Legislature(2001 - 2002)
05/02/2002 03:47 PM Senate STA
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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
MS. AMY ERICKSON, Aide to Representative Lisa Murkowski and the
House Labor & Commerce Committee, said HB 212 addressed a decade-
long issue regarding workers' compensation insurance coverage for
sole-proprietors, individuals working for themselves without
employees. Current statutes did not require sole-proprietors to
carry workers' compensation insurance but did require general
contractors to carry workers' compensation insurance on their
employees. She said the workers' compensation board determined,
based on the relative nature of work test, that in certain cases
injured sole-proprietors were actually acting as employees of the
general contractor. Because of these determinations, insurance
companies charged general contractors additional premiums for
sole-proprietors. She said sometimes these extra premiums were
charged after the policy was audited and therefore had not been
anticipated nor included in their bid.
She said a statewide task force was established to look at the
problem, identifying several different possibilities. HB 212 is
the ultimate compromise the task force came up with. She said
requiring sole-proprietors to provide their own workers'
compensation coverage would eliminate any gray area, give all
parties equity and allow for risks and associated costs to be
anticipated and recovered in the bidding process.
CHAIRMAN THERRIAULT said the committee had given Ms. Erickson a
copy of a proposed CS. He asked if she had a chance to discuss
the CS with Representative Murkowski.
MS. ERICKSON said although Representative Murkowski had seen the
CS, they had not had a chance to discuss it because she had been
on the floor all day.
CHAIRMAN THERRIAULT said he developed the CS after talking with
members of the Senate and seeing that there seemed to be a lot of
dissatisfaction with HB 212. He said he was looking for a
different way to approach the issue. He asked if there was
anyone who wished to testify.
MR. DON ETHERIDGE said he was testifying on behalf of the AFL-CIO
Alaska State in support of HB 212. He said they believed it
would create a more equitable playing field for all of the
subcontractors that bid on a project. He said some of the
subcontractors taking a risk and not purchasing the insurance
were able to underbid others and the general contractor became
liable for everything.
CHAIRMAN THERRIAULT asked if there were questions for Mr.
Etheridge. There were none.
MR. PAUL GROSSI, Director, Division of Workers' Compensation,
Department of Labor & Workforce Development, asked if the CS had
been introduced.
CHAIRMAN THERRIAULT said the CS was mentioned but was not adopted
as a working document.
MR. GROSSI said a task force consisting of homebuilders, labor,
the insurance industry, insurance brokers, the timber exchange
and the Workers' Compensation Committee of Alaska put HB 212
together. He said it was a compromise trying to deal with the
problem of the risk involved with subcontractors working for a
general contractor. He said when a subcontractor got injured
they filed a claim with the Workers' Compensation Board.
Sometimes they were found to be employees. As a result of that,
the insurance companies charged the general contractor a premium
for that potential risk. He said the homebuilders came to the
Division a couple of years ago with the issue, which prompted the
group getting together and coming up with HB 212. He said they
looked at several possible solutions, including waivers and
requiring the general contractor to cover everybody. He said the
solution in HB 212 was chosen because it was the least expensive
way of handling the problem.
CHAIRMAN THERRIAULT said the word "compromise" denoted
reluctance.
MR. GROSSI said the working group was a large, diverse group of
people and there was difficulty getting agreement among them. He
said HB 212 fixes the problem, puts certainty back into the
situation and allows for predictability of cost. He said HB 212
would allow everyone to know exactly where the liability would be
and who would be responsible for coverage.
CHAIRMAN THERRIAULT said it seemed like the uncertainty came from
the regulations of the relative nature of work test.
MR. GROSSI said the relative nature of work test was a regulation
that was a result of Supreme Court case law.
CHAIRMAN THERRIAULT said often a court case decided one factor
only to create a number of other questions, which the courts
would have to come back and clarify further. He asked if the
proposed CS would bring more clarity to the question of when a
sole-proprietor is acting as an employee.
MR. GROSSI said he sent the CS to his hearing officers to ask
them what it did. They said it codified the laws that exist
currently but it didn't really change anything. He said that
doesn't take away the uncertainty. He said it would eventually
have to be decided in the courts. He said the original bill
removes all uncertainty, which is a benefit over the way it's
done now.
TAPE 02-27, SIDE B
4:35 p.m.
