Legislature(1995 - 1996)
04/24/1995 03:20 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
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+ teleconferenced
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HB 238 - NO UNEMPLOYMENT COMPENSATION FOR DIRECT SELLERS CHAIRMAN KOTT announced the committee would hear HB 238, "An Act excluding certain direct sellers of consumer products from coverage under the state unemployment compensation laws." He said the House Labor and Commerce Committee is the prime sponsor, by request. ROD MOURANT, Administrative Assistant to Representative Pete Kott, said the committee has before them CSHB 238(STA), and read the following statement into the record: "The Department of Labor (DOL) has taken the position that direct sellers are within the coverage of Alaska's unemployment compensation statutes. CSHB 238(STA), should it become law, provides an exemption for direct sellers from such coverage. "Direct sellers are not employees in the common understanding of the term. They are individuals who sell products, with no supervision, directly to their customers. They are not paid a salary, and they are not paid on an hourly basis. Their compensation is based solely on their success in selling the product. Because of these factors, direct sellers are individual contractors and not employees, and therefore, they are outside the underlying purpose of unemployment compensation. "The federal government, for purposes of the Internal Revenue Code, does not consider direct sellers to be employees. CSHB 238(STA) adopts, by reference, the federal standard. Thus, passage of HB 238 conforms Alaska law with the treatment accorded to direct sellers by the federal government and the Internal Revenue." Number 271 The first person to testify was JOE MARIANO, Vice President Direct Selling Association (DSA), located in Washington, D.C. He said DSA is a national trade association that represents companies and the individuals who sell for those companies, which market their products through personal demonstration, primarily, though not exclusively, in the home. Companies like Amway, Avon, the Kirby Company, Mary Kay Cosmetics, Logger Burger Baskets, House of Lloyd, Shakley, Tupperware and Nu Skin, are among DSA's 150 corporate members. There are almost six million people, nationally, who sell for these companies as independent contractors and includes more than 10,000 people in Alaska. MR. MARIANO referred to correspondence from DSA's companies and Alaskan citizens, with regard to HB 238, and said that the bill was offered in an effort to address a current dispute which a specific group of direct sellers in Alaska has had with the DOL about their status under existing law. Most direct sellers have not had a problem under the existing law, but there is a unanimous feeling within the industry and among the people who sell for DSA's companies, that it is very important to pass legislation this year to deal with the problem experienced by the local direct sellers and to avoid the possible misapplication of the law and similar cases in the future. MR. MARIANO said direct sellers are universally treated as independent contractors and not subject to unemployment insurance (UI) coverage. There is no one issue more important to direct sellers than their independent contractor status. He noted this has been true, historically, for the entire industry. Most people who sell direct, enter and exit the business frequently. Most of the 10,000 Alaskan direct sellers operate their small direct sales businesses on a part-time bases for only a few hours every week, perhaps a few weeks or months out of every year. Their earnings are generally quite small and meant to supplement their family's other income. MR. MARIANO said if direct selling was considered to be employment, the state, direct selling companies, as well as individuals, would be swamped by paperwork. Most direct selling companies would go out of business, at least in the form that they currently do business, because of the increased and unnecessary costs. Most individual direct sellers would lose their micro enterprises. Mr. Mariano said in DSA's internal surveys over the last two years, the independent nature of these businesses for these individuals has been sighted by them as the number one reason they get involved in direct sales. MR. MARIANO said approximately 25 states have laws which specifically exempt direct sellers from coverage. In those states which do not, as in Alaska, a more general test, the ABC test, is used to determine unemployment coverage. Direct sellers are found virtually never to be covered under these laws. Unfortunately, the ABC test is subject to somewhat inexact interpretation and occasional administrative decisions have determined that direct sellers are found wrongly to be covered employees. This is what has happened in Alaska with some Kirby direct sellers. As a result, all of the parties, the state, and the individuals involved and the companies, can face lengthy and costly judicial proceedings (indisc.) administrative proceedings to confirm that the direct seller is an independent contractor not covered by the unemployment compensation