Two new statutes, signed into law by Arizona Governor Doug Ducey this legislative session, attempt to set new standards on defining the independent contractor relationship and how wages are regulated. Below is a description of each of the new statutes.
HB 2114 Attempts to Define the Independent Contractor Relationship
The distinction between an employee and an independent contractor has recently been the topic of many lawsuits in which independent contractors have alleged that they should be treated as employees.
On May 12, 2016, Arizona Governor Doug Ducey signed into law House Bill Number 2114 (HB 2114). The bill adds a new chapter, Chapter 10, Employment Relationships, to the Arizona Revised Statutes’ Title 23, Labor. The new law establishes a standard that permits an independent contractor to self-identify that relationship. Businesses and independent contractors that elect to comply with the standard establish a rebuttable presumption of an independent contractor relationship, when certain criteria are met. The law lays out ten factors that can be included in an independent contractor’s declaration. If six of the ten factors are met, the law recognizes a rebuttable presumption of an independent contractor relationship.
Supporters of the new statute, which will be codified at A.R.S. §§ 23-1601 through 23-1602, say it follows recent Department of Labor guidance addressing the factors to be considered to determine when someone is an employee or an independent contractor.
Purpose & Practical Implications of the Statute
The statute, entitled Declaration of Independent Business Status (DIBS), is intended to lay the groundwork for independent contractors and businesses to define their independent contractor relationship. In this process, the independent contractor executes a declaration outlining the nature of the contractor’s relationship with the business. There are ten factors in the statute that indicate an independent contractor relationship. If the parties can meet six or more of those ten factors and execute a valid declaration, the result is a rebuttable presumption of independent contractor status. This standard was designed to be flexible and accessible to various industries.
Use of DIBS is entirely optional. Business owners and independent contractors can choose whether to take advantage of the statute. The statute states that choosing not to execute a DIBS declaration is not evidence that an independent contractor relationship does not exist.
The idea was to establish the intent of the parties and their relationship at the outset. Once the rebuttable presumption of independent contractor status is established, the statute is designed to shift the burden to an auditing agency (or future plaintiffs) to overcome the presumption by presenting evidence that an employment relationship—and not an independent contractor relationship—actually existed.
The process has a few limitations. For instance, the DIBS process:
Exempts those licensed by the Registrar of Contractors, unless they are contracting with an independent contractor. A.R.S. § 23-1061(C).
Does not act as a substitute for a written agreement executed pursuant to A.R.S. § 23-902(D) (Workers’ Compensation statute).
Does not affect any investigatory or enforcement authority related to the determination of the independent contractor or employment status of any relationship as provided by Title 23 or federal law. A.R.S. § 23-1602.
Requirements of the Declaration of Independent Business Status
The DIBS declaration must be signed and dated by the independent contractor and must substantially comply with the following form:
This Declaration of Independent Business Status is made by (CONTRACTOR) in relation to services performed by the Contractor for or in connection with (CONTRACTING PARTY). The Contractor states and declares the following:
The Contractor acknowledges that the Contractor operates the Contractor’s own independent business and is providing services for or in connection with the Contracting Party as an Independent Contractor.
The Contractor acknowledges that the Contractor is not an employee of the Contracting Party and the services rendered for or in connection with the Contracting Party do not establish any right to unemployment benefits or any other right arising from an employment relationship.
The Contractor is responsible for all tax liability associated with payments received from or through the Contracting Party and the Contracting Party will not withhold any taxes from payments to the Contractor.
The Contractor is responsible for obtaining and maintaining any required registration, licenses or other authorization necessary for the services rendered by the Contractor.