CHAIRMAN THERRIAULT said that uncertainty is removed because HB
212 would require coverage regardless of the situation.
MR. GROSSI said all subcontractor sole-proprietors would be
required to have workers' compensation coverage, not all sole-
proprietors.
CHAIRMAN THERRIAULT asked why we should differentiate between
when a sole-proprietor comes into the home to lay carpet one day
and when he lays carpet in a house in a new subdivision the next
day. He said in one instance the sole-proprietor would be
required to have workers' compensation coverage and in the other
he wouldn't.
MR. GROSSI said that had more to with whether the purchaser was a
consumer or a producer. He said there is never any potential
liability for a consumer who is simply a customer.
CHAIRMAN THERRIAULT said it was the same sole-proprietor doing
the same job. He asked if Mr. Grossi had seen the revised 2002
rates for sole-proprietor policies based on assigned risk in bill
packet, which listed the dollar amounts of premiums for sole-
proprietors who purchase the insurance for themselves that were
in the bill packet.
MR. GROSSI said that probably came from the Division of
Insurance, not his office.
CHAIRMAN THERRIAULT said this would be the cost to the individual
as laid out in HB 212. He asked if there were any questions for
Mr. Grossi. There were none.
MR. ALLEN WILSON, Legislative Chair, Alaska State Homebuilders,
said he had worked on this issue for several years. He said he
faxed the proposed CS to his co-chair and one of the other task
force members to get their opinion on it. He said they were
intrigued by the approach and especially liked the definition of
a subcontractor. He said it seemed clearer than the current
relative nature of work test. He said they would like some time
to look at it and get it to other task force members and come
back and offer further input.
CHAIRMAN THERRIAULT said during the last campaign he heard from a
constituent who was a sole-proprietor doing drywall work. The
constituent complained that the State required several licenses,
insurance and bonding and he had to do a lot of work just to
cover those costs. He said the constituent wanted the
legislature to consider going in the other direction, which may
not be realistic. When he saw HB 212, he thought it was a step
in the opposite direction than his constituent was encouraging
him to go. He also heard several comments from his colleagues
that led him to believe the original version of HB 212 would have
problems passing the Senate. He asked Mr. Wilson what comments
he had heard from his association members.
MR. WILSON said the association was made up primarily of general
contractors. He said they were caught in a catch-22 where they
were asking their sole-proprietor subcontractors to get a
workers' compensation policy because they were getting charged
for it after the fact and could not recover the investment. The
sole-proprietor subcontractor is not required to get workers'
compensation coverage. He said they had to make the decision
whether to operate illegally and use the subcontractor or add
them to the payrolls, which is more expensive than the insurance
coverage. He said when you're in business for yourself,
generally the higher the risk you assume, the higher the reward.
The association members agreed that you should be able to take
that risk. However they did not want to have to pay for it. He
said that was why the nature of work test in the CS has some
appeal and he felt his association members would like it.
However, he had to ask if it provided enough protection when the
insurance companies did their audits. He said at first glance
the CS seemed to meet those requirements.
CHAIRMAN THERRIAULT asked about the workability of the nature of
work test if a sole-proprietor subcontractor brought his own
tools to the job or used a forklift on the jobsite.
MR. WILSON said especially in custom homebuilding, the general
contractor would work with the homeowner to pick out carpeting.
Because the general contractor gets a better deal on carpet
because of volume, he would purchase the carpet. The installer
would supply tack strips, glue, nails, labor and tools. He said
under the current nature of work test the installer would be
considered an employee because the general contractor supplied
the carpet. He suggested removing "materials" from subparagraph
(F) in Sec. 3 of the CS because that word might put them back in
the same situation.
CHAIRMAN THERRIAULT asked if there were any questions for Mr.
Wilson. There were none.
MS. BARBARA HUFF-TUCKNESS, Director of Governmental and
Legislative Affairs, Teamsters Local 959, said they were in
support of HB 212. She said Teamsters Local 959 represented a
lot of truckers, some of who were in a single owner-operator
status, others who worked as owner-operators for part of the year
and as subcontractors for the other part of the year. She said
some of the truckers would purchase workers' compensation
insurance in accordance with the high-risk trucking
classification. Others would not by calling themselves business
managers or by getting a lesser policy.
