One of the most common and problematic issues confronting employers in every industry today is the misclassification of workers as independent contractors. Such misclassifications are a key enforcement target of both federal and state enforcement agencies, as well as various state and federal taxing authorities. Lawsuits commenced by private plaintiffs’ attorneys are also common.

The misclassification of a worker as an independent contractor can result in both business and personal liability for unpaid wages, liquidated damages, workers’ compensation benefits, unemployment compensation benefits, tax penalties and other types of damages. 

During the last legislative session, the Arizona Legislature provided employers^[1] with a valuable new “tool” to assist in reducing legal exposure in this area. This statute creates a rebuttable presumption that a worker is correctly classified as an independent contractor if the worker signs a “declaration of independent business status” that contains terms identified in the statute, and the parties in fact comply with those terms. See A.R.S. § 23-1601(B). Thus, if an Arizona employer meets these two requirements, i.e., has the worker sign a properly drafted declaration and complies with the terms contained in that declaration, then there is a rebuttable legal presumption that the worker is correctly classified as an independent contractor.

The resulting legal presumption does not guarantee a finding that the worker is correctly classified as an independent contractor. For example, if it is later shown that the worker and the employer are not in fact complying with the terms of the declaration, then the legal presumption can be defeated with resulting potential liability for the employer. Moreover, while this new Arizona statute provides a means of establishing independent contractor status for all state law purposes, it is not binding on federal enforcement authorities or in legal proceedings commenced under federal law. However, it is yet to be determined how much weight the compliance with this new state law will carry with federal enforcement authorities and in federal law proceedings.

Compliance with this statute is not mandatory, and failing to have a worker sign a “declaration of independent business status” does not prevent the finding of independent contractor status. See A.R.S. § 23-1601(D). However, having a worker sign such a properly drafted declaration and complying with its terms puts an Arizona employer in a much stronger legal position to defeat potential claims that a worker is incorrectly classified. 

This Arizona statute went into effect in August 2016.

Notes:

[1] Unfortunately, this new Arizona statute expressly excludes from its coverage most of the construction industry. See A.R.S. § 23-1601(C).