers still faced a 5-10 percent annual increase in average medical costs per workers’ compensation claim.

Under carve-out arrangements, labor and management can negotiate the length of medical control. Most often, collective bargaining agreements have set this at the life of the claim. However, the employer does not choose the doctor, as can be done in the statutory system, and only restricts the doctor to a jointly negotiated list. While this list is often extensive, applicant attorneys have voiced frustration at not being able to choose doctors they feel will treat or evaluate injured workers most favorably.

Complaints about abuse of control of the treating physician are often leveled at the employer. In fact, statutory maintenance of the 30-day limit on employer control in the face of rising costs has been justified as a way to encourage employers to maintain the proper balance between treatment and cost. The reasoning is that if the employee receives good medical treatment during the initial period, there will be little incentive to change physicians after 30 days.

For California’s carve-outs the tension between employers and unions over the restrictions of medical provider lists has been one of the most serious problems. The balance between cost control and freedom of choice is one of the main challenges to the success of their internal responsibility systems.

Many critical issues in workers’ compensation are legal questions determined by medical findings. This is referred to as the medical-legal process and is distinct from treatment Medical-legal evaluations generally begin at the time the injured worker reaches maximum medical improvement, referred to as permanent and stationary in the California system. At this time, the primary treating physician makes a report concerning several issues, the most important of which are listed below. As with decisions about treatment, the findings are presumed to be correct and are difficult for an objecting party to overcome. Issues include:

The workers’ compensation system has been successful at establishing effective cost controls over medical-legal exams. One mechanism established during the same legislative reforms that created carve-outs was the granting of presumption to the findings of the primary treating physician. This high threshold has doubled from 15 percent to 30 percent the number of claims resolved based solely on the primary treating physician’s evaluation.

However, medical-legal costs are only two to three percent of insurers’ direct costs. The major impact of the medical-legal process on employer costs and employee benefits is indirect, though the effect that the opinion of the medical-legal evaluator has on indemnity payments to injured workers. The California medical-legal process and opinions on permanent disability have been criticized as overly subjective. Given the subjectivity, many argue that parties abuse the process by manipulating the choice of evaluating physician.

As an example, two doctors evaluating the same patient may differ in their permanent disability evaluation by a substantial amount. This is especially true if the doctors are chosen by the applicant or defense side for their liberal or conservative judgment. This is especially true if a particularly extreme evaluator is also the primary treating physician. Chart 1 compares the distribution of ratings performed by the DWC Disability Evaluation Unit on claims for which reports by more than one doctor were submitted for ratings on the same injury. On 50 percent of these claims the ratings differed by more than 7.5 rating points, a difference of between $3000 and $15,000 depending on rating and average weekly wage. On 10 percent of these claims the two ratings differed by more than 35 rating points, a difference of between $20,000 and $100,000 depending on rating and average weekly wage. Such differences are extraordinary, in light of the fact that the vast majority of ratings are below 25 percent. Examination of the most extreme conservative and liberal ratings suggests that they are highly concentrated among a subset of the evaluating physicians.

Carve-outs offer an opportunity to management and labor to agree on establishing limited lists of medical-legal evaluators. Ideally, the lists would eliminate the most extreme doctors while including the majority of evaluators, thus maintaining choice. This requires substantial effort by management and labor to identify and agree upon an applicable list, and this is one of the areas in which carve-outs have been least successful.

The major role of the Division of Workers’ Compensation (DWC) is to resolve disputes over entitlement to medical and indemnity benefits. Figure 3 describes this process. Claimants can file applications for adjudication at any stage in the process where a dispute arises. The basic steps, which may occur more than once or not at all, are 1) application for adjudication, 2) declaration of readiness to proceed, 3) mandatory settlement conference, 4) hearing, and 5) decision by judge/referee. Most cases settle before a trial or decision. The settlement document in most cases is a compromise and release agreement in which the claimant releases the insurer of liability in the case for a payment, usually a lump-sum. Other types of resolutions are stipulated settlements—voluntary settlements of all issues not stipulated, findings and awards, and take-nothings. The last two are decisions by a judge/referee.

Following a decision by a judge/referee, parties can appeal the decision to the Workers’ Compensation Appeals Board (WCAB). This is also the level at which a dispute that is unresolved in the carve-out alternative dispute resolution process would enter the conventional compensation dispute resolution process. WCAB decisions can be, but rarely are, appealed to the State Courts of Appeals.

The terms dispute and litigation are often used in discussions of the workers’ compensation system, and their meanings can be confusing. Here we use the term dispute to generally refer to any disagreement between parties over an issue that falls within the jurisdiction of the WCAB. The term litigation refers to disputes that involve one or more formal dispute resolution process.