She said Lynden Transport hired subcontractors during peak times
of the year and required that they have workers' compensation
insurance or buy into Lynden's plan, which was a much higher
policy. She said when the trucking industry was deregulated the
truckers themselves became very regulated. She said some
truckers did carry the insurance, but others did not. She said
if you were looking at the same costs, you would have a level
playing field. She noted that this was not a union versus
nonunion issue. She believed the policy increased to $3,000 this
year.
MS. HUFF-TUCKNESS said a trucker might decide that they were an
owner-operator and they wanted to run the risk that they were not
going to get in an accident. She said the next week that trucker
might flip their truck over and get hurt or killed. She said
current statute had a big enough loophole that those individuals
could make that choice. She said she did not wish to give an
opinion on the proposed CS because she had not had a chance to
discuss it with her colleagues.
CHAIRMAN THERRIAULT asked if there were any questions for Ms.
Huff-Tuckness. There were none.
MR. CHARLIE MILLER, Alaska National Insurance, said he would like
to touch on a couple of the questions that came up earlier. The
first was the question of consumer versus contractor and why
there should be different applications of coverage for someone
who laid carpet in a home one day and for a contractor the next.
When the sole-proprietor laid carpet in a home, there was no
legal standing for a workers' compensation claim against the
homeowner. When the sole-proprietor lays carpet for a general
contractor, there was a potential cause of action. He said those
were two completely different situations and the sole-proprietor
was not being penalized for doing one job over the other, it was
simply a matter of risk incurred.
CHAIRMAN THERRIAULT said from Mr. Miller's client's perspective,
he could understand that they would potentially have to provide
coverage.
MR. MILLER said no one provided workers' compensation coverage
for homeowners.
CHAIRMAN THERRIAULT said if a sole-proprietor subcontractor was
determined to be an employee, Mr. Miller's client would
potentially have to provide coverage.
MR. MILLER said that was correct.
CHAIRMAN THERRIAULT noted that even if it was determined that the
sole-proprietor subcontractor was not an employee, there was the
cost of the litigation to get to that point.
MR. MILLER agreed.
CHAIRMAN THERRIAULT asked if there was no way to clear up that
ambiguity.
MR. MILLER said they had hoped to do that with HB 212. He said
he understood this was what Chairman Therriault was trying to do
with the CS.
CHAIRMAN THERRIAULT said HB 212 would clear up ambiguity by
eliminating the question of who should provide the coverage. He
said there was still the issue of what rules the person would
have to play by and when it was determined they had crossed over
the line into being an employee.
MR. MILLER said that area was not as predictable as anyone would
like. He said there were two main solutions to the problem
discussed by the workgroup. One of them was HB 212. The other
was somewhat along the lines of the proposed CS, except with a
fix at the end. He said the CS did not address a solution it
just codified the problem. He said the approach they discussed
would be a fixed point where there was no chance for appeal, no
chance for the injured party to go before the board and claim
that under the conditions of the relative nature of work test
they were an employee despite whatever they had signed or what
the situation was before. He said that situation would still
exist under the proposed CS. He noted that he hadn't discussed
the proposed CS with his attorneys, but he felt it had been
discussed enough for him to feel confident in this statement. He
said cutting off avenues of appeal was an unappealing solution
because there can be situations where the sole-proprietor
subcontractor felt that the only way he would get the job was to
sign on as a subcontractor. He said he didn't feel anybody
wanted to make a public policy call that cut off avenues of
appeal.
He said once there was a claim for workers' compensation and no
premium had been paid, the only rational cost for the premium was
the cost of the claim. He said if someone were injured, the
general contractor couldn't be presented with the cost of the
claim and it wasn't reasonable to expect the injured party to
cover the cost. He said it would be possible to backdate and
charge a standard premium for the amount of time the
subcontractor-come-employee had been on the job. In that case,
he said you already knew you had lost. He said that was like
betting on a game that had already been played. He said the
injured party avoided their responsibility to prepare for the
possibility of an injury but received the same benefit as someone
who paid the premiums and prepared for that possibility.
MR. MILLER said the comment made earlier was that it was unfair
to force sole-proprietors to buy workers' compensation insurance.
