Arizona Legislature Responds to Independent-Contractor Debate

New Arizona law creates a rebuttable presumption of independent contractor status

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In light of recent employment-related lawsuits against gig economy giants like Uber and Lyft, Arizona has made it a little easier to prove that a worker is an independent contractor rather than an employee.

The state recently enacted a law that allows employers to ask workers to sign a declaration stating that they are independent contractors.  The declaration includes certain key information about their work relationship with the hiring company.

"Under the old way, the hiring entity would have the burden of proving by clear and convincing evidence that an independent contractor relationship exists," said Jeffrey Bernick, an attorney with Jackson Lewis in Phoenix.

The new law eases the burden on hiring entities, but Bernick cautioned that it's not "a magic pill that cures all."

Businesses are struggling with the need for more certainty in this area, said Joseph Clees, an attorney with Ogletree Deakins in Phoenix, in an interview with SHRM Online.

This is part of a national trend and an effort by the Arizona legislature to provide more clarity about who is and who is not an independent contractor, at least under state law, he added.

Signed Declarations

Arizona House Bill 2114, which went into effect on Aug. 6, states that the existence of an independent contractor relationship may be proven by having the worker sign a "declaration of independent business status."

"This law seems to be a reaction to what we've seen across the country with the struggles that hiring entities are having with classification issues," Bernick said. "The waters have become somewhat murky lately, and there's been a significant rise in misclassification claims."

The new law provides sample language for the declaration, including that the worker understands he or she:

  • Is an independent contractor, not an employee of the company, and therefore isn't entitled to unemployment or other benefits afforded to employees.
  • Isn't covered under the company's workers' compensation insurance.
  • Is permitted to accept work from other businesses.
  • Is responsible for supplying his or her own tools and complying with licensing requirements.
  • Is responsible for paying business-related expenses and income taxes.
  • Is authorized to determine the days and time the work is performed—but the company may impose quality standards and performance deadlines.

A declaration signed by the worker will serve as evidence that he or she is properly classified as an independent contractor, but the worker will have an opportunity to produce evidence to the contrary.

Declarations Are Optional

The new law doesn't force companies to have independent contractors sign a declaration.

It's voluntary, Bernick said, so there's no presumption that an independent-contractor relationship doesn't exist if the company opts not to use the declaration.

"This format has been used in Arizona before," Clees said. In recent years, the state legislature has stepped in to provide a safe harbor for businesses in certain situations. The new law says businesses don't have to take this measure, but if they do, they will be provided with some added protection, at least under state law.

Bernick said he doesn't see any meaningful downside to having independent contractors in the state sign a declaration.

However, hiring entities "shouldn't be lulled into a false sense of security that if they do this, they are fine," he noted. "They have to walk the walk too."

Businesses need to make sure that the work relationship is in line with the statements in the declaration.

Limited Application

Furthermore, the declaration only applies to Arizona law, Bernick added. It doesn't replace federal independent-contractor tests prescribed by the U.S. Department of Labor, the Internal Revenue Service or the National Labor Relations Board.

The Arizona law will have little, if any, effect on the aggressive regulations and enforcement efforts at the federal level, Clees said.

At the state level, however, employers probably have the greatest vulnerability to misclassification claims when former workers apply for unemployment benefits, he noted.

Unlike employees, properly classified independent contractors generally are not eligible for unemployment benefits.

Increasingly, state unemployment authorities are finding that discharged contractors were actually employees, and they are granting unemployment benefits, Clees said.

Having a signed declaration could provide a little extra protection for businesses when it comes to these claims.

Digital Platforms 

Another new Arizona law—House Bill 2652—specifically addresses the type of work relationships that stem from the gig economy and the use of smartphone technology.

Under this law, "qualified marketplace contractors" will be considered independent contractors if certain conditions are met.

The law defines a qualified marketplace contractor as an individual or organization that uses another company's digital platform to connect with third parties that are seeking the contractor's services.

There must be a written agreement, containing specific provisions outlined in the law, between the contractor and the company that supplies the digital platform.

Furthermore, the agreement must state that it "may be terminated without cause by either party to the contract at any time on reasonable notice given to the other party."

Update Agreements

The best practice for businesses is to "dust off their current independent contractor agreement—or create one if they don't have one," Clees said. They should carefully review the law and consider revising their contract to be consistent with the statute.

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