Joint Interim Committee on Select Workers' Compensation Issues Report

              ARIZONA HOUSE OF REPRESENTATIVES

MEMO

DIANA O'DELL, RESEARCH ANALYST, COMMERCE COMMITTEE ... 542- 3745

Re: 1995 Final Report of the Joint Interim Committee on Select

Workers' Compensation Issues

Date: December 27,1995

Attached is a copy of the 1995 Final Report of the Joint Interim Committee on

Select Workers' Compensation Issues. Copies of the report have been distributed

to the following individuals:

fi

Senator John Greene

SPEAKER OF THE HOUSE OF REPRESENTATIVES

Representative Mark Killian

INTERIM COMMITTEE MEMBERS

Senator Brenda Bums Representative Paul Mortensen

Cochair Cochair

Senator Randall Gnant Representative Pat Conner

Senator Manuel " Lito" Pefia, Jr. Representative Paul Newman

Senate Staff

Majority Research

Minority Research

House Staff

Majority Research

Minority Research

JOINT INTERIM COMMITTEE

ON SELECT WORKERS' COMPENSATION ISSUES

Final Report

I. Establishment

The Joint Interim Committee on Select Workers' Compensation Issues was

created by the Speaker of the House of Representatives and the President of the

Senate on June 26, 1995 and terminates on December 3 1, 1995. ( Attachment A)

II. Puyose

The Committee was directed to evaluate the applicability of Arizona's workers'

compensation laws within the taxicab industry. In examining the issue, the

Committee may consider the criteria used to determine employee status and shall

submit recommendations for introduction of legislation next session.

III. Membership

The Committee comprised six members which include the following:

House Members Senate Members

Representative Paul Mortensen Senator Brenda Bums

Cochair Cochair

Representative Pat Conner Senator Randall Gnant

Representative Paul Newman Senator Manuel " Lito" Pefia, Jr.

IV. Meeting

The Joint Interim Committee on Select Workers' Compensation Issues held

one public hearing on Monday, November 6, 1995. ( Attachment B)

Those testifying before the Committee included Larry Etchechury, Director of

the Industrial Commission, Bill Amett, President of Yellow Cab Company, Anita

Valainis, Chief Counsel, Industrial Commission, Jerry Wilson, President of Greater

Phoenix Transportation Company d/ b/ a Courier Transportation, Jon Allen, Arizona

State Compensation Fund, and Samantha Fearn, National Federation of Independent

Business ( NFIB).

Testimony revealed that all employers in Arizona are required to obtain workers'

compensation insurance coverage for their employees. The only exceptions are employers

of domestic workers and persons that hire independent contractors. Further, Article XVIII,

Section 8 of the Arizona State Constitution specifically states that no industry shall be

eliminated from the requirement to provide coverage, except by initiated or referred measure.

Historically, taxicab drivers were considered as independent contractors for purposes

of workers' compensation insurance. However, the Arizona Court of Appeals recently ruled

that taxicab drivers were employees for workers' compensation purposes. Central

Management Co. v. Industrial Commission, 162 Ariz. 187, 781 P. 2d 1374 ( App. 1989)

Consequently, the Arizona State Compensation Fund, which was the carrier for the industry

in Maricopa and Pima counties at that time, notified taxicab companies that insurance

premiums must be paid on all drivers. An estimated $ 1.73 million in benefits will be

awarded to taxi drivers from the period 1990 through 1993 as a result of the Central

Management case, but no premiums have ever been paid to the State Fund.

Testimony from the taxicab industry reflected that deregulation, coupled with liberal

court rulings, have placed financial strains on the industry and up to 40% of revenues would

be paid to workers' compensation premiums if companies were forced to comply.

Other states are clarifying and hrther defining independent contractor using some of

the 20 common law factors initiated by the United States Internal Revenue Service. States

void of constitutional provisions that limit or prohibit exemptions are passing legislation that

provides a blanket exemption. ( Attachment C)

V. Final Recommendations

There were no final recommendations, but the cochairs requested that any proposed

language or ideas that clarify the definition of independent contractor be submitted for

review.

VI. Attachments

A. Establishment, Membership and Purpose of Committee

B. Meeting Notice

C. Minutes of Meeting

All handouts are available in the Office of the Secretary of the Senate.