The majority of claims are medical only, involve no dispute and are resolved quickly. A small percentage of claims have disputes over one or more issues that result in a mandatory settlement conference or hearing. Figure 3 shows the issues and approximate timing of them.

Since agreements involving permanent disability claims are required to be reviewed by a workers’ compensation judge for adequacy, nearly all claims involving permanent disability file an application for adjudication or a declaration of readiness. Most applications are filed simultaneously with a settlement document, either compromise and release or stipulated settlement. Only a small number of claims are actually adjudicated. The following table gives the approximate percentage of claims at each stage of the claims adjudication process.

*Data from WCAB On-line System, analyzed by authors, injury years 1991-1993

While two-thirds of claims are medical only, of the remaining third where the worker spends some time on disability, 40 percent involve some level of permanent disability. Of the permanent disability claimants, 80 percent are represented by attorneys.

Legal fees for attorney representation of injured workers before the Division of Workers’ Compensation, Workers’ Compensation Appeals Board, or Appellate Court are determined by the WCAB. No attorney may demand or accept a fee for such purpose until the amount of the fee has been approved or set by the WCAB. According to the Labor Code, when establishing these fees consideration is given to the responsibility assumed by the attorney, care exercised in representing the applicant, time involved and results obtained. In practice, local custom at the particular WCAB office is usually followed in applying a percentage to the benefits obtained by the worker. The law is silent on negotiation of fees for services other than representation before the division, board, or appellate courts.

The WCAB customarily determines fees as a percentage of the final settlement of benefits. The fee structure has evolved as a contingency fee dependent on the settlement of the claim and the decision of the WCAB judge concerning a reasonable percentage. The average fee is 12-18 percent of the award for permanent disability, future medical, and vocational rehabilitation maintenance amounts. In nearly all instances the attorney’s fee is paid out of the award to the worker, reducing the worker’s compensation by the size of the fee.

Though defense attorneys representing the employers/insurers are involved in fewer claims than applicant attorneys, defense attorney costs in any year are about 150 percent of the total applicant attorney costs. Data supplied by the WCIRB show that defense attorney expenses paid in 1997 were equal to 4.4 percent of premiums paid by insured employers. Applicant attorney expenses equaled 12.5 percent of all permanent disability and vocational rehabilitation maintenance allowance indemnity payments to injured workers in 1997.

The direct financial impact or liability of a workplace injury can fall on parties other than the insurer responsible for securing the liability for workers’ compensation coverage. Disputes over the liabilities are sometimes adjudicated within the administrative law system, and sometimes they involve additional legal issues that are resolved in the tort system. For example:

Each of the above issues involves specialized legal knowledge and injured workers without legal representation rarely pursue them.

Numerous other social insurance benefits are delivered that overlap the workers’ compensation system, making it difficult to isolate workers’ compensation from its impact on delivery of other benefits. Even "carved-out" alternative arrangements exist within a complex web of interrelated systems. Some important examples follow:

In theory, workers’ compensation benefits are provided to the injured workers quickly and easily or in the words of the California Constitution, "…shall accomplish substantial justice in all cases expeditiously, inexpensively, and without encumbrance…." Evidence in recent years indicates that many injured workers in California have not been able to get through the system quickly or easily. These workers’ problems appear to be caused in part by tremendous difficulties in learning about their rights and obligations in the workers’ compensation system and in getting sufficient help to process their claims. When faced with denials of their claims, long delays, or threats to their employment, these workers either forego their rights to medical treatment and benefits altogether or end up in protracted disputes and litigation.

Many of the workers report that they felt the system was unfair, they were kept in the dark about what was happening with their claims, shut out and pushed aside. Carve-out arrangements, particularly the ombudsperson innovation, were expected to resolve many of these problems. For example, the statutory system includes a mechanism, the DWC Information and Assistance Unit (I&A) that in theory acts like the ombudsperson in solving problems and informing workers about the process. However, I&A can be difficult to contact and has been ineffective in assisting workers who face problems. Without assistance from the state, workers felt required to seek the expertise and assistance of an attorney. Within carve-outs, ombudspersons were expected to assist the worker and theoretically increase understanding, solve problems, reduce disputes, and eliminate the need for attorneys.

Claim resolution in workers’ compensation is a long process. Half of all permanent disability claims are unresolved thirty months after injury, and ten percent remain unresolved after five years. Many system participants have blamed the dispute process for these delays, in particular the involvement of attorneys. The feeling is that attorney involvement leads to delays in resolution and escalation of disputes. Most carve-outs have instituted some form of restriction on attorney participation in the initial stages of alternative dispute resolution. It was the expectation of proponents that the dispute process would operate more inexpensively and more quickly under carve-outs.

Proponents of attorney involvement argue that the system is complex by nature and an unrepresented worker is unlikely to understand the full range of issues. This can have significant consequences for the workers’ compensation and the opportunity to return to work with the at-injury employer. The ombudsperson was expected to be available to answer questions at different points in the process, enabling workers to better understand the decisions faced at any moment, but ombudspersons were not expected to play the role of worker’s advocate.

The carve-out alternative dispute resolution process differs markedly from the state administrative law system. Control of the alternative dispute resolution process is in the hands of interested parties, while the state is essentially neutral on issues before the WCAB. As we will discuss later, the balance of power between management and labor in the collective bargaining process can influence the design of a carve-out’s alternative dispute resolution arrangement. In addition, many parties with interests in the outcome of a claim adjudicated under alternative dispute resolution are not parties to the collective bargaining process, and this could lead to shifting costs from the bargaining parties to third parties.

For example, the WCAB is a means by which SDI becomes aware of a compensation claim and is able to recover on that lien. On a monthly basis, the California Employment Development Department (EDD) matches SDI claims with claims filed at the WCAB. An EDD representative at each local WCAB office pursues recoveries of SDI liens when claims are resolved. Since SDI is worker supported and workers’ compensation is employer paid, separation of these two benefits has important implications. There is no mechanism within existing carve-outs to allow EDD to become aware of claims against an employer that involve EDD, and hence to facilitate recovery.

Liens by third parties, apportionment of permanent disability between multiple employers, third party liability against subcontractors covered under a wrap-up project, and liability for future medical treatment on the health benefit side are just a few of the issues that may be problematic under alternative dispute resolution.

The construction industry is primarily composed of small employers with less than 100 employees and who employ an itinerant work force. The majority of individual contractors cannot successfully predict their future volume of business and employment because of competitive bidding for projects. Except for a few key personnel, employment is limited from project to project.

Even within a particular project, employment fluctuates widely by craft. On a commercial or industrial building, for instance, operating engineers and teamsters are required to operate earth-moving equipment for site preparation and excavation. The next work is done by carpenters, concrete finishers, ironworkers, plumbers, pipe fitters and electricians, and a smaller number of operating engineers to hoist building materials. On a highway project, dam or other primarily earth-moving projects, the operating engineer employment is more continuous, though the types of equipment fluctuate.

A general contractor is responsible for an entire project and typically employs the five basic trades—carpenters, laborers, cement masons, operating engineers, teamsters—while subcontracting with specialty contractors for the other required skills. The specialty trades move even more frequently among projects, though they may remain for several projects in the employ of a single subcontractor. Whether for basic or specialty trades, any one project may last from a few weeks to a few years. A construction worker may have one or several employers in one construction season, and upwards of one hundred or more employers over a working career.

Since contractors cannot afford to keep workers on their payrolls between projects, a casual labor market is the result. Both the employer and the employee may be permanently attached to the industry while not attached to each other. Weather adds an additional seasonal and sporadic factor to the employment relationship, differing by geographical section of the country. A fully employed construction worker can rarely expect more than 1,500 annual hours of employment, including overtime.

The type of construction is another variable. Housing and commercial construction may be fairly continuous, though fluctuating in volume in any one locality. Highway construction is sporadic in any one locality, yet fairly continuous within a state. Heavy construction projects, such as dams and airports, and major industrial construction, such as power-generating plants, oil refineries and factories, occur rarely in any one locality. Commercial and housing contractors can concentrate geographically, while industrial and heavy and highway contractors must maintain geographical mobility. Craft mobility must be equal to that of the contractors.

The industrial relations of the construction industry are shaped by these forces. Since the employers tend to be relatively small and tenuous, the building and construction trades unions serve as the personnel arm of the industry in order to protect their members. With labor costs usually around 25 percent of total production costs and contracts awarded by competitive bidding, workers have an interest in seeing that wages are not unduly driven down in the process. The primary goal of construction unions is to take wages out of competition.

Though any one contractor might find advantage in breaking ranks and bidding on the basis of lower wages in a particular instance, they all have an interest in knowing that their competitors can not obtain skilled labor any more cheaply. Hence, there is employer support for a uniformly enforced wage rate. Wages negotiated between a craft union and an association of all the employers of that craft is an advantage to all within the industry.

Similarly, the training and recruitment functions are also shaped by the forces mentioned above. Few construction industry employers are large enough and provide sufficient continuity of employment to afford training their own employees. The costs must be imposed on the employees, the public education system, or spread over the entire industry. If a trainee is to have continuity of employment and exposure to all applications of the craft, there must be a mechanism for rotation among employers. Pursuant to regulations of the Taft-Hartley Act, jointly negotiated and administered union-management apprenticeship systems have resulted.

Also, for employers to be free to release any unnecessary employees, yet be assured of access to competent skills when they were again needed, there has to be a multi-employer referral system. Since the priority interest is that of the employees, the union is the driving force in hiring hall operations, but employer cooperation is essential.

