INDEPENDENT CONTRACTORS: A NEW CHAPTER IN AN OLD STORY

AASCIF LAW COMMITTEE CONFERENCE

October 3-4, 2005

Kiawah Island, South Carolina

Presented by: Curtis Larsen, Montana State Fund

BASIC FIRST QUESTION FOR WORKERS’

COMPENSATION COVERAGE

Employer - Employee

Or

Hiring Agent – Independent Contractor

“The definition of the term ‘employee’ for purposes of vicarious liability, workers’ compensation, labor legislation, unemployment compensation, social

security and miscellaneous enactments applicable to employees, has probably produced more reported cases than any definition of status in the modern

history of law.”

3-60, Larson’s Workers’ Compensation Law, § 60.01

COMPETING INTERESTS

Worker protection statutes

vs

Being your own boss

or

Shadow Economy

CHALLENGES

•Increased insurance and claims costs in the 1980’s led to avoidance of workers’ compensation coverage through:

Exemptions

Misclassification

Underreporting of payroll

Leasing arrangements

•States responded with:

Registration or exemption processes

Increased compliance efforts

PEO licensing laws

2003 IC EXEMPTIONS BY INDUSTRY - MONTANA

56%

13%

9%

22%

Construction

Services

Transportation

Other

IC Exemption Average Annual

Employment

% IC s to Average Annual

Employment

1998 14,429 364,401 4%

1999 20,025 371,193 5%

2000 24,902 379,046 7%

2001 27,043 383,996 7%

2002 29,204 388,161 8%

IC vs. EMPLOYMENT IN MONTANA

IC Exemptions Average Annual Employment

% IC s to Average Annual Employment

Montana 29,204 388,161 8.00%

Florida 162,503 6,754,0090 2.4060%

Indiana 12,000 2,822,000 0.4252%

Maine 1,200 579,261 0.2072%

Oklahoma 8,548 1,420,000 0.6020%

Rhode Island 6,756 438,822 1.5396%

South Dakota 2,213 353,635 0.6258%

Washington 3,215,000 0.0000%

MONTANA’S 8% vs. OTHER STATES

LARSON’S ELEMENTS OF EMPLOYMENT RELATIONSHIP

(1) A servant is a person employed to perform services in the affairs of another and who with respect to the physical conduct in the performance of the services is subject to the other’s control or right to control.

(2) In determining whether one acting for another is a servant or an independent contractor, the following matters of fact, among others, are considered:

a) The extent of control which, by the agreement, the master may exercise over the details of the work;

b) Whether or not the one employed is engaged in a distinct occupation or business;

c) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision;

d) The skill required in the particular occupation;

e) Whether the employer or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;

f) The length of time for which the person is employed;

g) The method of payment, whether by the time or by the job;

h) Whether or not the work is a part of the regular business of the employer;

i) Whether or not the parties believe they are creating the relation of master and servant; and

j) Whether the principal is or is not in business.

3-60, Larson’s Workers’ Compensation Law, § 60.01

LARSON’S ELEMENTS OF EMPLOYMENT RELATIONSHIP(continued)

TYPICAL WORKERS’ COMPENSATION STATUTORY DEFINITION OF EMPLOYEE

39-71-118, MCA

“every person in the service of another under any contract of hire, express or implied, …”

COMMON LAW DEFINITION OF COMMON LAW DEFINITION OF AN INDEPENDENT AN INDEPENDENT

CONTRACTORCONTRACTOR

Referred to as the A-B Test

Free from control and direction, and

*

* have his or her own independently established trade, occupation, or business

1. Direct evidence of control or direction, or the right to control the worker

2. Furnishing of equipment

3. Method of payment (hourly vs completed contract), and

4. The right to fire.

4 FACTORS of CONTROL TEST STATED

BY THE COURTSE.g., Solheim v. Tom Davis Ranch and State Compensation Fund, 677 P.2d 1034 (Mont. 1984)

"The consideration to be given to the four (4) factors is not a balancing process. Rather, . . . independent contractor-ship . . . is usually established by a convincing accumulation of these and other tests, while . . . employment . . . can, if necessary, often be solidly proved on the strength of one of the four (4) items …."

It only takes

ONESharp v. Hoerner Waldorf Corporation, 584 P.2d 1298 (Mont. 1978)

OLD EXEMPTION PROCESS IN MONTANA

1. AB Test

and

2. Conclusive Exemption Certificate issued by Labor

3. No testing of whether worker is true IC

COURT CASES

•Gonzales v. Walchuck, 59 P.3d 377 (2002)

Worker not bound by IC exemption certificate that Employer asked her to apply for when she couldn’t read English, and didn’t understand what the certificate was.

