Natalie Virden’s labor and employment law practice includes wage and hour law, collective and class action lawsuits, Title VII, and labor arbitration.
New Arizona Law Brings Clarity to the Use of Independent Contractors
While not a cure-all for employee misclassification, a newly enacted state law offers significant benefits for companies and workers alike.
On August 6, a new Arizona law designed to clarify the blurry
line between employees and independent contractors went into effect. The new law
§ 23-1601) allows companies and independent contractors to memorialize the
terms of their agreement by signing a “Declaration of Independent Business
While the new statute does not require independent contractors
and contracting parties to execute such a declaration, there are benefits to
First, the declaration creates a “rebuttable presumption” that
the relationship is, in fact, an independent contractor relationship. (However,
failing to have an independent contractor sign such a declaration does not
create any presumptions against the contracting party.)
Also, the declaration has the potential to help companies avoid
the financial consequences of misclassifying an employee as an independent
contractor. Misclassification can result in business and personal liability for
unpaid wages, tax penalties, shortfalls in unemployment insurance, and
violations of worker’s compensation laws.
In signing the declaration, the independent contractor
acknowledges that he or she:
is not an employee of the “contracting party”;
is responsible for all taxes; and
has no right to unemployment benefits or any other
rights arising from an employment relationship.
In order for the declaration to be effective, the contracting
party must treat the independent contractor in a manner consistent with his or
her stated status and not as an employee.
The statute also provides ten factors to be considered in
determining whether a person is an employee or an independent contractor. The
independent contractor must verify that at least six of the factors apply to his
or her relationship with the contracting party. The list includes the following:
The contracting party does not restrict the
independent contractor’s ability to perform services for or through other
parties, and the independent contractor is authorized to accept work from and
perform work for other businesses and individuals.
The contracting party does not dictate the
performance, methods or processes that the independent contractor uses to
The contracting party has the right to impose quality
standards or a deadline for completion of services performed, or both, but the
independent contractor is authorized to determine the days worked and the time
periods of work.
The contractor is responsible for providing and
maintaining all tools and equipment required to perform the services performed.
The declaration provided in the new statute is not a cure-all,
and it poses two important limitations.
First, while its use provides Arizona employing units with some
security when they utilize independent contractors, it will not impact federal
employment laws, such as the Fair Labor Standards Act and the Civil Rights Act
of 1964 (“Title VII”). Thus this new rule will have no impact on federal claims
or investigations by federal agencies. In these cases, such guidelines as the
IRS “20-factor test” will still apply.
Second, the new law specifically excludes much of the
construction industry – arguably one of the economic sectors that struggles the
most with employee misclassification. Subsection C of the new law allows
contractors and subs to utilize the declaration only when “contracting with an
independent contractor to perform services that do not require a license
pursuant to [A.R.S.] Title 32, Chapter 10” – in other words, workers that do not
perform construction work (e.g., clerical and administrative staff).