He said workers' compensation is a long-established no-fault
system. He said if a contractor were to cause a situation where
someone got injured the contractor couldn't be sued or if an
employee came to work drunk or disregarded safety protocol the
contractor had no recourse to deny the claim. He said everyone
who hired employees was required to purchase workers'
compensation insurance. He said when a contractor didn't require
someone who might be working in the gray area between employee
and subcontractor to pay for workers' compensation insurance,
they were giving them the benefit that was allowed to all their
other employees. He said it could be looked at in a different
way; instead of forcing a sole-proprietor subcontractor to buy
the insurance, HB 212 really tried to make them play by the same
rules that everybody else had to play by. He said if you gave
them the benefits without requiring them to pay into the system,
every other worker who paid into the system would be paying for
their benefits. He said this argument might be similar to the
debate that's brought up in political science class that you have
the right to free speech but does that give you the right to yell
fire in a crowded theater. He said you have a right to take a
chance that you may be injured.
He said the system didn't forget an injured party. He said an
injured person would need to go to the doctor and they would need
money to cover their rent. He said that person would be
receiving all the benefits of having a policy even though they
had not participated in the system to that date. He said just
because they apply for a claim doesn't mean they're going to be
successful but that still costs the system in litigation
expenses. There was still some degree of confidence that they
wouldn't be forgotten. He said it seemed unfair to let them
avoid the cost of the protection because they wanted to be
independent. He noted that they were not independent after the
injury. They became very dependent on one part of the system or
another. He said that situation was what made the task force
decide against that solution. He said the other approach seemed
to be more rational because if everyone who thought they didn't
need the coverage didn't get it, it would be chaos. He said no
one expected to have an injury that prevents him or her from ever
working in that field again.
He said HB 212 does not allow any profit margin increase to the
insurance industry. He said the added policies would go through
the residual market and be assigned to a particular pool and no
insurance company makes money off of that. In fact, in the past
several years, the pool lost money and the premium payers were
subsidizing it. He said everything seemed to be lined up in
favor of HB 212 except for the fact that it was unpalatable to
tell someone they have to do something to protect themselves when
they felt that they didn't need to.
CHAIRMAN THERRIAULT asked if there were any further questions for
Mr. Miller. There were none.
MS. SARA MCNAIR-GROVE, Property Casualty Actuary, Division of
Insurance, Department of Community & Economic Development, said
the Division participated in the discussions and the task force
that came up with HB 212. She said there were two approaches
that were discussed. One was the solution that was presented in
HB 212. She said the workgroup also discussed as their most
desirable solution a way to define when a sole-proprietor was
acting as an independent contractor. She said several of the
previous testifiers had addressed the problems with that
approach. She said the current solution was a compromise and it
would provide certainty.
She said she looked at the proposed CS and would like more time
to study it. She said if there were clear guidelines on how to
determine whether somebody was an independent contractor or an
employee and make that determination stick, it would be
preferable. One of the problems with that was the premium audit
that takes place after a job ended. She said workers'
compensation policies were based on payroll, so the contractor
estimated what their payroll was going to be. After the job, the
contractor was audited to determine if their estimated payroll
met the actual payroll. She said if someone was determined at
the beginning of the job to be an independent contractor and
broke one of the conditions of the relative nature of work test
and was subsequently determined to be an employee, there would be
an additional premium based on the audit. She said if you can
clearly determine what situations merit a premium being
collected, the general contractor could plan for those costs and
wouldn't be surprised during the audit. She said that still
wouldn't eliminate the problem.
CHAIRMAN THERRIAULT asked what triggered the determination that a
subcontractor was actually an employee during the audit process.
MS. MCNAIR-GROVE said they went back and looked at what the
individual did to determine whether they had been acting as an
employee or not.
CHAIRMAN THERRIAULT asked if there was a specific list of
questions.
MS. MCNAIR-GROVE said there was a list of questions but she
didn't know what those questions were.
CHAIRMAN THERRIAULT asked what caused those back premiums to be
triggered.
MS. MCNAIR-GROVE said she didn't know the specifics. She said
she could get a list of the types of things that were looked at
that was suggested by the National Council on Compensation
Insurance.
CHAIRMAN THERRIAULT asked if there were any questions for Ms.
McNair-Grove. There were none. He asked if there was anybody
else who wished to testify on HB 212. There was nobody.
HB 212 was held in committee.
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