law. MR. MARIANO said the CS for HB 238(STA), as well as a similar CS for SB 122 which deals with the same issue, will avoid this result by making Alaska's law consistent with the other narrow state laws which define direct sellers. He said the DSA believes that such consistency and reliability is vital for direct sellers and the law, and can be accomplished by the simple referral to be acknowledged in the existing definition of direct selling and direct seller which is used in the federal Internal Revenue Code. Many other states have done just that. Such an amendment would clearly address the current problem. MR. MARIANO explained that the federal language has been in place since 1982, and has proven to be a effective limited definition of direct seller for federal tax purposes, and in those states that use it for their purposes as well. Only true direct sellers, the Avon representatives, Amway distributors, Kirby sales people, etc., have qualified under this definition. He noted the DOL has indicated that it is rarely, if ever, supportive of this type of legislation, but has acknowledged the need and its desire for legislation, in this case, to assist the local Kirby distributors who engaged in the dispute. MR. MARIANO said the DSA feels confident that CSHB 238(STA) is the simplest, most limited and effective manner, of clarifying their status under the law. The original version of the bill, which the department did support, would have done so, unfortunately, in a manner inconsistent with federal and other state laws. For example, the original language would have applied to sellers who make sales in the customer's home. Many direct sellers now sell in the customer's offices, or the home of a third party hostesses. The CS eliminates that problem by adopting the uniform, reliable and acknowledged standard. It is one which the entire industry can support as one that will clarify the existing law and avoid any potential misapplication with regard to any direct sellers in the state. Number 347 ANN CREWS, Manager, Corporate Affairs, Mary Kay Corporation, said she was in attendance on behalf of the Mary Kay Corporation and its sales force in Alaska. She expressed support for CSHB 238(STA). Ms. Crews said there are Mary Kay beauty consultants and sales directors operating throughout the state. She said this direct selling career is a great income earning opportunity, usually a second or part-time job for Alaskans. Mary Kay beauty consultants and other direct sellers are independent small business people and truly value their independence as much as the income they earn. In fact, direct sellers were an integral part of the grass roots process included in the effort to define direct sellers in the federal code in 1982. Ms. Crews said the direct seller definition contained in the bill will give Alaskan Mary Kay beauty consultants and other direct sellers additional security regarding their statutory classification as a non- employee independent contractor. She stated she agrees with the definition. Ms. Crews stated the proposal is revenue neutral as contributions are not currently made to the unemployment compensation fund on behalf of direct sellers. REPRESENTATIVE ELTON asked if there are any Mary Kay direct sellers who have had a problem with the existing state system. MS. CREWS said she isn't aware of any specific problems. Number 399 PAM NEAL, President, Alaska State Chamber of Commerce, said she is in support of CSHB 238(STA). Ms. Neal said the chamber has worked with the DSA, and noted Avon Corporation is a member of the Alaska State Chamber. She said she has worked with Steve Egli with Kirby Corporation to come to an agreement. The Alaska State Chamber of Commerce supports CSHB 238(STA). REPRESENTATIVE ELTON referred to the Juneau Chamber testifying by letter and said their testimony is in support of the Senate version of the bill. He said they noted that with the DOL signing off on the legislation, the bill should be viewed as a piece of housekeeping legislation. MS. NEAL stated the Alaska State Chamber of Commerce feels very strongly that some legislation needs to be passed, either of the versions. She said it seems that the Internal Revenue Service (IRS) is usually known to be very strict and narrow in their interpretations of who could be exempt from anything. She feels that the IRS version really takes away any idea that these aren't direct sellers. They are direct sellers and are independent contractors. She said the Chamber prefers CSHB 238(STA), but supports either bill. It is very important that something be passed. Number 413 STEVE EGLI, Kirby Sales, said his company has been involved in a dispute with the DOL since 1992. Kirby has been involved in half a dozen different disputes with the Alaska DOL. The problem is the current ambiguity of the unemployment statutes, which is commonly referred to as ABC test. Kirby prevailed in 1974. The case that Kirby prevailed, which went to the superior court in Anchorage, was then used against Kirby because they had lost at the departmental level. He said they were audited March 17, 1992. Because they had paid sales people out of their checkbook, the department auditor determined that the sales people were employees with no other bases other than the fact that Kirby sales people had been deemed by the department to be employees. Mr. Egli said for Kirby to defend its position, they spent a tremendous amount of resources. Currently, they are involved with the superior court with more resources being expended for an issue that would probably cost a lot less just to settle with the DOL. He said he is sure the department's costs are probably similar to his and maybe even higher. Mr. Egli said Kirby's sales people want to be treated as independent contractors. Because they are independent contractors, it allows them the opportunity to make a better living. If they don't make a living, it is because they aren't skilled in the art of sales. Most people who aren't skilled in the art of sales aren't going to stay in a sales type of business. These people aren't flocking to the DOL asking for unemployment. He said to the best of his knowledge, Kirby Sales hasn't had an individual file for an unemployment claim. MR. EGLI said legislation needs to be enacted. He said the (indisc.) would work adequately, and the Senate legislation would also be fine. He urged that legislation be passed this session. He said his indications are that the DOL is backing the Senate version. He urged legislation be passed so the ambiguity of the current situation can be changed. Mr. Egli thanked the committee. Number 453 CHAIRMAN KOTT pointed out that both the Senate and House versions of the legislation are identical. Number 457 DIRK BLOEMENDAAL, Counsel, Cooperate Government Affairs, Amway Corporation, testified via teleconference. He said Amway today, on behalf of several thousand independent Alaska Amway distributors, wishes to register very strong support for CSHB 238(STA). Mr Bloemendaal said as he has described in written correspondence to the committee, Amway is a manufacturer and distributor of a wide variety of home and personal care products sold by thousands of independent distributors throughout the country, including several thousand distributors in Alaska. He said the Alaskan Amway distributors sell products to family, friends and neighbors to supplement their family incomes. The sales take place not only in the prospective customer homes, but also in their customers' offices, the distributors' own homes and in many other locations. He noted that there are distributors in Alaska's large cities such as Anchorage, Fairbanks and Juneau, and also in small towns and villages such as Big Lake, Eagle River, North Pole, Palmer, etc. MR. BLOEMENDAAL explained Amway distributors are not employees of Amway Corporation, but are independent contractors whose status as independent contractors is not disputed. CSHB 238(STA) proposes to specifically exempt these direct sellers from the state unemployment compensation law. The language mirrors laws enacted by some 25 U.S. states, which directly tracked the language enacted by the U.S. Congress in 1982. The language is precise, limited in scope, and ensures that legitimate direct sellers are indeed exempt from coverage under the state unemployment compensation law, while ensuring that non-direct sellers are not exempt from the state unemployment compensation law. The bill, therefore, codifies the status of all direct sellers in Alaska and ensures that no misunderstandings or misinterpretations as to their status will arise in the future. No persons, other than legitimate direct sellers selling consumer products in the home, or otherwise in a permanent retail establishment, can qualify under the language. Further, if the bill were enacted, it would help all Alaskan direct sellers and not just a few. MR. BLOEMENDAAL pointed out the Michigan Legislature enacted language in Michigan's unemployment compensation law this session. Because Amway distributors sell products in all 50 states, it is vitally important to Amway that individual state laws be consistent with one another. Companies and their independent direct sellers must be able to rely upon the fact that their status will not change when distributors cross state lines or do business in another state. MR. BLOEMENDAAL said the (indisc.) of the ABC test make it vital that the definition of direct sellers put into Alaska law accurately and correctly describe all direct sellers doing business within Alaska. For these reasons, on behalf of several thousand independent Alaskan Amway distributors, Amway urges the committee to support CSHB 238(STA), and pass it out of committee. Number 500 CHAIRMAN KOTT said he would like to make a correction, for the record, that the Senate bill doesn't match CSHB 238(STA). However, it does match CSHB 238(L&C), dated 4/20/95, which the committee has not yet adopted. Chairman Kott asked Mr. Flanagan to come forward. Number 506 ED FLANAGAN, Deputy Commissioner, Department of Labor, said a cover letter to the Chairman Kott, with a memorandum to the State Affairs Committee, was distributed when the bill was first scheduled in the Labor and Commerce Committee. He said he wanted to correct something that might have given a misperception of the department's position in Mr. Mourant's statement. Mr. Flanagan said the DOL has