by Tina Vannucci & Denis Fitzgibbons, Fitzgibbons Law Offices
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 a misclassification can incur costly penalties and liabilities for failure to pay overtime wages and employment taxes and to provide workers compensation and other employment benefits.
To help employers avoid employee misclassification, a state law now in effect allows many companies, under certain conditions, to substantiate a proper independent contractor relationship by asking their contractors for a “Declaration of Independent Business Status.”
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.
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
- Will maintain any necessary registrations, licenses or authorizations to perform services.
Also, the Declaration must affirm at least six of the following conditions:
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.
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. If a Declaration is signed, it will be effective only if the parties’ actions toward each other are consistent with the Declaration’s provisions.
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.
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 of Contractors.
For assistance in working through the classification of employees and independent contractors, contact Fitzgibbons Law Offices (520-426-3824).