Legislators, industry, work out independent contractor definition
Definition of independent contractor under HB 79
(11) a person is an independent contractor for the purposes of this chapter only if the person
(A) has an express contract to perform the services;
(B) is free from direction and control over the means and manner of providing services, subject only to the right of the individual for whom, or entity for which, the services are provided to specify the desired results, completion schedule, or range of work hours, or to monitor the work for compliance with contract plans and specifications, or federal, state, or municipal law;
(C) incurs most of the expenses for tools, labor, and other operational costs necessary to perform the services, except that materials and equipment may be supplied;
(D) has an opportunity for profit and loss as a result of the services performed for the other individual or entity;
(E) is free to hire and fire employees to help perform the services for the contracted work;
(F) has all business, trade, or professional licenses required by federal, state, or municipal authorities for a business or individual engaging in the same type of services as the person;
(G) follows federal Internal Revenue Service requirements by
- obtaining an employer identification number, if required;
- filing business or self-employment tax returns for the previous tax year to report profit or income earned for the same type of services provided under the contract; or
- intending to file business or self-employment tax returns for the current tax year to report profit or income earned for the same type of services provided under the contract if the person's business was not operating in the previous tax year; and
(H) meets at least two of the following criteria:
(i) the person is responsible for the satisfactory completion of services that the person has contracted to perform and is subject to liability for a failure to complete the contracted work, or maintains liability insurance or other insurance policies necessary to protect the employees, financial interests, and customers of the person's business;
(ii) the person maintains a business location or a business mailing address separate from the location of the individual for whom, or the entity for which, the services are performed;
(iii) the person provides contracted services for two or more different customers within a 12-month period or engages in any kind of business advertising, solicitation, or other marketing efforts reasonably calculated to obtain new contracts to provide similar services.
A knotty problem over the definition of an independent contractor in a bill dealing with workers’ compensation has been worked out in the Legislature.
However, delays created by extended negotiations over the issue, between business groups and the state administration, now mean House Bill 79 will remain in the House Finance Committee until the 2018 legislative session.
But with the kinks worked out HB 79 should move easily toward passage next year.
A similar measure, Senate Bill 40, is pending in the Senate Labor and Commerce Committee, but senators decided early on to let the House take the lead in working out problems.
Gov. Bill Walker sponsored the legislation, which was introduced in the House and Senate Jan. 25.
Most of HB 79 and SB 40 deal with procedural issues and streamlining in the state workers’ compensation program but a key part of the bill is to define, in statute, what constitutes an independent contractor, according to Marie Marx, director of the Division of Workers’ Compensation.
The division is part of the state Department of Labor and Workforce Development.
Earlier this spring the Alaska Trucking Association, the National Federation of Independent Business, or NFIB, and the Alaska Homebuilders Association objected strongly to the definition of an independent contractor that was originally in the bill.
Everyone is on board with new language, however.
“This clears up the uncertainty as to when a person is independent,” said Aves Thompson, executive director of the Alaska Trucking Association, who was involved in the redrafting.
“There’s now a clear set of rules. If you do these things, you can meet the standard. There’s no more splitting of hairs,” or subjective decisions, Thompson said.
The truckers, NFIB and homebuilders have submitted letters to legislators supporting the latest version of HB 79.
An example of a problem for truckers in the original language, Thompson said, was a prohibition against an employer from hiring a contractor in the same “core field.”
“We are motor carriers who haul freight and this could be interpreted so that we couldn’t hire independent truck drivers,” Thompson said.
“In my world (of trucking) the ability to hire contract drivers is critical in ramping up quickly to meet a contract. It would take too much time to hire people as employees.”
Marx and others in the division want a definition in the law so there is clear guidance for employers on when a worker is an independent contractor, and where the employer then has no responsibility to provide workers’ compensation insurance.
The lack of clarity has led to abuses, Marx said, where employers either intentionally or unintentionally “misclassify” workers as contractors when they should be employees.
Many contractors and labor unions are unhappy with this, claiming that competitors can inappropriately call workers contractors to avoid the cost of insurance, and then underbid firms that do provide insurance.
Ambiguity can lead to unpleasant surprises for employers, Marx said. Because there is now no definition, the state Board of Workers’ Compensation makes largely subjective determination after a worker has been injured and a claim is filed alleging misclassification by the employer.
The board relies on a multi-factor test that relies on judgment as to the nature of the work involved and if an employer is found to have misclassified the worker as independent the employer is liable for medical and other costs.
Having a clear definition in statute ends that ambiguity, Marx said.
Thompson credited state Labor Commissioner Heidi Drygas and workers’ compensation director Marie Marx in working with business and labor groups to reach a compromise.
It reflects well on the legislative process. HB 79 was moved slowly through the House Labor and Commerce Committee and then the House Judiciary Committee as changes were made.
Rep. Lora Reinbold, R-Eagle River, offered the final package of amendments to resolve problems in the Judiciary Committee.
There were some issues raised with other parts of HB 79, such as the workers’ compensation medical fee schedule, but those were resolved by other amendments in committee. The independent contractor disagreement was contentious, however.
Marx called its resolution a win-win for all parties.
“We can meet our goal of keeping abuse by employers from happening and providing guidance to employers,” Marx said. “Employers will be happy because it will keep them from being underbid,” by unscrupulous competitors.
Most employers want to do the right thing but the ambiguity and lack of uncertainties in the current system can create surprises, which can be expensive.
“The bill is not intended to force anything on independent contractors, but to ensure people know what is required if they do want to be independent,” she said.
Other parts of the bill, which were noncontroversial, involve procedural matters such as speeding up dispute resolution before the Workers’ Compensation Board and to provide a timeframe for an employer to authorize or deny medical treatment upon a medical provider’s written request.
The bill would also reduce costs by allowing employers to pay benefits to injured workers electronically and mandate the filing of certain reports from employers and insurers electronically.
Tim Bradner is co-publisher of Alaska Legislative Digest and a contributor to the Journal of Commerce. He can be reached at [email protected].