If all of that is so, why has the construction industry, which was 70 percent union a generation ago, become 70 percent non-union? First, the driving force in the open shop movement has been not the contractor-employers, but the large-scale purchasers of construction services. While contractors were concerned more about relative costs than absolute costs, the purchaser of construction was paying the tab for all. Second, there has been considerable excess capacity and high unemployment in the industry for the past quarter century. Skilled workers were available and they had to accept employment where they could find it. If purchasers insisted upon non-union conditions and workers had no alternatives, open shop contractors had no difficulty finding the needed skills.

The construction industry has seen greater declines in unionization and wages than the U.S. labor market as a whole. Chart 2 shows the weakening of the union movement nationwide. Union membership has been declining since the mid-1950s, although it increased in absolute numbers until the early 1980s. The civilian labor force increased 22 percent from 1970 to 1980, whereas union membership increased only 8 percent in that decade.

Declining in absolute numbers thereafter, the percentage organized became half what it had been three decades earlier. Chart 3 shows that average real wages have fallen persistently since the early 1970s while benefits have stagnated, sustained from decline by rising health care costs.

These economy-wide trends in unionization and compensation have been realized in the construction industry to a larger extent. As Chart 4 shows, the construction industry has historically been one of the most unionized sectors of the U.S. economy. However, construction union membership, after starting higher, has fallen faster, farther, sooner, and almost as low as union membership in the general economy. In 1947 construction workers were 87 percent organized and by 1960, half of all construction workers were unionized. In 1991 construction worker unionization stood at 22 percent. During this precipitous decline, construction employment has maintained a constant five percent share of the U.S. labor force. Despite the dramatic decline in the rate of unionization, union workers have sustained a substantial wage premium over their nonunion counterparts. Figure 3 shows that the union wages have historically been 20 percent higher than nonunion wages. Real wages fell for both union and nonunion construction workers from 1970 to 1991 (see Figure 4). Union workers experienced a 26 percent decline while nonunion wages fell 27 percent.

The jointly-trusteed workers’ compensation funds, which administer and finance the carve-outs in California, are part of a long tradition of unions and union employers sponsoring benefit programs for their members and employees. Beginning around the 1850s, American labor unions sought to add benefits beyond wages to improve the well-being of their members. The movement did not gain much strength until the 1890s. Establishment of benefit funds was a dramatic break with the old ideology that insurance programs were more of a burden to unions than an advantage.

By the end of the century the ideology had changed. Unions recognized that benefit funds strengthened a union by bolstering its treasuries. The funds were not subject to a great deal of government regulation, and the union could invest the money as it wished or dip into the treasury in an emergency situation, such as a strike. Also, allegiance to the union was strengthene. Death benefits or pensions could only be obtained if the worker remained with the union. And when the economy took a downturn and employers tried to cut costs by hiring nonunion workers, these benefits were a factor in convincing union members not to scab in order to avoid losing such future income.

The first union-sponsored benefit funds were not collectively bargained for and were administered solely by the unions. In almost all unions, administration of benefit funds was "carried on by the officers who maintained the general affairs of the union."

Following World War II, benefit programs emerged as an integral objective of American unionism. Chronologically, the first factors contributing to the growth of union-negotiated benefit plans were the wage stabilization and taxation policies enacted during wartime and extended into the postwar period. The economic boom fostered a favorable climate at the collective bargaining table for union negotiators. However, their ability to bargain for increased wages was checked by government wage controls. Compensation had to be diverted into areas other than members’ paychecks. Taxation laws favored a shift from wages because employer contributions toward employee insurance were tax deductible. Also, employees did not have their benefit contributions taxed as income. The Internal Revenue Service decided to tax pensions only upon their receipt and not their accumulation. The result was an increase in the number of health insurance and pension programs within unions.

Most important for all unions, the National Labor Relations Board (NLRB) ruled in 1948 that pension and insurance benefits were included in the term wages, which meant that pensions and group insurance were mandatory subjects of collective bargaining. This decision came after a Chicago local of the United Steelworkers took the Inland Steel Company to court on the issue of employee benefits. Inland had refused to bargain on a change in the company’s pension plan. The NLRB ruled against the company, stating that pensions were included in the term wages under the National Labor Relations Act. The Supreme Court upheld the NLRB decision in April 1949. The effort of the Chicago local was a turning point in the history of union struggle for benefit programs. Because employers now had to bargain in good faith over such benefits though they did not have to grant them, health insurance and pensions became an integral part of any compensation package.

