Legislature(2001 - 2002)
04/26/2001 01:50 PM Senate L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 212-WORKERS' COMP:CONTRACTORS & SUBCONTRACTOR
CHAIRMAN PHILLIPS announced HB 212 to be up for consideration.
REPRESENTATIVE LISA MURKOWSKI, sponsor, explained that statutes
don't require sole proprietors to have worker's compensation
insurance and this has caused problems when the Worker's Comp Board
makes a determination that an employee or sole proprietor is
construed to be an employee of the general contractor. "As a
consequence, there are assessments to the general for the worker's
compensation insurance, it causes uncertainty in the bidding
process…"
She said this issue has been a problem for quite some time and that
a state wide task force had been set up to look into it. HB 212 is
the result of that compromise. It requires that sole proprietor
entities maintain worker's comp insurance, which will add an
increased cost to that sole proprietor.
SENATOR AUSTERMAN asked how "sole proprietor" is defined.
REPRESENTATIVE MURKOWSKI replied that it is defined as an
individual or an entity that is working for himself. They are an
independent contractor. This has been part of the problem.
SENATOR AUSTERMAN asked if there was any discussion about a sole
proprietor who had no employees.
REPRESENTATIVE MURKOWSKI replied that he would be required to have
worker's comp coverage.
SENATOR AUSTERMAN said he understood that a sole proprietor could
have 40 employees.
REPRESENTATIVE MURKOWSKI responded that was correct and that a sole
proprietor business is owned by the individual.
SENATOR AUSTERMAN asked if there was discussion about making a sole
proprietor with no employees exempt from this requirement.
REPRESENTATIVE MURKOWSKI replied that they didn't have that
discussion in committee.
SENATOR LEMAN said if this represents a compromise, what were the
other proposals. He thought it seemed to be an aggressive move into
an area where they hadn't gone.
MR. PAUL GROSSI, Director, Division of Worker's Compensation,
clarified that this only deals with subcontractors. It isn't for
all sole proprietors. "A sole proprietor by definition has no
employees."
He said this bill just deals with a narrow focus when you have a
subcontractor situation. The problem is when you try to determine
if that person is an employee or truly a subcontractor. "That's a
pretty gray area - especially if the contractor has an actual
employee doing basically the same work."
MR. GROSSI said the problem is that there is risk out there. He
said they don't have that many claims, but insurance companies
audit a contractor and tell the state they should have covered a
person because they could be construed as an employee. The
insurance company, then, backcharges for premium. This is after the
contract has already been let and the funds can't be recovered. He
said that all this does is recognize that there is a risk and
allows for it to be covered through contracts and things like that.
He explained that the compromise came in when they decided how to
do a waiver. You really can't get rid of all risk. A person could
sign a waiver and still come in and say they were required to do it
by the contractor. They could go to the courts even if they
couldn't go to the board.
SENATOR LEMAN asked if this covered all subcontract relationships
in all professions.
MR. GROSSI replied that it would. He said their primary problems
have come from home builders and construction.
SENATOR LEMAN asked why they didn't limit it to the professions
where they had problems.
MR. GROSSI responded that the risks would be out there for anybody.
Basically it was easier to see the relationship when using a
contractor/subcontractor standard. For instance, if a homeowner
contracted to have their house painted, the board would never rule
that is a subcontractor situation. Basically the homeowner is just
a consumer. That would be true in most contract situations.
SENATOR LEMAN said that most medical doctors and dentists are set
up as their own professional corporations or sole proprietorships.
He wanted to know if this reached into those areas.
MR. GROSSI answered that he didn't think most of those situations
were subcontractors.
SENATOR LEMAN asked about situations where they contract with
someone to fill a spot and it's not done on an employee basis. That
person operates independently and makes independent judgments. They
are under some master clinic like the Alaska Native Tribal Health
Consortium.
SENATOR AUSTERMAN said he couldn't imagine that this insurance
would be cheap.
MR. GROSSI responded that this wouldn't cover a homeowner
purchasing a carpet and having it put into their homes. He said an
example of a carpet and vinyl installer premium was $1,467 per
year.
REPRESENTATIVE MURKOWSKI reaffirmed that there would be nothing in
the bill that would specifically exempt the medical community.
