Legislature(2017 - 2018)BARNES 124
03/06/2017 03:15 PM LABOR & COMMERCE
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HB 79-OMNIBUS WORKERS' COMPENSATION 3:17:37 PM CHAIR KITO announced that the first order of business would be HOUSE BILL NO. 79, "An Act relating to workers' compensation; repealing the second injury fund upon satisfaction of claims; relating to service fees and civil penalties for the workers' safety programs and the workers' compensation program; relating to the liability of specified officers and members of specified business entities for payment of workers' compensation benefits and civil penalties; relating to civil penalties for underinsuring or failing to insure or provide security for workers' compensation liability; relating to preauthorization and timely payment for medical treatment and services provided to injured employees; relating to incorporation of reference materials in workers' compensation regulations; relating to proceedings before the Workers' Compensation Board; providing for methods of payment for workers' compensation benefits; relating to the workers' compensation benefits guaranty fund authority to claim a lien; excluding independent contractors from workers' compensation coverage; establishing the circumstances under which certain nonemployee executive corporate officers and members of limited liability companies may obtain workers' compensation coverage; relating to the duties of injured employees to report income or work; relating to misclassification of employees and deceptive leasing; defining 'employee'; relating to the Workers' Compensation Board's approval of attorney fees in a settlement agreement; and providing for an effective date." 3:17:56 PM CHAIR KITO closed public testimony on HB 79. [HB 79 was set aside and taken up again later in the meeting.] HB 79-OMNIBUS WORKERS' COMPENSATION 4:10:23 PM CHAIR KITO announced that for its final order of business, the committee would return to HOUSE BILL NO. 79, "An Act relating to workers' compensation; repealing the second injury fund upon satisfaction of claims; relating to service fees and civil penalties for the workers' safety programs and the workers' compensation program; relating to the liability of specified officers and members of specified business entities for payment of workers' compensation benefits and civil penalties; relating to civil penalties for underinsuring or failing to insure or provide security for workers' compensation liability; relating to preauthorization and timely payment for medical treatment and services provided to injured employees; relating to incorporation of reference materials in workers' compensation regulations; relating to proceedings before the Workers' Compensation Board; providing for methods of payment for workers' compensation benefits; relating to the workers' compensation benefits guaranty fund authority to claim a lien; excluding independent contractors from workers' compensation coverage; establishing the circumstances under which certain nonemployee executive corporate officers and members of limited liability companies may obtain workers' compensation coverage; relating to the duties of injured employees to report income or work; relating to misclassification of employees and deceptive leasing; defining 'employee'; relating to the Workers' Compensation Board's approval of attorney fees in a settlement agreement; and providing for an effective date." 4:10:44 PM REPRESENTATIVE WOOL moved to adopt the proposed committee substitute (CS) for HB 79, Version 30-GH1789\D, Wallace, 3/3/17. There being no objection, version D was before committee as a working document. 4:11:59 PM DEBBIE BANASZAK, Legislative Liaison, Office of the Commissioner, Department of Labor & Workforce Development (DLWD), presented the proposed changes in HB 79, Version D. She explained that the title was changed to reflect the proposed changes in the bill. Section 9 added language stating that a person "actively in charge of the operations of the business entity" or a person that has "the authority to insure the business entity" would be liable for penalties for an employer's failure to insure. The change would ensure that if a business entity has 11 members, all with less than 10 percent ownership interest, then that person would still be accountable for uninsured injuries and penalties for failing to insure. She added that Section 11, in Version D, adds language to clarify the Division's civil penalty assessment, which must be based on substantial evidence. The section also clarifies that an employer's civil penalty assessment is based on the amount the employer would have paid had the business been insured as required by law, including properly classifying its employees. MS. BANASZAK relayed that Section 13 deals with civil penalty assessment appeal process and does not have substantial changes; the previous language in HB 79 was a bit unclear. She stated that Section 16 addresses preauthorization by adding language to clarify that the preauthorization request's estimated fee would be subject to the Alaska medical fee schedule just like any other workers' compensation medical bill. Section 18 addresses the hearing schedule and gives the [Alaska] Workers' Compensation Board control of the scheduling of hearings. Having the parties control the hearing scheduling process has led to inefficiencies and protracted resolution. 4:14:34 PM MS. BANASZAK noted that Section 19 simplifies the self- representation language of the previous version. Section 23 addresses the reporting of a change in compensation and adds language stating that the division would provide notice to an employee when an employer has terminated or changed compensation. She explained that Section 24 clarifies how an employee would be notified that his/her employer denied benefits. Section 25 addresses penalties for failure to timely preauthorize medical care: the penalty would be 25 percent of the amount in the preauthorization request. MS. BANASZAK drew attention to Section 27, which repeals an earlier section addressing how benefits are paid. The previous section required payment by check, but with so many current options for payment, it was determined that this section was no longer needed. She noted that Section 28 revises language to allow the Benefits Guaranty Fund to file a lien within one year of its knowledge of an employee's injury or death. She explained that sometimes the fund may not become aware of an injury or death when it occurs. She stated that Section 30 refines the definition of independent contractor to ensure that true independent contractors can continue to operate as independent contractors. 4:16:11 PM REPRESENTATIVE BIRCH recalled a letter from the Alaska Trucking Association - an association that relies on independent contractors. He asked if the association's concerns have been addressed. 4:16:40 PM MARIE MARX, Director, Division of Workers' Compensation, Department of Labor & Workforce Development (DLWD), answered yes: the department believes the current definition addresses the concerns. She added that truckers and other stakeholder groups such as the [Alaska State Home Building] Association relayed their concerns to the department and she offered to detail how the concerns were met. 4:17:23 PM MS. BANASZAK continued presenting the changes in the bill. She noted that Section 36 discusses persons liable for criminal penalties for failure to pay compensation and adds language similar to language in Section 9. She explained that Section 37 talks about persons liable for criminal penalties for transferring assets. It adds a person "actively in charge of the operations of the business entity" or a person that has "the authority to insure the business entity" as persons liable for criminal penalties for knowingly transferring assets with the intent to avoid the payment of compensation. She said that Section 39 changes the definition of employee by removing "in the service of" and inserting "employed by". 4:19:10 PM REPRESENTATIVE JOSEPHSON asked Ms. Marx to go through the changes to the definition of employee. MS. MARX explained that the new revision is found in Section 30, page 17, line 7, which states that the definition is intended to apply only to workers' compensation definitions, not [Internal Revenue Service] (IRS) or other labor law definitions. She noted that line 8 addresses a relayed concern by adding "for the purposes of this chapter only". She noted that another change was made on page 17, lines 13-15, to address concerns raised about required control and direction; the new language clarifies that control and direction performed as a result of a requirement of law or contract would be allowed. An independent contractor could still have control and oversight without impacting whether the individual is determined to be an independent contractor. MS. MARX offered an example in response to a question: If hard hats are required for health and safety reasons, then the business for whom the services are being provided can control whether the independent contractor wears a hard hat. Such business control would not disqualify the individual from being considered an independent contractor. 4:21:45 PM MS. MARX noted that another change was made on lines 16-18, page 17 of Version D. A concern was raised that contractors may provide materials or equipment for use but an independent contractor provides all the other tools and labor. She remarked: After hearing from various stakeholder groups, this clarified that an independent contractor is a person who provides tools, labor, and other operational costs necessary, and recognized now that materials and equipment can be supplied by the contractor to the independent contractor without pushing that person - that independent contractor - out of the definition. MS. MARX mentioned another change found on page 17, line 23, which clarifies that any license, permit, or certification required by the work the independent contractors does would suffice: the previous version had only mentioned a business license. She said that based on input from various stakeholder groups and researching other states' determining tests, the department eliminated the requirement to meet 11 or 12 factors to be considered an independent contractor. Instead of 11 or 12 necessary factors, Version D provides 7 required factors that must be met, and 5 optional factors, of which 3 must be met. She offered her opinion that such a test allows a wide enough net to capture the true independent contractors, but still narrow enough to make sure that employees are not included in the definition. Subparagraph (H), on page 18, lists the optional "prongs" which allow for more flexibility. 4:24:31 PM REPRESENTATIVE WOOL asked if the earlier test had required 11 factors. MS. MARX answered that there were 11 factors, although one factor was a two-part requirement, so she indicated [that could be considered a total of 12]. REPRESENTATIVE WOOL asked if the 7 required factors and the 5 optional factors are the same 12 that were in the original description. He asked if it is accurate to say that the description went from 12 [factors] to 10 out of 12. MS. MARX answered, "That's correct." She noted that the most controversial and complicated "prong" for stakeholder groups was (H)(v), which read as follows: the person engages in a trade, occupation, profession, or business to provide services that are outside the usual course of business for the individual MS. MARX explained that prong is optional under the current version. She stated that stakeholder feedback indicated that this "prong" would be complicated to apply; therefore, it was reclassified from a mandatory to an optional factor. If a person does not meet that factor but he/she does meet three of the other factors, then he/she could still qualify as an independent contractor. 4:26:30 PM REPRESENTATIVE JOSEPHSON offered his assumption that if the independent contractor [requirements are] met by an individual who has employees, then he/she would also need to buy workers' compensation. MS. MARX stated that is correct. She added that the test is used to determine whether a person providing services is an independent contractor. She said that whether or not the independent contractor has employees is a separate inquiry. 4:27:46 PM REPRESENTATIVE KNOPP asked if home-based businesses, such as plumbers, are classified as a separate place of business. MS. MARX responded that sub-subparagraph (ii), on page 18, line 10, states that the business location has to be separate from the location for which [the independent contractor] is providing service. She explained that the department investigates whether or not the independent contractor operates out of the contractor's business or receives mail at the contractor's business. She remarked: In this day and age, I think it is very common for people to have merely a website as their base, but it has to be just different from that contractor, so we would look to where that contractor's business is and see if they are there. REPRESENTATIVE KNOPP asked what was amended in Sections 9 and 11. MS. MARX explained that Sections 9 and 11 have been repealed and reenacted in full. 4:30:01 PM REPRESENTATIVE KNOPP read from a confidential letter he received from a municipal attorney, as follows: I see no benefit from deviating from the Federal Labor Standards Act guidance in Alaska court jurisprudence regarding the distinction between employees and independent contractors. ... Subsection 11 of Section 31 of the bill deviates substantially from existing status quo and adds unreasonable additional requirements defining someone as an independent contractor that exceeds federal guidance and prior decisions by our Alaska Supreme Court. REPRESENTATIVE KNOPP added that the attorney has not seen the committee substitute. He asked if the committee substitute alleviates the concerns mentioned by the attorney. He asked if the bill would be substantially more restrictive than federal labor standards. MS. MARX answered that HB 79 has a very narrow application: It does not apply to all labor standards, it applies to workers' compensation. She stated that in the last 10 years, other states have found that multi-factored balancing tests are not effective in tackling the misclassification issue. She explained that the IRS has a 20-factor balancing test [to determine the status of an independent contractor]. She suggested that although that test may work for the IRS, the multi-factor balancing tests aren't working for workers' compensation, which has a goal of protecting employees from severe injury or death and protecting employers from huge uninsured losses. She said that some employers have contacted the Division of Workers' Compensation in order be proactive about determining whether their employees are independent contractors. She remarked: They want to be proactive, and we want to be proactive. And we give them a balancing test where no one factor is determinative. It is very difficult for these employers - especially small business employers - to know whether they meet that test without going to an attorney and perhaps getting some legal advice. Our goal is to make this a ... much clearer test so employers know ahead of time what the requirements are - and employees or independent contractors can know and protect themselves .... So it is different and it was intended to be a change. REPRESENTATIVE KNOPP pointed out that within the letters of support [included in the committee packet], some components of the bill were supported and some were not. He asked for a breakdown of the areas of concern. 4:33:23 PM CHAIR KITO stated that he plans to weigh the issues of concern and determine whether the committee will move forward or cover the issues in a future committee meeting. He said he does not intend to move the bill today and the bill will have public testimony in the future. 4:33:54 PM REPRESENTATIVE JOSEPHSON expressed that the multi-factor tests sound like a continuum of behavior or acts undertaken by an employee; however, HB 79 lays out clear statements. He analyzed that in the current system, which Ms. Marx claimed is unsuccessful, the employer must sort out the employee's classification based on tasks and actions. 4:34:41 PM MS. MARX responded that the current test set in regulation defines "employee". She explained that some states narrowly define "independent contractor" instead of defining "employee" with a broad definition. Defining "employee" has led to complications and misclassification. She stated that misclassification is being dealt with throughout the United States. She assessed that the tests defining "employee" are more difficult to apply. States defining "independent contractor" have a much clearer application. She said that HB 79 defines "independent contractor" and revises the definition of "employee" to mean someone that is not an independent contractor that has a contract for hire. 4:35:54 PM REPRESENTATIVE KNOPP offered that a constituent of his is a real estate broker, and all of his brokers are independent contractors. He asked how HB 79 would apply to such an organization in regard to minimum wage and [the Federal Insurance Contributions Act] (FICA). MS. MARX answered, "He would be safe." She explained that persons who perform services for real estate have an exemption under AS 23.30.230 paragraph (10), and therefore the Workers' Compensation Act does not apply to them. 4:37:14 PM CHAIR KITO announced that there will be more updates to the expansive bill. 4:37:38 PM REPRESENTATIVE WOOL said, "Basically there's two types of people in this world - employees and independent contractors. Trying to define employee got complicated, so you're going to define what an employee isn't." MS. MARX responded that there are more than two types of people involved. Someone could be a volunteer or a trespasser, but for the purpose of the bill, there are two categories. She added that since 2007, states have found that multi-factor tests defining "employee" don't work and have led to misclassification and confusion for employers. She explained that HB 79 is in line with what many states are doing - defining "independent contractor" instead of "employee". REPRESENTATIVE WOOL asked if doing so basically defines what an employee isn't. MS. MARX responded that an employee would be someone who is not an independent contractor but also has a contract for hire. It differentiates them from a volunteer or trespasser. In response to a comment, she added that babysitters would also be exempted. 4:39:21 PM REPRESENTATIVE JOSEPHSON stated his understanding that the term "contract for hire" would include lawn-mowing 12-year-olds and could be complicated in court. MS. MARX responded that HB 79 applies to employers, and employers are those who conduct business. She explained that as a homeowner, unless you do business out of your house, you are not an employer and would not fall under HB 79. 4:40:57 PM CHAIR KITO announced that HB 79 was held over.