In 1947 Congress passed the Taft-Hartley Act of 1947. The act was a response to the National Labor Relations Act (NLRA) of 1935, which bolstered the power of organized labor. Management and conservative members of government sought to level the playing field or tip it in the direction of employers with the passage of Taft-Hartley. Its authors trusted employers, not unions, to unilaterally administer pension funds. In the case of union-negotiated benefit funds, a requirement for management representation was designed to prevent the union from using fund money to foster union goals. While management was given the right to serve on all union pension plans, Taft-Hartley did not mandate union representation on all benefit funds, which covered union members. The condition of union representation extended only to multi-employer plans. Single employer plans, such as the General Motors pension which covers members of the United Auto Workers, can be run exclusively by the employer. Subsection 302(c)(5)(b) of Taft-Hartley mandated that the multi-employer union pension funds be governed by an equal number of employer and union trustees. Generally, the union trustees were to be appointed by the president of the union in the case of a nationwide fund, or appointed by the chief administrative officer of a local union in the case of a local fund.

A jointly-trusteed benefit program in the construction industry has two sources of revenue: contributions from employers and employees and the return on assets held by a benefit fund. The responsibility for allocating this revenue falls in the hands of the board of trustees. The revenue flows to participants or insurance companies for payment of pension, health and welfare benefits and purchase of administrative services. The Employee Retirement Income Security Act of 1974 (ERISA) mandated that boards of trustees make these decisions under the consultation of professionals.

The joint management-labor trusteed benefit plans and the history of negotiating over benefits as well as wages set the stage for carve-outs. Carve-outs allowed management and labor to exchange aspects of rights, protections and regulatory oversight for reduced costs, potentially higher wages, and more union jobs.

In the early 1990s two severe blows hit the California construction industry. First, California was facing the worst recession in 50 years, and it was felt particularly strongly in the construction industry. As measured by the value of permits (see Chart 6), by 1993 construction had fallen to just half of what it had been at the end of the 1980s—the steepest decline in new construction in memory.

Source: California Labor Market Information Division, EDD

Second, workers’ compensation claim incidence and claim costs were at all-time highs. For the construction industry this was particularly serious. Because of the high rate of injuries and the severity of injuries, workers’ compensation costs are a significant cost of business to construction contractors. Table 3 gives the premium costs for most major construction trades per $100 of exposure, approximately equal to payroll without wage premiums for overtime.

Because union contractors paid higher wages than the nonunion sector, workers’ compensation premium costs, which are calculated as a percentage of payroll, were a problem for unions as well as employers. Union and nonunion workers received distinctly different wage rate distributions, employers were imperfectly experience modified, and employers paying higher wages were subsidizing the workers’ compensation costs of employers paying lower wages.

Just prior to this period, unions had been able to persuade the Rating Bureau to establish separate manual rates for union and nonunion workers. The second column of Table 3 gives the nonunion manual rate for trades where it was in effect. While this alleviated some of the competitive disadvantage caused by high workers’ compensation costs, union contractors were still competing for projects against nonunion firms. The level of construction employment in California represented by a union reached an all-time low of just over 20 percent—from nearly 60 percent less than 20 years earlier (see Chart 7).

Until recently, management/union collective bargaining agreements almost never involved bargaining over the design of the workers’ compensation system, or the delivery of medical or indemnity benefits. The sole exception was the agreements involving salary continuation benefits for industrially injured workers, common for police and firefighters in California and for some state and government employees. The medical provider, rehabilitation professionals, claims administration, and dispute resolution processes, despite their direct impact on workers and working conditions, were not subject to bargaining.

This report is concerned with two types of agreements common to the construction industry: collective bargaining agreement and project labor agreement. Collective bargaining agreements, the generic form of such agreements, can be used for any agreement between management and labor. In this report we use them in conjunction with agreements negotiated between a single trade and an employer or group of employers. Each construction trade negotiates a collective bargaining agreement covering a set time period and particular geographic area.

Project labor agreements are a special type of collective bargaining agreement covering a single project or group of projects and all trades working on the project. Project labor agreements are fairly common on very large construction projects. The following table highlights the difference between the two types of agreements.

Project labor agreements generally contain many of the contract provisions of the collective bargaining agreements that are in effect in the local area. In addition, project labor agreements offer several advantages:

While workers’ compensation had not been a negotiated benefit prior to the introduction of carve-outs, a collective bargaining or project labor agreement is required for negotiating a carve-out arrangement. The carve-out agreement is negotiated as an addendum to the collective bargaining agreement.

Carve-outs require an administrative structure to oversee the alternative dispute resolution process. Unions and management have a long history of organizing jointly-trusteed funds for specific purposes such as health and pension. Consequently, the structure for developing a neutral source of payment for the adjudication process was already in place. Without this reliable structure, it is difficult to imagine stable carve-out alternative dispute resolution. Direct payment by employers to the adjudicators would not be perceived as neutral. And workers would be unlikely to participate in paying for the adjudication, if expected benefits of the arrangement inured to employers.