•Kelly Wild v. Montana State Fund, 68 P.3d 855 (2003)

IC Exemption Certificate NOT conclusive as to status despite statute that said it was. Employer must apply A-B test.

“As Wild noted in his reply brief before this Court, if it looks like a duck, walks like a duck and quacks like a duck, it must be a duck. We would only add that it must be a duck even if it is holding a piece of paper that says it is a chicken.”

After the Wild case, a Legislative study committee found there was a real need for processes that ensure a degree of certainty in whether the working relationship is one of employer to employee, or hiring agent to independent contractor.

WHO IS AN INDEPENDENT CONTRACTOR UNDER MONTANA’S NEW LAW ?

(SB 108 - Effective April 28, 2005)

A person who regularly and customarily performs services at locations other than the person’s own fixed business location

has waived the rights and benefits of the Workers’ Compensation Act by obtaining an IC exemption certificate from the Department of Labor and Industry

-AND-

SENATE BILL 108 … 2005 LEGISLATURE

Effective April 28, 2005

When working under an IC exemption certificate, the person’s status is conclusively presumed to be an IC.

An IC has waived all rights and benefits under the Workers' Compensation Act.

-AND-

NEW LAW: SB 108

Effective April 28, 2005

• Statutory A - B test repealed, but incorporated in new certificate process administered by the Department of Labor and Industry.

• Applies to person who “regularly and customarily performs services at a location other than the person’s own fixed business location.”

• Person must either:

a) Obtain worker’s compensation coverage; or

b) Obtain independent contractor exemption certificate from Montana Department of Labor

• Definition of person: Sole proprietor, working member of a partnership, working member of a limited liability partnership, working member of a member-managed limited liability company.

NEW LAW: SB 108 (continued)

•Does not apply to corporations.

•Does not apply to “main street businesses” where owners work in their own shops or plants. Not required to have coverage or IC exemption certificate.

•Department of Labor makes decision about whether the person is engaged in independent business, trade or profession (Part B of the old statutory test), based on documentation submitted that satisfies a points test.

WHEN DOES IC EXEMPTION APPLY?

Applies when worker is working under the independent contractor exemption certificate.

Working under the certificate occurs when:

a) The person is performing work in the trade, business, occupation or profession listed on the certificate; and

b) Hiring agent and the certificate holder do not have an agreement that the certificate holder’s status is that of an employee.

HOW TO GET THE EXEMPTION CERTIFICATE

* Pay $125 fee

* Submit application affidavit

* Submit Waiver affidavit

* Submit supporting documentation

DOCUMENTATION TO VERIFY BUSINESS1. WC, UI, Revenue accounts for employees

2. Memo of Understanding or a Contract containing:

a. Complete or partial payment % basis

b. Ending date of contract

c. Liability for failure to complete (both)

d. Identifies who provide materials & supplies

e. Signed by both parties

3. List of equipment & tools with approx value

a. Rental or lease agreement

b. Business equipment tax – county document

4. Liability insurance policy

5. Bonding

6. Business location, lease or rental agreement

7. Business Tax forms or records Schedule C, E, F, or K

8. Trucking company lease agreement

9. Form 1099’s

10. Partnership agreement written and signed by all, containing

a. intent to form

b.  contribution by all parties

c. joint proprietary interest and right of mutual control

d. sharing of profit/loss

11. Application or business license or permit

12. Professional license

13. Business structure registered with SOS

14. Registered name of business with SOS

15. Internet, or on a professional list

16. 2 or more bids or estimates

17. Fed Employer Identification Number (FEIN)

18. Business bank account

19. Telephone bill in business name

20. Credit card – charge account in business name

21. Printed invoices, cards, brochures, hats, shirts

22. Advertises services in a newspaper, phone book,

24. Advertises using sign on vehicle, in yard, bulletin boards, corner lamp post, flyers, etc

25. Standard billing invoices

CLAIMS ISSUES

“B” part of IC test determined by Department of Labor.

“A” part of IC test determined by facts of each working relationship.

Department of Labor may suspend or revoke IC certificate – because of inappropriate level of direction and control by Hiring Agent or other issues.

Suspension or revocation does not take effect until Department gives notice to the hiring agent. Pre-notice injuries will not be covered.

If no certificate or no coverage, the injured worker must be considered an employee for comp purposes. No common law or statutory argument about IC status.