The Contractor acknowledges at least six of the following:
a. That the Contractor is not insured under the Contracting Party’s health insurance coverage or workers’ compensation insurance coverage.
b. That the Contracting Party does not restrict the Contractor’s ability to perform services for or through other parties and the Contractor is authorized to accept work from and perform work for other businesses and individuals besides the Contracting Party.
c. That the Contractor has the right to accept or decline requests for services by or through the Contracting Party.
d. That the Contracting Party expects that the Contractor provides services for other parties.
e. That the Contractor is not economically dependent on the services performed for or in connection with the Contracting Party.
f. That the Contracting Party does not dictate the performance, methods or process the Contractor uses to perform services.
g. That the Contracting Party has the right to impose quality standards or a deadline for completion of services performed, or both, but the Contractor is authorized to determine the days worked and the time periods of work.
h. That the Contractor will be paid by or through the Contracting Party based on the work the Contractor is contracted to perform and that the Contracting Party is not providing the Contractor with a regular salary or any minimum, regular payment.
i. That the Contractor is responsible for providing and maintaining all tools and equipment required to perform the services performed.
j. That the Contractor is responsible for all expenses incurred by the Contractor in performing the services.
6. The Contractor acknowledges that the terms set forth in this Declaration apply to the Contractor, the Contractor’s employees and the Contractor’s independent contractors.
The parties may utilize DIBS, outlined above, and the independent contractor may acknowledge that six out of the ten factors exist. But, compliance with DIBS creates only a rebuttable presumption of the existence of the independent contractor relationship. Should an agency (or future plaintiff) provide evidence that the relationship was an employment relationship, the presumption may be rebutted (proven otherwise). Thus, ongoing substantial compliance with the conditions in the declaration is necessary to maintain the rebuttable presumption of the independent contractor relationship.
New Legislation Prohibiting Cities from Regulating Nonwage Compensation
The second statute passed by the Arizona legislature this session, which employers may want to be aware of is House Bill 2579 (HB 2579), which Arizona Governor Doug Ducey signed into law on May 11, 2016. This bill amends sections 23-204, 23-350 and 23-357 of the Arizona Revised Statutes (A.R.S.)—relating to the payment of wages.
Arizona employers are required to pay regular employees at least the minimum wage. See HB 2579 Overview, available at HR 2579 House of Representatives Overview. In 2006, Arizona voters passed Proposition 202, which requires an annual increase in the minimum wage. Id. HB 2579 narrows the statutory definition of “wages” by removing certain enumerated types of compensation from the definition and creates a new statutory definition of “nonwage benefits,” which includes the types of compensation that were removed.
HB 2579 also proclaims that state laws addressing the benefits private employers must provide employees preempt any city or local ordinance on that topic. Under this statute, cities and counties may not tell private employers what kind of nonwage benefits they must offer by establishing that the “regulation of employee benefits, including nonwage compensation, paid and unpaid leave and other absences, meal breaks and rest periods, is of statewide concern. The regulation of nonwage employee benefits pursuant to this chapter and federal law is not subject to further regulation by a city, town or other political subdivision” of the state of Arizona. A.R.S. § 23-204(A).
HB 2579 is also aimed at specifically prohibiting cities and counties from passing local laws that require private companies to provide certain nonwage or “fringe” benefits like paid vacation time, paid sick time, or paid maternity leave.
Practical Implications of the Statute
The statute explicitly prohibits cities, towns, or other political subdivisions of the state to regulate nonwage employee benefits. A.R.S. § 23-204(A). “Nonwage benefits” are defined by the new statute to include “fringe benefits, welfare benefits, child or adult care plans, sick pay, vacation pay, severance pay, commissions, bonuses, retirement plan or pension contributions, other employment benefits provided in 29 United States Code Section 2611 and other amounts promised to the employee that are more than the minimum compensation due an employee by reason of employment.” Id. § 23-204(C).
The new law also removes from the statutory definition of “wages” any type of “sick pay, vacation pay, severance pay, commissions, bonuses and other amounts promised when the employer has a policy or a practice of making such payments.” Id. § 23-350(7).
Finally, the statute also adds a definition of “minimum wage” as “the nondiscretionary minimum compensation due an employee by reason of employment, including the employee’s commissions, but excluding tips or gratuities.” Id. § 23-350(5).
Parties may benefit from choosing to use DIBS in Arizona. Although complying with the Declaration requirement does not answer all independent contractor questions and there are a various exemptions, the new law may help establish that an independent contractor relationship exists.
HB 2579 narrows the state’s definition of wages to cash compensation paid by employers and adds a definition of non-wage benefits. Under the new statute, cities and counties are precluded from enacting statutes regulating non-wage benefits and prohibits cities and counties from requiring private employers to provide certain non-wage benefits to employees.