The legislation authorizing worker’s compensation carve-outs permits unions and contractors to set up an alternative dispute resolution process (California Labor Code Section 3201.5). The provisions essentially privatize the fact-finding or trial phase of disputes arising from workplace injuries, while preserving the injured worker’s ultimate right to appeal to the public system. With minor variations in collective bargaining agreements, they uniformly call for private resolution of disputes by ombudspersons, mediators, and arbitrators before a matter may be heard in the public system at the appellate stage.

To understand how alternative dispute resolution methods operate in carve-outs, it is first helpful to understand how they generally operate and differ as dispute resolution processes. For purposes of contrast we begin with a brief overview of the traditional litigation system and factors leading to the rise of alternative systems of dispute resolution. The principal distinguishing characteristics of alternative dispute resolution derive from the nature of the process and the roles played by third-party neutrals.

In the traditional legal system the resolution of disputes is an adversarial process that generally revolves around the law and the courthouse. Disputes are legalized by the rights of constitutions, statutes, court rules or other sources of law, and parties seeking to vindicate those rights do so in a court of law according to procedures that are generally predictable, well defined and designed to further the goal of fairness and accuracy in the pursuit of justice.

In an adversarial process the parties to the dispute present their versions of the facts and the law to an authority who in turn issues a decision resolving the dispute, and the decision may be appealed to a higher authority. The proceedings are conducted according to strict and intricate rules of evidence and procedure. As such, litigation is highly formalized in both its structural institutions and the agents who engage in the process. Judges decide questions of law. Juries, or sometimes judges, decide questions of fact to which the law will be applied. Attorneys generally represent parties in litigation because of the technical sophistication of the process. While ethical rules provide that final decisions regarding the case generally inure to the client, the lawyer plays a central role in this process. Direct party involvement is often minimal.

Specific rules vary widely by jurisdiction, such as whether a claim is filed in federal or state court or an administrative agency. The essential structure, however, tends to be fairly constant. At a very general level, the litigation process formally begins with filing a complaint by an aggrieved party alleging some violation of law, and the response to such complaint by the opposing party. These preliminary filings or pleadings set out the initial issues of the litigation, which are then clarified during an investigatory or discovery phase. Requests for judicial determination or motions are commonly filed during or upon completion of discovery, including motions on the admissibility of evidence and for summary judgment. The latter typically comes at the close of discovery, and essentially asks the court to rule in favor of the moving party as a matter of law. If that motion is rejected, the matter proceeds to trial, after which a decision is reached by a jury or a judge. That decision is appealable to higher courts to ensure the accuracy and integrity of the decision.

While this describes the basic structure of the litigation system, it is well worth noting that dispute resolution activity can and usually does take place informally before the filing of a complaint. Attorneys for both parties spend considerable time evaluating the legal and factual merits of their cases, interviewing potential witnesses, putting together arguments that ultimately would be used to persuade the judge/jury to rule in their favor. During this period the two sides begin negotiating possible settlements, a process heavily influenced by the parties’ analysis of their respective cases and general negotiation strategies [Robert Mnookin and Tony Kornhauser, "Bargaining in the Shadow of the Law," 88 Yale L.J. 950 (1979)].

While litigation is often thought of in terms of trial, this pre-trial negotiation process ultimately ends in the resolution of the dispute in the overwhelming majority of civil and criminal cases. Most researchers estimate that 95 percent of all disputes are resolved through negotiation and without the need for trial. This phenomenon is also reflected in the California workers’ compensation system (see Table 2, Chapter 1).

The litigation process may be effective as a truth and justice seeking vehicle, yet it certainly carries efficiency costs. While research tends to disavow popular beliefs in a litigation crisis, the civil justice system nonetheless remains heavily burdened and can be expected to become even more so. An already sluggish civil trial process is further slowed by the gamesmanship of litigation, which increases costs to parties and the system itself—costs that are reflected in higher insurance premiums and lower public confidence in the system. Moreover, the complexity of the process, the trauma often associated with trial, and a general dissatisfaction with the traditional legal system have led to a search for new avenues to resolving disputes.

The late 1980s and early 1990s saw an unprecedented rise in alternative dispute resolution in public and private spheres at both state and federal levels. The movement toward more informal methods of dispute resolution is considered one of the most significant modern civil justice developments, and includes dispute resolution methods that have their source of authority in court orders, legislative pronouncements and private contracts. The California workers’ compensation carve-outs are one such technique, legislatively authorized and contractually secured.