not determined that direct sellers should be covered under the UI. He said as Ms. Crews stated Mary Kay people have never been caught up in unemployment compensation. They satisfy the ABC test. He referred to Amway and Shakley and said nobody has come forward to say that any of them have ever been found or audited to owe unemployment tax, going back as far as 25 years. Kirby has about six times since 1972. He said Kirby had a problem. Two Alaskans that testified prior to him, the business man who needed a situation addressed and the chamber representative, mentioned that the Senate bill will take care of the situation that needs fixing. For the rest of the sellers, there is a situation where it isn't broke and it doesn't need fixing. MR. FLANAGAN said he finds it ironic that in Alaska, of all states, we're being encouraged to slavishly adopt federal language from, of all places, the IRS Code. He said it boggles the mind. Mr. Flanagan said the DOL doesn't like the federal language. Frankly, the department doesn't care how they do it outside. He said he doesn't think Alaska needs to be the twenty- sixth state to lock step and get in line. There is no vagaries here. Mr. Flanagan said the ABC test is actually a two part test. First, there has to be a master-servant relationship established and then there is the ABC test determining the independent contractor status. There is no problem for any of the direct sellers whether they are selling in the home, in someone's office, or in a church basement. They are independent contractors. The DOL has never audited them and never will. MR. FLANAGAN said Ms. Crews stated the bill is revenue neutral and that is because none of them are currently paying, and nothing in the bill is going to change that. He said Mr. Bloemendaal mentioned the vagaries of the ABC test. There are no vagaries. It is very strict and that is why Kirby has repeatedly been caught up in it. He noted that Kirby prevailed on a point of the ABC test in either 1972 or 1974, and never really did beat it. He indicated Mr. Egli is the requester of the bill. He said the DOL isn't interested in diluting the statute and removing people from coverage from any of their statutes. They aren't voluntary. Mr. Flanagan said the commissioner raised a question about Kirby salesmen, "How do we catch them up in audits and not Amway, Mary Kay, Shakley, Nu Skin, whoever." He said the fact is that the DOL didn't ever trigger audits on them, but did in the case of Kirby and did get the department to look at the situation. Where the Kirby sellers kept getting hung up was with the unique arrangement of where there is a central office that the sellers work with and it has a retail establishment, where Mr. Egli doesn't sell new Kirbys out of it, so they couldn't satisfy the ABC test. Mr. Flanagan said the DOL did try to work out some language. They looked at the federal language. The original direct sellers language, more specifically than the federal, included sales of services. There is no way that the department, and hopefully the legislature, would support that. He said he doesn't think we need to march to the drumbeat of some Washington lobbying organization. The DOL fees they have the responsibility to look out for Alaskan situations. He said he knows that Mary Kay doesn't need additional security. They are already secure in their own independent contractor status. MR. FLANAGAN said the current language in the State Affairs CS threatens the security of other employees out there. Someone will figure out a way to call them direct sellers and they'll be selling services, or they'll be selling from a boiler room operation telephone sales. He said before the DOL would pursue anything for Kirby, they did research and couldn't find a single case where there was a blocked claim. In other words, where an employee had come forward and said, "I worked for Kirby, so I should be eligible for unemployment." He said if the DOL had found one person, they probably wouldn't have even supported the Senate (indisc.). There are other situations where there are people selling directory space, etc. Mr. Flanagan urged the committee either adopt the Senate language as an amendment, or to move the Senate bill. Number 578 REPRESENTATIVE ROKEBERG referred to what is in the Senate bill and said the language still has the IRS reference in subsection 21. MR. FLANAGAN said State Affairs took the Senate bill and stripped out the Senate language and put in the "Teffer" (Sp.?) language. The Senate bill that came over had language that was worked out with the requester, with Senator Kelly's staff and with the DOL, to address the department's concerns. He noted there was also the approval of Kirby, even at the national level. The Direct Sellers Association decided they had a problem with it. There was discussion regarding which version of the bill the committee was addressing regarding a proposed Labor and Commerce CS. There being no further testimony, CHAIRMAN KOTT said he would ask if there is any discussion. Number 593 REPRESENTATIVE ROKEBERG moved that the committee adopt CSHB 238(L&C), 9-LSO871/G, Cramer, 1-20-95, as the working document. CHAIRMAN KOTT asked if there was