Attachment A

JOINT INTERIM COMMITTEE

ON SELECT

WORKERS' COMPENSATION ISSUES

( No Statutory Cite)

Created by the Speaker and President on June 26, 1995.

Requested by Representative Mortensen and Senator Burns

Committee Charge:

To evaluate the applicability of Arizona's workers' compensation laws within the taxicab

industry. In examining this issue, the Committee may also consider the criteria used to

determine employee status ( e. g. employee vs independent contractor) for the purpose of

workers' compensation insurance.

The Committee shall make recommendations for introduction of legislation in the next

regular session.

The Committee Terminates: December 31,1995.

House Members:

1. ( R) Mortensen, Cochair

2. ( R) Conner

3. ( R) Newman

Senate Members:

4. ( R) Bums, Cochair

5. ( R) Gnant

6. ( D) Pefia

Attachment B

ARIZONA STATE LEGISLATURE

meet in^ Notice

Open to the Public

JOINT INTERIM COMMITTEE ON SELECT WORKERS'

COMPENSATION ISSUES

DATE: Monday, November 6,1995

TIME: 1 : 30 p. m.

PLACE: House Hearing Room 2

AGENDA: 1 ) Opening remarks.

2) History and background regarding independent contractor vs.

employee status for workers' compensation purposes.

3) Applicability within the taxicab issue.

4) Testimony.

5) Discussion.

6) Adjourn.

Senator Burns

Cochairman Cochairman

MEMBERS:

Representative Conner

Representative Newrnan

Senator Gnant

Senator Pefia

" - People with disabiliies may request reasonable accommodatiom such as intepreters, alternative formats. or assistance

with physical accessibility. If you require accommodations, please contact the Chief Clerk's Office at ( 602) 542- 3032.-

Attachment C

ARIZONA STATE LEGlSLATURt

JOINT INTERIM COMMITTEE ON SELECT WORKERS'

COMPENSATION ISSUES

Minutes of Meeting

November 6, 1995 - 1.30 p. m.

House Hearing Room 2

Members Present

Senator Burns, Cochairman Representative Mortensen, Cochairman

Senator Gnant Representative Conner

Senator Peiia Representative Newman

Members Absent

None

Staff Present

Wendy Baldo, Senate Research Analyst

Diana OIDell, House Research Analyst

Cochairman Mortensen called the meeting to order at 1: 40 p. m. and attendance was

noted. See attached list for other attendees.

Cochairman Mortensen explained that it was the Committee's desire to hear the issues

surrounding workman's compensation as it relates to independent contractors. He stated

he is of the belief that there is a need to rethink workman's compensation because of such

things as changes in the work force, changes in the way in which work is currently

performed, deregulation and so forth. Cochairman Mortensen announced that a number

of people were present to speak to the Committee on the issue that is before the

Legislature in this day and age concerning independent contractors and how they fit into

workman's compensation. He asked Wendy Baldo to give a historical perspective on the

Arizona workmen's compensation system in Arizona with respect to the independent

contractor issue versus the employee issue.

Wendy Baldo, Senate Research Analyst, referred the Committee members to her outline

on the workman's compensation system ( on file with original minutes). She explained that

the Arizona State Constitution bases the applicability of workman's compensation laws and

mandated coverage on the existence of an employment relationship. She stated that

because the Constitution is silent on the criteria that is to be used in defining the

employment relationship, the Arizona Legislature has to determine the criteria. At the

present time, Arizona statute stipulates two criteria, when used in conjunction with one

another, are used to determine employee status: ( a) the extent to which the employer

retains supervision or control over the work performed and ( b) the extent to which the work

is part or process in the trade or business of the employer. Ms. Baldo stated that because

workman's compensation, by nature, is remedial, the courts have been very liberal in their

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Ms. Baldo explained that ARS 523- 902 provides that employees, for workman's

compensation benefits, depends on ( 1) the extent to which the employer retains

supervision or control, and ( 2) the extent to which the work is part or process of the

business. Because the statutory language is very vague, a fair amount of case law has

been developed, including four cases that have had a significant impact on workman's

compensation in Arizona.

