Legislature working out kinks in workers’ comp reform bill
JUNEAU — Legislators and state labor officials are working are working out the kinks in a bill that would clarify when workers can be classified as independent contractors who are exempt from state laws requiring workers’ compensation insurance.
The legislation, House Bill 79 Senate Bill 40, both sponsored by Gov. Bill Walker, also changes penalty provisions for violations imposed on employers who “misclassify” workers as contractors and also streamlines procedures in the state Division of Workers’ Compensation in processing claims on injuries and also in handling disputes. The bill also streamlines procedures for preauthorization by employers for medical treatments of injured workers.
The independent contractor definition is the heart of the bill that has also become a source of contention, although new language introduced in the House Labor and Commerce Committee on March 5 could ease the problem.
Department of Labor and Workforce Development Commissioner Heidi Drygas told the House Labor and Commerce that the administration’s intent with HB 79 is to tackle an increasing problem of employers who, innocently or intentionally, misclassify workers as contractors who should be considered employees.
Employers are required to purchase workers’ compensation insurance for employees, but not for contractors. The problem is really only with individual workers because a contractor or subcontractor that has employees is required to insure against workplace injuries.
One other problem, Drygas said, is the practice of some employers “underinsuring” by misclassifying the type of work employees do, for example classifying an employee doing construction-type work as a clerical worker.
“There are various ways fraud can be done,” Drygas said. “When more people purchase workers’ compensation insurance the risks are spread because more employers have insurance.”
Other parts of the bill are aimed at speeding dispute resolution and clarifying the preauthorization process for medical treatment, which is currently “ambiguous” in current law and regulations,
The bill also clarifies penalty provisions, in some cases imposing penalties where there are currently none and, in other areas, changing provisions that sometimes result in excessive penalties that are difficult to enforce, Drygas told the committee.
The independent contractor definition in HB 79 and SB 40 has drawn heat, however, from some Alaskan industries where use of contractors and subcontractors is standard practice, particularly in trucking and homebuilding.
Aves Thompson, executive director of the Alaska Trucking Association, said the language in the original bill is too narrow and would make it difficult for his member companies to hire independent truckers.
The National Federation of Independent Business–Alaska, a small business group, voiced similar concerns.
“We believe (the definition) is far too narrow and (would) prevent many Alaskan entrepreneurs functioning as the independent contractors they truly are,” said Dennis DeWitt, state director of the NFIB, in a letter to legislators.
Marie Marx, director of the Division of Workers’ Compensation, said new language proposed to the House committee March 5 is broader and more flexible, and should solve issues raised by the trucking association and others. The bill is still pending in the committee.
Rhonda Gerharz, chief investigator in the Workers’ Compensation Division, said having the definition in statute would add clarity and help employers understand the rules. There is currently no definition of an independent contractor in state law or even in regulations, Gerharz said.
In weighing enforcement actions, the Board of Workers’ Compensation relies on a complex case-by-case procedure of weighing multiple factors that can lead to subjective decisions.
Many employers misunderstand the requirements and are shocked when they are found to be out of compliance, Gerharz said.
“For example, out-of-state contractors who bid on jobs here and bring employees with them often believe they are in compliance if they carry workers’ comp insurance in the state where they are from. This isn’t the case. The insurance must be purchased from an Alaska broker,” she said.
Others assume that workers can be contractors if they just call them that and issue an IRS Form 1099.
“This doesn’t cut it, either,” Gerharz said.
It’s an issue that must be taken seriously by employers, who can be jointly held liable for workplace injuries if a worker is injured that should have been classified as an employee, and is found to be uninsured.
“The liabilities for this can ruin a small business. We’re seen some real horror stories,” Gerharz said.
The liability can extend to the project owner, too, in the case of construction.
“Having the definition in statute is important because employers will typically read statutes to see what the rules are, where many won’t bother to dig down into regulations,” she said.
“Most employers want to do it right and having the definition in law will help us be more up-front and more efficient,” Gerharz said.
A section in the bill changing penalty provisions corrects a situation that currently leads to very high penalties that do not withstand appeals. The current maximum penalty of $1,000 for each uninsured worker workday had led to unintended consequences, according to the governor’s letter of introduction for the bill.
One is that very high penalties usually lead to extensive appeals and costs; the second is that the penalty punishes employers who keep good records of employee work schedules but tends to benefit employers who fail to keep records of workdays.
The new penalty maximum will be easier to administer. It would be three times the workers’ compensation insurance premium the employer would have paid if employees were properly classified.
“We’re trying to ensure a level playing field,” Drygas said told the House committee, between employers who play by the rules and competitors who don’t.
The problem has particularly concerned Alaska construction contractors and labor groups because some out-of-state contractors seeking work in Alaska try to skirt the workers’ compensation insurance requirements and underbid competitors, who are mostly Alaskan and comply with the law.
Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected].