New Arizona Law Brings Clarity to the Use of Independent Contractors

While not a cure-all for employee misclassification, a newly enacted state law offers significant benefits for companies and workers alike.

By Natalie B. Virden

On August 6, a new Arizona law designed to clarify the blurry line between employees and independent contractors went into effect. The new law (A.R.S. § 23-1601) allows companies and independent contractors to memorialize the terms of their agreement by signing a “Declaration of Independent Business Status.”

Benefits 

While the new statute does not require independent contractors and contracting parties to execute such a declaration, there are benefits to doing so.

First, the declaration creates a “rebuttable presumption” that the relationship is, in fact, an independent contractor relationship. (However, failing to have an independent contractor sign such a declaration does not create any presumptions against the contracting party). 
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Also, the declaration has the potential to help companies avoid the financial consequences of misclassifying an employee as an independent contractor. Misclassification can result in business and personal liability for unpaid wages, tax penalties, shortfalls in unemployment insurance, and violations of worker’s compensation laws.

The Declaration 

In signing the declaration, the independent contractor acknowledges that he or she:

• is not an employee of the “contracting party”;
• is responsible for all taxes; and
• has no right to unemployment benefits or any other rights arising from an employment relationship.

In order for the declaration to be effective, the contracting party must treat the independent contractor in a manner consistent with his or her stated status and not as an employee.
The statute also provides ten factors to be considered in determining whether a person is an employee or an independent contractor. The independent contractor must verify that at least six of the factors apply to his or her relationship with the contracting party. The list includes the following:

• The contracting party does not restrict the independent contractor’s ability to perform services for or through other parties, and the independent contractor is authorized to accept work from and perform work for other businesses and individuals.
• The contracting party does not dictate the performance, methods or processes that the independent contractor uses to perform services.
• The contracting party has the right to impose quality standards or a deadline for completion of services performed, or both, but the independent contractor is authorized to determine the days worked and the time periods of work.
  
• ​The contractor is responsible for providing and maintaining all tools and equipment required to perform the services performed.

The Limitations

The declaration provided in the new statute is not a cure-all, and it poses two important limitations.

First, while its use provides Arizona employing units with some security when they utilize independent contractors, it will not impact federal employment laws, such as the Fair Labor Standards Act and the Civil Rights Act of 1964 (“Title VII”). Thus this new rule will have no impact on federal claims or investigations by federal agencies. In these cases, such guidelines as the IRS “20-factor test” will still apply.

Second, the new law specifically excludes much of the construction industry – arguably one of the economic sectors that struggles the most with employee misclassification. Subsection C of the new law allows contractors and subs to utilize the declaration only when “contracting with an independent contractor to perform services that do not require a license pursuant to [A.R.S.] Title 32, Chapter 10” – in other words, workers that do not perform construction work (e.g., clerical and administrative staff).