Ms. Baldo explained that in the 1984 Mollner vs. lndustrial Commission case, the court

held that Mr. Mollner was an employee because the employer had the authority to exercise

control and supervision over his work. Mr. Mollner was a repair mechanic for a large

equipment company, he was paid by a 1099, the checks were written directly to his

business account, and he did not establish his own hours. Ms. Baldo commented that the

courts look at whether the business owner has the right to control or supervise the worker

and not the actual exercising of the control.

The 1976, Huahes vs. lndustrial Commission case emphasizes the liberal construction by

the court of the workman's compensation statutes. This is a case where a real estate

agent was found to be an employee of the broker even though the agent was paid strictly

on commission and worked no set hours.

In the 1984, Anton vs. lndustrial Commission case, Mr. Anton was a woodcutter who was

doing some work for a pulp wood contractor. He owned his own tools, he did not work

specific hours, and he was paid by the cord. The court ruled that it was not reasonable

that workers could operate as independent contractors because the business was in fact

contracting out the very heart of the business, the pulp wood industry.

In the 1990, International Mariachi America vs. Larrv Suarez & lndustrial Commission case,

the court held that neither the absence nor the presence of a written contract controls

whether a person is an employee versus an independent contractor. In this case there

was a contract which said that the worker was in fact an independent contractor which was

reversed by the court.

Ms. Baldo explained that because of the case law, the Legislature tried to deal with the

issue of independent contractor in the past. In 1993, as a direct result of the Huahes

decision, the Legislature attempted to more clearly define the role of real estate sales

persons as being independent as contractors and not statutory employees. In 1994, the

Legislature looked again at the definition of independent contractor and tried to clarify what

exactly was " part or process in the trade or business" by adding statutory language that a

particular work activity, in the context of ongoing and integral business process, is regular,

ordinary or routine. The Legislature also authorized, by statute, the use of waiver forms

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9. Doing Work on Employer's Premises. An employee works on the

premises of an employer, or works on a route or at a location designated by

an employer.

10. Order of Sequence Set. An employee must perform services in the order

or sequence set by an employer.

11. Oral or Written Reports. An employee submits reports to an employer.

12. Payment by Hour, Week or Month. An employee is paid at regular

intervals.

13. Payment of Business and/ or Traveling Expenses. An employee's

business and travel expenses are paid by an employer.

14. Furnishing of Tools and Materials. An employee is furnished significant

tools, materials and other equipment by an employer.

15. Significant Investment. An independent contractor has significant

investment in the facilitieslequipment helshe uses.

16. Realization of Profit or Loss. An independent contractor can make a profit

or suffer a loss.

17. Working for More Than One Firm at a Time. An independent contractor

gives hislher services to two or more unrelated persons or firms at the same

time.

18. Making Services Available to the General Public. An independent

contractor makes hislher services available to the general public.

19. Right to Discharge. An employee can be fired by an employer.

20. Right to Terminate. An employee can quit hislher job at any time without

incurring liability.

Senator Burns inquired if the IRS, in making their determinations, requires that the 20

factors be in place. Ms. Baldo explained that the IRS uses the 20 factors, some of which

are given more weight than the others. She added that the courts use the 20 factors in

determining independent contractor status. Ms. Baldo stated that determinations are

based on the weights given to each factor. By way of example, she stated she was of the

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Ms. Baldo replied yes. She explained that by virtue of the fact that a sole proprietor

actually has no employees, they are not required to carry workman's compensation

insurance on themselves. Ms. Baldo stated that the problem has arisen because some of

the larger companies contract with independent contractors. She explained that when

there is an injury, the courts have come back saying that while the taxicab companies may

have been calling their workers independent contractors, the court believes the workers

are the taxicab companies' employees because the companies are either contracting out

the very heart of the business or have control or supervision, whether it is within training,

hours, or utilization of dispatch services.

Representative Mortensen asked if an independent contractor can be a sole proprietor.

Ms. Baldo answered yes. She explained that the problem, in making a clear distinction,

is because of the liberal interpretation of the courts. Ms. Baldo stated that by IRS

definition, a sole proprietor has no employees; however, that same sole

proprietorlindependent contractor perhaps has to be an employee for purposes of

workman's compensation.