The claimed advantages of alternative dispute resolution can be understood in terms of efficiency and process. Efficiency arguments supporting alternative dispute resolution are that it is a faster and therefore less expensive process than traditional litigation—although researchers have not been able to document such advantages. Efficiency rationales are by far the most commonly cited justifications for adoption of alternative dispute resolution in workers’ compensation carve-outs. Process rationales suggest that the alternative dispute resolution processes are more satisfying, produce better outcomes, are more private and contribute to a more civil society through less contentious methods of dispute resolution. [See generally, Warren Burger, "Isn’t there a Better Way?," 68 A.B.A. J. 274 (1982); Robert Raven, "Alternative Dispute Resolution: Expanding Opportunities," 43 Arbitration Journal 44 (1988); William Simon, "Informality and Redistributive Politics," 19 Clearinghouse Review 384 (1985); Frances McGovern, "Beyond Efficiency: A Bevy of ADR Justifications (An un-footnoted Summary)," 3 Dispute Resolution Magazine 12-13 (1997)]

Perhaps not surprisingly, the perceived disadvantages of alternative dispute resolution are a mirror image of its strengths. To the extent that court formalities in part strive to equalize the power imbalances between the parties, the informal structures of alternative dispute resolution can serve to reinforce those imbalances. Similarly, the privatization of dispute resolution through alternative methods infuses a profit motive for the neutral that does not exist in the public system. As such, repeat players, particularly large institutional players like insurers and banks, can have a significant advantage in alternative dispute resolution. Alternative dispute resolution also results in the sacrifice of constitutional and other public rights through its processes—such as the right to an attorney and due process, the accurate application of public laws, and the deterrent value of public decision making. For this reason, one of the most controversial issues in modern alternative dispute resolution is whether one can be coerced into such processes, and the ramifications of such coercion.

Of the many different forms of alternative dispute resolution, three are implicated by carve-outs: arbitration, mediation, and ombudspersons.

Arbitration refers to an adversarial process in which a third-party neutral simply decides or adjudicates the dispute between the parties in an informal proceeding not bound by traditional rules of evidence or procedure. The arbitrator’s decision or award is generally final and not appealable on substantive grounds.

Commercial arbitration arose early in the 19th century because of the importance of industry customs and standards, and the need for speed in resolving disputes. Disputants preferred to have arbitrators with knowledge and experience in the disputed area, as they could bring more technical expertise to the resolution process than could judges in courts of general jurisdiction. Labor arbitration first appeared in the last half of the 19th century in response to labor unrest and as an alternative to strikes, and became more pervasive after World War II. Today virtually all collective bargaining agreements include provisions for arbitrating grievances. Contractual arbitration is also common in the nonunion workplace—virtually all employment disputes in the securities industry, for example, are decided by arbitration rather than trial.

The judiciary initially viewed arbitration with skepticism and distrust, and generally refused to enforce agreements to arbitrate under the so-called ouster doctrine. Beginning in the 1920s, however, federal and state legislatures began passing legislation providing for the specific enforcement of such clauses that preempted application of the doctrine. Such statutes provide the backbone of the modern alternative dispute resolution movement, although their application of alternative dispute resolution in workers’ compensation carve-outs is less direct because of the specific statutory authorization of the carve-outs. To the extent that the carve-out statutes may need to be interpreted by courts, it is certainly possible that judicial decision-making will be guided by and may even rely directly on these statutes and the cases that interpret them.

Decision makers in arbitration settings are called arbitrators, and wield considerably more unchecked power than their public judicial counterparts. They act alone and blend the functions of judge/jury into a single adjudicatory power for resolving disputes that is supported by broad statutory and common law discretion. Moreover, they generally are not bound by the constraints of substantive law in either the procedures by which they conduct their hearings or in the standards they use to resolve the dispute. In fact, arbitrators need not even have legal training.

The many different types of arbitration have some common characteristics. First, they are informal procedures unlike their highly regimented public court counterparts. Both sides have an opportunity to present witnesses and evidence, and to engage in cross-examination—subject to the arbitrator’s discretion, or to the rules agreed upon by the parties themselves (or by the government in court-related programs) prior to the arbitration—although there is much less discovery than in traditional litigation. As a result, the arbitrator’s decision, called an award, generally may be rendered quickly on the basis of the arbitrator’s sense of fairness under the circumstances, rather than on traditional legal norms.

A second unifying feature is the unique character of arbitrators. Unlike judges, arbitrators are selected primarily for their substantive expertise and experience, rather than their general knowledge of the law. The ability to bring substantive expertise into decision making is perhaps arbitration’s greatest strength as a dispute resolution process. For this reason, arbitration is best suited for cases involving technical and related matters. Also unlike public judges, the decisions of arbitrators are generally not subject to substantive review. They may be modified for scrivener’s errors and other such technical imperfections, yet may only be vacated upon proof of bias, fraud, misconduct or abuse of discretion by the arbitrator. An arbitrator’s award may be adopted by public courts and enforced as their own judgments.