any objection. Hearing none, Version G was adopted. REPRESENTATIVE ROKEBERG asked if Mr. Mariano could address CSHB 238(L&C). CHAIRMAN KOTT reopened public testimony and asked Mr. Mariano to come forward. REPRESENTATIVE ROKEBERG said there are two different bills. There is the IRS citation as well as Sections (a), (b), and (c), which he assumes is the ABC test. He asked Mr. Mariano to comment on the prior testimony. MR. MARIANO said he has two points of clarification. He said he had not seen the Labor and Commerce Committee CS. The bill that he was voicing strong support for was the State Affairs Committee CS which is basically everything through line 6 of what the committee currently sees. He said what the Labor and Commerce Committee CS does is combines the two versions of the bill. He said frankly, the DSA had suggested this, informally, a week ago as an effort to reach middle ground with the DOL. He said the Labor and Commerce CS is not the preferred route because it is not simple and straight forward and is somewhat convoluted. The straight reference to Section 35.08 of the Internal Revenue Code, which is through line 6 of the CS before the committee, and what came out of State Affairs, is a much simpler and more straight forward version. He said the ABC test in the bill is not the same ABC test which is the more general broad test, which causes the DSA problems. The ABC test in the bill does cause them difficulty standing alone on its own. He understands that it is somewhat complicated and convoluted. REPRESENTATIVE ROKEBERG asked Mr. Mariano if he has a recommendation. MR. MARIANO recommended that the committee adopt CSHB 238(STA). REPRESENTATIVE ROKEBERG asked if there wasn't testimony that the IRS definition tends to be more restrictive. Number 626 MR. MARIANO said DSA's position is that the IRS language is very limited and narrow in its scope, however, it does define differently direct sellers in the original version of the bill, which is supported by the DOL. He said it is broader in the sense that it more accurately defines all direct sellers. He said the DSA believes that it does define, only and exclusively, direct sellers. Number 635 MS. NEIL referred to her statement of it being more restrictive and said she meant that positively. She feels that it covers all the bases and so they are in support of the IRS language. REPRESENTATIVE ELTON said he has a couple of proposed amendments and said the purpose of the amendments is to make the language the same as what is in the Senate bill, which is preferred by the DOL. The first amendment is on line 5,...(end of tape) On line 5 following "who" delete remainder of sentence and all of line 6. REPRESENTATIVE ROKEBERG objected. TAPE 95-43, SIDE B Number 013 REPRESENTATIVE ELTON said what he is trying to do is get rid of the third option and revert to the preferred version that the DOL has testified to which is the Senate version. He said he has two fairly simple amendments to the Labor and Commerce CS. If these amendments are adopted, we would be back to the Senate version that was supported by the representative from DOL. The first amendment gets rid of the onerous IRS provision that is in the House State Affairs version. REPRESENTATIVE ROKEBERG said the onerous IRS division is what the private sector people are saying they support. REPRESENTATIVE ELTON said his interest is that the committee has heard testimony from the affected party, the Kirby Corporation, where they talked about their problem. Representative Elton said we're starting with a fairly discrete problem and if we start adding things to it, he is afraid that what is going to happen is nothing this session. He said what he is proposing is a simple approach that is supported by the department, and is solves the Kirby Corporation problem. He said he would hate to be in a situation where we try to expand the definition of the problem and the way that problem is solved, and have the DOL go to the Governor's Office and end back at ground zero. CHAIRMAN KOTT said he hates to address a particular single issue. He said he isn't going to guess what the Governor might or should do. He said he thinks as long as the committee takes care of a potential problem, it should be done with this vehicle. He said there is another vehicle available which is the Senate version. REPRESENTATIVE ROKEBERG said he still maintains his objection. Number 068 A roll call vote was taken on Amendment 1. Representatives Elton and Masek voted in favor of the amendment. Representatives Sanders, Kott and Rokeberg voted against Amendment 1. So Amendment 1 failed. Number 077 REPRESENTATIVE ELTON said Amendment 2 is on page 12. It restores language that is in the Senate bill under subparagraph (i). After "commissions on sales" insert "or other remuneration directly related to sales or sales performance;". CHAIRMAN KOTT said he would like to amend that amendment. He asked it to be considered a friendly amendment. On line 6, after the word "as amended" insert "." and delete the rest. REPRESENTATIVE ELTON said it is different than his Amendment 2, which related more to the first amendment. He said the question he has is what is the effect. He noted he