Employment Law

October 2016

New Arizona Law Helps Avoid Employee Misclassification

A “Declaration of Independent Business Status” can help define the murky relationship between a company and its independent contractors.

Tina Vannucci

Many Arizona businesses struggle with determining whether to classify some of their workers as employees or independent contractors. Making the right determination is important, as an employer that misclassifies an employee as an independent contractor can incur costly penalties and other liabilities for failure to pay overtime wages and employment taxes and to provide workers compensation and other employment benefits.

To help Arizona employers avoid employee misclassification, a state law that went into effect on August 6 allows many companies, under certain conditions, to substantiate a proper independent contractor relationship by asking their contractors for a “Declaration of Independent Business Status.”

Under the new law (A.R.S. § 23-1601), a signed Declaration creates a “rebuttable presumption” of an independent contractor relationship. The law’s intent is that, if there is a dispute as to whether an independent contractor relationship exists, the burden is on the objecting party to show that it does not.

Independent Contractor Representations

A valid Declaration must be signed and dated by the independent contractor and represent that the contractor:

•  operates an independent business;

•  is not an employee and is not entitled to any rights arising from an employment relationship;

•  is responsible for all taxes associated with payment under the contract; and

•  will maintain any necessary registrations, licenses or authorizations to perform services.

Also, the Declaration must affirm at least six of the conditions described in the following two bullets:

•  The contractor is not insured under the contracting party’s insurance coverage; is authorized to accept work from others; has the right to accept or decline requests for services from the contracting party; is not economically dependent on the contracting party; is paid based on the work contracted for and not based on a regular salary or minimum regular payment; is responsible for maintaining all necessary tools and equipment; and is responsible for all expenses incurred in performing the services.

•  The contracting party expects the contractor to provide services for others; will not dictate the contractor’s performance, methods or processes; and has the right to impose quality standards and deadlines but not to control the days and time periods worked.

Declaration Not Required

It is important to note that the new law does not require employers to enter into a Declaration with their independent contractors, and the absence of a Declaration cannot be used to deny that an independent contractor relationship exists. However, if a Declaration is signed, it will be effective only if the parties’ actions toward each other are consistent with the Declaration’s provisions.

Limitations

It is also important for employers to recognize the law’s limitations. Neither the new law nor a signed Declaration is binding on federal agencies, such as the IRS or the U.S. Department of Labor. Consequently, businesses still need to rely on the guidelines provided by the IRS when facing federal requirements or claims regarding employee misclassification.

Also, a signed Declaration does not guarantee that a court will agree that the relationship is that of an independent contractor.

Finally, the new law does not apply to general contractors and subcontractors unless they are entering into a Declaration with someone whose work does not require them to be licensed by the Arizona Registrar of Contractors.

Useful Tool

While having a signed Declaration does not offer any guarantees, it can provide a substantial benefit to the employer by defining its relationship with the contractor and, in case of a legal challenge, by shifting the burden of proof to the challenging party.

For assistance in working through the classification of employees and independent contractors, contact Fitzgibbons Law Offices (520-426-3824).

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