For this reason, the selection of the arbitrator is critical to the process, and research supports the intuitive belief that the identity of the individual neutral plays a significant role in the outcome of a given case. [See for example, K.D. Schultz, Florida’s Alternative Dispute Resolution Demonstration Project: An Empirical Assessment, Florida Dispute Resolution Center, 1990; and J.D. Rosenberg and H.J. Folberg, Alternative Dispute Resolution in a Civil Justice Reform Act Demonstration District: Findings, Implications and Recommendations, University of San Francisco School of Law, 1993] The competence, neutrality, and independence of the arbitrator is of paramount concern to a fair process and to the parties’ perception of a fair process.

However, the presence of a profit motive and repeat players combine to create an unusual and potentially dangerous pressure on arbitrator neutrality. The pressure can be eased somewhat by the customary participation of all parties in the selection process. Reputation is the arbitrator’s stock in trade, and a reputation for bias can lead to the parties’ refusal to select an arbitrator. While the marketplace provides this safeguard, serious questions can be raised about equal access to information in establishing the pool of arbitrators from which the selection is drawn—as well as bargaining power disparities between the parties in such negotiations. This problem is particularly poignant in carve-outs, as the ultimate end-user of arbitration, the injured worker, is often not involved in the selection process. Our discussion of California carve-outs includes instances in which the selection of the arbitrator is an issue.

Unlike adjudicatory judicial and arbitration proceedings, mediation is a consensual process in which the parties decide the resolution of the dispute themselves with the help of a third-party neutral. This is typically accomplished by the mediator taking the parties through a series of stages: agreement upon ground rules, issue development by identifying facts and positions, working the conflict by promoting mutual understanding and developing mutually acceptable options, and closure by agreement on options. [C. Moore, The Mediation Process: Practical Strategies for Resolving Conflict 32-33 (1986); Rogers, Nancy and Craig McEwen 1989]

As a method of dispute resolution, mediation’s central strength lies in its communicative power—the ability of the parties with the help of a third-party neutral to get beyond the initial positions that defined the conflict to the real underlying interests of the parties—as well as the powerful potential to reach creative solutions not possible in a court of law, arbitration hearing, or other adjudicatory process. As such, it can be particularly effective in interest-based cases in which the preservation of relationships is particularly important, and which allow for the consideration of options for resolution that exceed those traditionally available in a court of law. While mediation agreements can generally be confirmed by a court for purposes of enforcement, the most fundamental enforcement power of mediation comes from the fact that the parties themselves reached the agreement.

Though mediation techniques have been practiced for centuries, their use in alternative dispute resolution is still in the early stages of formalization. Experts have yet to agree on such fundamental issues as the definition of mediation, the necessary training and qualifications of a mediator, and the proper role if any of lawyers in the process. All these issues are relevant to mediation proceedings in workers’ compensation carve-outs.

On the question of definition, there are two central models of mediation: facilitative and evaluative. In facilitative mediation, the least controversial of the two, mediators may only facilitate the parties’ own consensual dispute resolution process, and should offer neither their opinions nor their substantive expertise to the parties. This view has been adopted by the American Arbitration Association, the Society of Professionals in Dispute Resolution, and divisions of the American Bar Association.

In evaluative mediation, mediators are encouraged to offer opinions, expertise, advice, whatever the parties need to promote resolution of the dispute. Evaluative mediations can resemble the settlement conferences that are a staple of the traditional public litigation system. There is raging debate about whether evaluative mediation is in fact a mediation process or a different form of settlement altogether.

The definition of mediation will in turn affect mediator training and qualification, another subject of continuing debate. Many states, through legislation, court rules or task force recommendations, use a hybrid method of mediator qualification, requiring some combination of two or more of the following: academic degree, apprenticeship or mentoring, training, or practical experience. No consensus has emerged and states have not yet begun to regulate mediator qualifications. [Margaret Shaw, Selection, Training, and Qualifications of Neutrals 157, in National Symposium on Court-Connected Dispute Resolution Research, National Center for State Courts (1994). SPIDR Commission on Qualification Presents Report at Annual Meeting, 2 BNA/ADR Reports 392 (1988). See generally, Nancy Rogers and Craig A. McEwen, Mediation Law, Policy, Practice (1989) Ch. 10]

Regardless of orientation, mediation may not be effective for all disputes. A critical problem in mediation is its capacity to exacerbate power imbalances. In particular, some criticize mediation as tending to favor the economically or emotionally stronger party, or to work against the one who can least tolerate conflict or who most values a harmonious resolution. Some parties may settle for far less than they might obtain before a judge in a traditional adversarial setting. As one writer has put it, "compromise only is an equitable solution between equals; between unequals, it inevitably produces inequality" [Jerold S. Auerbach, Justice Without Law? 136 (1983)]. For example, while mediation can be extremely effective in addressing interest-based issues of child custody and property division in divorce proceedings, some women’s rights organizations have taken positions urging women not to mediate such disputes.

One common remedy for this problem is for partie