thinks there is a punctuation problem. CHAIRMAN KOTT said we would have a "." after "as amended". Anything after "as amended" would be deleted. That would take it back to the original bill. REPRESENTATIVE ELTON said the only objection he would have is that there is an amendment pending that isn't anything close to Chairman Kott's amendment. CHAIRMAN KOTT withdrew his amendment and said the committee would deal with Amendment 2. He asked if there was an objection to Amendment 2. Number 123 REPRESENTATIVE ROKEBERG objected. He said he wishes to delete the whole area below it, that it becomes redundant. He said that is why he is objecting. Number 130 A roll call vote was taken on Amendment 2. Representative Elton voted in favor of the amendment. Representatives Rokeberg, Masek, Sanders and Kott voted against the amendment. Amendment 2 failed to be adopted. CHAIRMAN KOTT offered Amendment 3, page 1, line 6, insert a "." after the word "amended" and strike the remaining portion of line 6 as well as lines 7 through page 2, line 5. He moved the amendment. REPRESENTATIVE ELTON objected. He said he has heard from Mr. Egli, who is one of his constituents, that there is a problem. He said the testimony that the committee has heard is from a national professional association and some national and multi- national corporations who don't have a problem that needs fixing. All of a sudden, the committee is fixing a problem for one of his local constituents with language that is being proposed and brought to the legislature from Washington, D.C., from Dallas, Texas, and other points of the globe. Representative Elton said by fixing it in the way they want, he believes that his constituent and the problem is being put at risk. He said he doesn't want the committee to come up with a solution that is a solution for three months until it gets to the Governor's desk, and somebody decides that they're going to listen to the DOL better than the legislature listened to the DOL. He said he objects to this because we're risking some help that will come to one of his constituents. He said the only Alaska input that the committee has received is a sheaf of one sentence letters that all came from the same fax machine in Anchorage. He said, "I don't think that is necessarily the way we help my constituent." CHAIRMAN KOTT said he has a sheaf of additional fax material that has come from all over. REPRESENTATIVE ELTON said he has information from all over too, all over the United States. He said the information he has from Alaska came from one fax number in Anchorage. Number 197 CHAIRMAN KOTT said since the committee sponsored the bill on behalf of Mr. Egli, he thinks the amendment, as proposed, would be all inclusive to cover Mr. Egli's problem. He said by initiating the original bill, it was brought to his attention, that there may be some other potential problems that could be headed off before they occur. Whether or not there is a problem out there remains to be seen. Chairman Kott said, in this particular case, he thinks it would do more good than harm by supporting the bill as it is hopefully going to be amended. REPRESENTATIVE ELTON said if this language is the best approach, he would appreciate some kind of an explanation on why the committee felt that we needed a CS, that was briefly glanced over, and now we're going back to the bill as it came to the committee. There must be something that compelled the committee to change the State Affairs version. He said he hasn't heard what those reasons are. Number 205 CHAIRMAN KOTT said the State Affairs version, as well as the new CS, contains the Internal Revenue Code as part of it. He said he had asked his staff to try and work with the DOL on some language that would address their particular concerns. That was the reason additional language was included. It clarifies specifically the intent. However, it is his understanding that this isn't satisfactory, so the committee will go back to the original State Affairs version of the bill. He said he would object to the motion to adopt Version G. Chairman Kott said he has moved Amendment 3, and asked Representative Elton if he is still maintaining his objection. REPRESENTATIVE ELTON indicated he is maintains his objection. A roll call vote was taken. Representative Sanders, Masek, Rokeberg and Kott voted in favor of the amendment. Representative Elton voted against the amendment. Amendment 3 was adopted. Number 247 REPRESENTATIVE SANDERS made a motion to move CSHB 238(L&C) out of the House Labor and Commerce Committee with individual recommendations, unanimous consent and zero fiscal notes. CHAIRMAN KOTT said there is a motion to move CSHB 238(L&C), Version G, out of committee with individual recommendations. He noted there was a request for unanimous consent. Chairman Kott asked if there was an objection. REPRESENTATIVE ELTON objected. A roll call vote was taken. Representatives Rokeberg, Masek, Sanders and Kott voted in favor of moving the bill. Representative Elton voted against moving the bill. CSHB 238(L&C), Version G, as amended, with a zero fiscal note, was moved out of the House Labor and Commerce Committee.
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