One Simple and Important Thing Arizona Employers Can Do to Insulate Themselves from Liability when Working with Independent Contractors

Jaburg Wilk
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Jaburg Wilk

A recent Arizona law, A.R.S. § 23-1601, provides protections for Arizona employers who use independent contractors. Many Arizona businesses aren't taking advantage of the benefits and protections the law provides.

What are the Benefits?

The law, ARS § 23-1601, offers protections to Arizona businesses that employ independent contractors, but only if they have an agreement that complies with all of the legal requirements . The protections include a "rebuttable presumption" that the contractor is properly classified as an independent contractor for purposes of all Arizona laws. This is important because misclassification disputes are commonplace and can be expensive if litigated.

Another benefit of having this kind of agreement is that it sets forth parties' expectations of each other and helps minimize miscommunications.

It is important to note that this law does not provide protections from federal laws, including the IRS, Fair Labor Standards Act, Title VII, and immigration laws. However, having this agreement may still give some protections under those laws because it shows the parties had a clear mutual understanding as to both of their expectations.

Also, this law generally tracks the factors that courts use to determine whether someone is an employee or independent contractor. Thus, an agreement declaring that the parties intend to govern their relationship consistent with how an independent contractor is supposed to be treated will help immunize a business from liability under federal laws.

How Does an Arizona Employer Get the Benefits?

The law requires that the independent contractor agreement contain certain specific declarations. It also requires that the parties strictly comply with those declarations. In other words, it is insufficient to have an agreement that says the contractor is going to do certain things when in fact they are not doing those things. The parties' relationship has to be consistent with the declarations in the agreement.

The agreement must contain several declarations, including the following:

  1. The contractor operates their own business and is providing services under that business.
  2. The contractor is not an employee.
  3. The contractor is responsible for all tax liability for any payments they receive.
  4. The contractor is responsible for maintaining any required licenses or registration to conduct their business.

The fifth and final declaration gives the contracting party and contractor some flexibility. There are 10 additional declarations to choose from. The contractor and contracting party must include at least 6 of the 10 declarations in the agreement. Those declarations are as follows:

  1. The contractor is not being provided health insurance.
  2. The contracting party does not restrict the contractor's ability to perform work for others.
  3. The contractor has the right to accept or decline requests for services made by the contracting party.
  4. The contracting party expects the contractor to provide services for others.
  5. The contractor is not economically dependent on the contracting party. This means that the contracting party does not receive all or substantially all of their income from the contracting party.
  6. The contracting party does not dictate the performance, methods, or processes that the contractor uses to perform services.
  7. The contracting party has the right to impose quality standards or deadline for completion of services, but the contractor is authorized to determine when they work and what hours they work.
  8. The contractor will not be paid a regular salary or any regular minimum payment. Instead, they will be paid based on the work that they are contracted to perform.
  9. The contractor is responsible for providing all of their own tools and equipment.
  10. The contractor is responsible for all expenses incurred in performing the services.

Again, only 6 of these 10 factors must be applicable and included in the agreement.

Any Reason Not to Have an Agreement?

The only reason not to have an independent contractor agreement is that there are some workers who can never be classified as independent contractors because of the nature of their work. An agreement that says these workers are independent contractors will not hurt the company, but the better solution would be to treat these workers as employees.

Determining whether a worker can be classified as an independent contractor is complex. There are well over 50 different state and federal employment laws, and each has their own multi-factor test for determining whether someone is an employee. A business should work with an experienced employment attorney to determine who can be classified as an independent contractor. If the employer is located in Arizona and employs independent contractors, they need an independent contractor agreement that complies with provisions of A.R.S. § 23-1601.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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