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.
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.
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
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
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