Ms. Baldo continued with her presentation. She identified various issues of consideration

by the Committee, including ( 1) a definition of an independent contractor to include

clarification of the control language in ARS § 23- 902 and possibly incorporating some of the

20 common law factors into statute if the Legislature chooses to clarify the definition of

independent contractor, ( 2) clarifying the language regarding part and process of a trade

or business, ( 3) eliminating the provision that the sole proprietors be licensed with the

Registrar of Contractors, ( 4) addressing the problem of some constituencies who are able

to use the statutory vagueness of who is an employee and who is an independent

contractor to their advantage when an injury occurs, and ( 5) addressing constitutional

issues. Ms. Baldo stated that Ms. Diana O'Dell would present the constitutional issues to

the Committee with respect to exempting industries out of workman's compensation

coverage, and would report what other states are looking at in terms of defining

independent contractors.

Representative Newman asked for an example of a situation where statutory vagueness

is used to the industries' advantage when an injury occurs. By way of example, Ms. Baldo

stated, " I am the owner of a 200- unit apartment building who hires a painter to come in

each time that a resident moves out. I consider that person to be an independent

contractor and the worker considers himself an independent contractor. In the course of

painting an apartment, the painter is injured. The painter has the right to sue by virtue of

the fact that he is not an employee of that apartment owner." Ms. Baldo commented that

in some situations where the matter goes to court, the business owner is given legal advice

to consider the injured worker as an employee for workman's compensation purposes

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She added that the 1925 language is currently codified in ARS § 23- 902. In 1973, the

Legislature eliminated the language that exempted employers of agricultural workers. She

commented that in essence, only employers of domestic workers and those who hire

independent contractors are exempt from providing workman's compensation coverage.

For clarification purposes, Representative Mortensen asked if his understanding is correct

that only domestic servants and employers of independent contractors are exempted. Ms.

O'Dell replied yes. Representative Mortensen added that he was of the belief that the

motion picture industry is also exempt from providing workman's compensation coverage

for their employees for a certain length of time.

Referring to her packet of information, Ms. O'Dell explained that she used the word

" exception" rather than " exemption" because the motion picture industry must have

workman's compensation coverage for their people. She added that the motion picture

industry has to have been in Arizona less than eight months and must have some type of

insurance coverage.

Representative Mortensen asked if his understanding is correct that licensed real estate

agents qualify under that independent contractor status. Ms. O'Dell explained that the real

estate persons were classified statutorily as independent contractors because of the 1976

Huahes court case and are therefore exempt from workman's compensation.

Referring to the motion picture industry, Senator Peiia asked if the motion picture industry

exemption, referred to by Representative Mortensen, related only to the company that

provides coverage. He stated that he recalled that the exemption given to that industry

was- that they could use an insurance company they had in California, Florida or some

other state or country but they had to provide insurance coverage for their workers.

Ms. O'Dell replied yes. She explained that the motion picture industry must be otherwise

insured if they are not insured in the State of Arizona and must be temporarily on location

in Arizona for no more than eight months.

Ms. O'Dell continued with her explanation. Referencing the review of other states'

workman's compensation statutes, including Colorado, Virginia, Florida and Oregon, Ms.

O'Dell stated that all of the four states provide an exemption for taxicab drivers and that

Virginia passed their exemption in 1989. She explained that the 20 common law factors

are the common factors that each state includes in its definition of employee and

independent contractor. Ms. O'Dell commented that the direction the states appear to be

taking is not to define what an independent contractor is but rather what an employee is

not. She stated that some of the determining factors that are common among Oregon,

Florida and Colorado include: ( 1) who manages and controls, ( 2) whether that person has

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coverage, Senator Pefia asked if his understanding is correct that the three employees has

been changed to one or more employees. Ms. O'Dell replied that his understanding is

correct. She added that any employer who has employees must cover those employees

with workman's compensation. She also advised that the statutory language read into the

record was the original Constitution language in ARS 523- 902.

Cochairman Mortensen thanked Ms. O'Dell for her presentation and opened the meeting

for public testimony.

Larry Etchechury, Director, lndustrial Commission, stated that he was available to

answer any questions.

Representative Conner asked Mr. Etchechury if he had a definition of independent

contractor. Mr. Etchechury replied that he did not have any other definition other than the

definition as presented by Ms. Baldo in terms of the control issue and the part and process

issue.

