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