MR. AL WILSON, Chairperson, Alaska State Homebuilders Association,
said their problems arise when their audits are done at the end of
the year. He explained if his cabinet maker sends his crew out to
install the cabinets, they are required to be covered with worker's
compensation. When the sole proprietor is on his job site, he
wanted to know if he was an employee since his policy doesn't cover
him. "It ends up on my policy and more importantly at the end of
the year, my insurance carrier comes back and picks those guys out
and get to pay the premium on them….We are not wholeheartedly
behind this, but it takes care of the problems."
MR. WILSON said his framing subcontractors pay $2,500 per year.
This is an insurance policy that if they were to buy it
independently as health insurance, it would cost them a minimum of
twice as much and it would only cover them when they're not on the
job. Another benefit of the policy is that if it's in place
regardless of what claims come out of employees or subcontractors,
that's the end of it right there. It doesn't work its way up the
chain.
SENATOR LEMAN said he thought the coverage he described only
covered work related injuries and did not extend to a health
problem outside of work.
MR. WILSON said that was correct.
Number 1600
REPRESENTATIVE OGAN said he got into government because he was
frustrated with all the things government imposes on small business
people. He recently slipped on some ice and broke his leg and if he
was less than an honorable person, he might have put in a worker's
compensation claim. A lot of sole proprietors don't have health
insurance and he thought they needed to consider the potential for
fraudulent claims. This bill would create a whole lot of outlaws,
because a lot people simply won't get the insurance. He offered to
work with the sponsors.
MR. CHARLIE MILLER, Alaska National Insurance Company, said the two
ways to handle this are to clarify in statute somehow that no
matter what the cause, a sole proprietor who has taken advantage of
this exemption for the requirement of worker's compensation
insurance, never has coverage. That is a very difficult thing to
craft in statute and isn't good public policy. If a subcontractor
is forced by an unscrupulous contractor to declare sole proprietor
status to get work and then work only on that job using their tools
under the other job conditions that are set up for an employee,
there should be coverage for him. "The task force came to the
conclusion that the only way to handle this is to come up with a
requirement of coverage…"
He explained that the audits need to be flexible so the amount of
premium changes if the job is longer or shorter than originally
estimated. If an unscrupulous proprietor decides to file a
fraudulent claim, that money comes out of people's pockets.
The only way we could come up, as a task force, with
something that was fair to everyone was to dictate, take
the ambiguity out of it, the unpredictability out of it,
and dictate coverage. The coverage available to sole
proprietors is very limited in the market. It's often
impossible to get it. That is why the State of Alaska set
up an assigned risk pool. So that anyone that can't get
coverage is assigned to a carrier that writes worker's
compensation in the State of Alaska and they get a policy
that is basically subsidized. They are all put into a
pool for economies of scale and are assigned to a
carrier. The administrative carrier takes care of the
premium, does the claims management if there is an injury
on the job and it's handled that way.
They are not paying the same rate as a regular employer
either - because they pay a minimum premium that has been
established at $20,000. So, as a contractor, if you pay
someone $100,000 at the carpenter rate, you pay for the
entire $100,000 formula. As a sole proprietor, at
$20,100, your payroll stops and everything you are paid
after that is taken out of the equation. So, you only pay
an insurance premium as if you were paid $20,000 for the
entire year, no matter how much you work. So, if an
employer hires someone to do the exact same work, they
pay the rate at the full payroll, which may be five times
as much. So, the sole proprietors are not providing a
windfall to insurance carriers and they're not losing any
kind of competitive edge. All they're doing is being
asked to be responsible as everyone else is and not
slough their costs off on other participants in this
whole project.
So, we spent a lot of time trying to figure out a way to
make it an option for sole proprietors, but the only
thing you can do that is to put additional risk on the
general contractor and their carriers. We don't think
that's fair. If the legislature can find a way to do so
and relieve everyone else from this unpredictable risk,
we would be glad to entertain it. But a lot of people
spent a lot of time trying to do that and they couldn't.
This is the best possible solution in our opinion for
everyone involved including the sole proprietor.
CHAIRMAN PHILLIPS thanked him for his testimony and said he would
hold the bill for further work.
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