A lengthy discussion followed between Representative Conner and Mr. Etchechury

regarding the definition of an independent contractor under workman's compensation law

and the criteria used by the courts in determining independent contractor status and

employee status. Mr. Etchechury stated that the courts have defined an independent

contractor as an entity not controlled by anyone and not a part or process of the business.

He added that the issue becomes even more confusing because there is a definition of

independent contractor for tax purposes and a definition of independent contractor for

unemployment insurance purposes, all of which have been ruled on by the courts. Mr.

Etchechury cited various cases and briefly described the different rulings.

Representative Conner inquired if taxicab drivers paid any workman's compensation prior

to 1989. There was no response.

Cochairman Mortensen asked if any member of the audience could answer Representative

Conner's specific question.

Bill Arnett, President, Yellow Cab Company, Phoenix, AZ, replied that prior to the

decision in the Central Manaaement case, the lndustrial Commission ruled that Yellow Cab

Company taxicab drivers were independent contractors and paid no workman's

compensation premiums. He stated that subsequent to the court's ruling in 1989, the

lndustrial Commission asked to see Yellow Cab Company's contracts, the contracts were

provided to the lndustrial Commission, and the Commission sent a letter to Yellow Cab

Company stating that taxicab drivers were no longer independent contractors.

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Representative Newman asked if the Industrial Commission is working on a national level

to come up with some sort of definition. Ms. Valainis replied that the Commission is not

working nationally.

Representative Newman asked if she was aware of any definition that anyone is working

on, nationally, to help with the problem. Ms. Valainis replied no.

Jerry C. Wilson, President, Greater Phoenix Transportation Company d/ b/ a Courier

Transportation, explained the history of the taxicab industry in Arizona for which he has

served for 49 years. In the beginning, taxicab drivers were employees almost nationwide

and were on a commission arrangement with the company. Over the years, many changes

took place including deregulation of the industry. In 1982, the Legislature sent the matter

to a vote of the people and the taxicab industry became even more complicated. Mr.

Wilson stated that at the present time, he does not know of a single taxicab company in

Arizona that has an arrangement with their drivers other than as an independent

contractor. With regard to unemployment compensation, Mr. Wilson stated there is no

payment from federal unemployment presently to the drivers in Arizona or drivers

nationwide. He added that to his knowledge, the Unemployment Compensation Division

of the Arizona Department of Economic Security ( DES) has made no issue of the matter.

Mr. Wilson stated that most taxicab companies have favorable results from the IRS with

respect to determining independent contractor status. Mr. Wilson commented on the

Central Manaaement case, stating that the issues in the court's decision were very narrow,

having to do with whether or not the driver had a right to accept or reject the call that was

given to him over the radio. Referencing the 20 common law factors, Mr. Wilson stated

that to his knowledge, every taxicab company in Arizona complies with the 20 factors. In

conclusion, Mr. Wilson stated that the taxicab industry is now faced with an issue of

transporting thousands of people in Arizona and dangerously getting close to being put out

of business. He added that the taxicab drivers do have contracts and they admit that they

understand they are not covered by workman's compensation.

Representative Mortensen asked what would happen if a taxicab company had a driver

that was injured and not covered by workman's compensation. Mr. Wilson answered that

some of the drivers have their own insurance and some of the drivers use the medical

services offered by the county hospitals. He also stated that there are on- dutyloff- duty

insurance coverages available for independent contractors that they can take advantage

of if they choose to do so.

Representative Mortensen asked Mr. VVilson if he had ever been sued. Mr. Wilson replied

no.

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Company will seek protection in Bankruptcy Court. Mr. Arnett expressed hopefulness that

the Legislature can find an answer to the problem.

Representative Mortensen inquired of the status of Central Management Company. Mr.

Arnett replied that the company started business after the industry was deregulated in

1982 and ended in bankruptcy. He stated that Central Management Company is no longer

in existence.

Representative Mortensen asked Mr. Arnett to explain how he would come up with the

money to pay the back insurance premiums to the State Fund. Mr. Arnett replied that it

would be impossible to come up with the money, estimated to be approximately four times

the net worth of his company. He explained that on an annual basis, it would take 40% of

the company's revenue. Mr. Arnett stated that if Yellow Cab Company were allowed to

collect from their employees, it would result in an increase in taxicab fares by

approximately 25%, putting Yellow Cab Company in a position where the company would

not survive because they could not compete with the independents who do not carry

workman's compensation. He stated that Yellow Cab Company fares would be 20- 30%

higher than the independent driver's fares.

Representative Mortensen asked Mr. Arnett if he felt he could speak for the rest of the

industry and asked if all of the industry is in the same situation. Mr. Arnett answered that

all of the industry is in the same position and are looking for some form of relief.

Representative Mortensen asked Mr. Arnett to speak about the competition. He asked if

there are several sole proprietors in the taxicab industry. Mr. Arnett replied yes. He

explained that subsequent to deregulation of the industry in 1982, the competition became

extremely fierce. If a person . wants to be in the taxicab business, he can put a top light on

his car and be in business. Mr. Arnett stated that before deregulation, there were

approximately 350 taxicabs in Arizona. After deregulation, the number rose to over 1,000

taxicabs. At the present time there are approximately 800- 900 independent taxicab drivers

in Arizona. He commented that because there are so many taxicabs in the City of

Nogales, the City has started to license the taxicabs and therefore limit the number of

taxicabs.

Representative Conner asked Mr. Arnett if he required in his contract that those drivers

with more than one cab carry workman's compensation on any of their drivers. Mr. Arnett

answered yes. He added that even though Yellow Cab Company requires drivers to

purchase workman's compensation insurance, they cannot buy it in the State of Arizona.

Discussion followed between Representative Conner and Mr. Arnett regarding the

problems encountered by sole proprietors seeking to purchase workman's compensation

insurance.

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Senator Burns asked if domestic workers who are exempt can get their own workman's

compensation policy. Mr. Allen replied that domestic servants in Arizona have the option

of purchasing their own policy or being insured through the homeowner. Domestic

servants work in the home and it is usually an option that if the homeowner wants to

provide coverage for the domestic servant, the homeowner may provide coverage but does

not have to provide the coverage if the domestic servant wants to purchase histher own

insurance. If the domestic servant can prove that hetshe is in a legitimate business, then

the domestic servant would have no problem purchasing a workman's compensation policy

through the State Fund. Mr. Allen added that he has never seen a domestic servant apply

for workman's compensation.

Senator Burns asked if deregulation has created the problem of taxicab drivers not being

able to qualify as a business. Mr. Allen answered yes. He stated that prior to deregulation,

the taxicab drivers were covered by the State Fund and that the State Fund insured a

number of taxicab companies in Arizona several years ago.

Discussion followed between Representative Conner and Mr. Allen regarding the rewriting

of the statute to comply with the State Fund's requirements such as supplying a copy of

the business income tax return, the IRS's requirement to meet the 20 common law factors,

the State unemployment compensation requirements and the federal unemployment

requirements.

Representative Mortensen asked Mr. Etchechury if his understanding is correct that the

Industrial Commission can file criminal charges against anyone or any company that tries

to collect workman's compensation premiums. Mr. Etchechury deferred to Ms. Valainis.

Ms. Valainis explained that when a situation is brought to the attention of the Industrial

Commission that workman's compensation laws are being violated, the alleged violator

receives a letter of inquiry from the Commission identifying the possible violation. The

letter contains language that cites the penalties. She stated that there is a $ 500 minimum

civil penalty. The criminal sanction is a Class 6 felony for anyone who violates any of the

provisions of the Workman's Compensation Act. If the business owner continues to

operate his business with employees not covered with workman's compensation, there is

an ultimate sanction of closing down the business through court order.

Representative Mortensen asked if criminal sanctions would be imposed if the employer

tries to collect premiums from the employee. Ms. Valainis replied yes.

Samantha Fearn, State Director, National Federation of Independent Business

( NFIB), stated that NFlB members do include taxicab companies. She stated that the

NFlB would like to see a definition that says who is not an employee -- an issue that is

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Representative Conner expressed agreement with Ms. Fearn's comments. He stated that

he was of the belief that it is necessary to have a definition of what an independent

contractor is so that the issue will be made clear to all persons and to all companies, rather

than addressing each industry that comes before the Legislature with their individual

problems. He emphasized the need for a clear definition for all industries.

Cochairman Mortensen invited further questions and comment. There was none. The

meeting adjourned at 3: 45 p. m.

Respectfully submitted,

( Tape and attachments on file in the Ofice of the Secretary of the Senate.)