HOUSE JUDICIARY STANDING COMMITTEE March 23, 1994 1:15 p.m. MEMBERS PRESENT Rep. Brian Porter, Chairman Rep. Jeannette James, Vice-Chair Rep. Pete Kott Rep. Gail Phillips (arrived at 1:30 p.m.) Rep. Joe Green Rep. Cliff Davidson (arrived at 1:30 p.m.) Rep. Jim Nordlund MEMBERS ABSENT None COMMITTEE CALENDAR HB 376: "An Act relating to services for and protection of vulnerable adults; and providing for an effective date." MOVED OUT OF COMMITTEE HB 420: "An Act relating to limited liability companies; amending Alaska Rules of Civil Procedure 20 and 24; and providing for an effective date." HEARD AND HELD HB 392: "An Act relating to the confidentiality of permanent fund dividend application information; relating to the permanent fund dividend program; and providing for an effective date." MOVED OUT OF COMMITTEE HB 459: "An Act relating to liquidated damages and attorney fees for minimum wage and overtime compensation claims." MOVED OUT OF COMMITTEE HB 367: "An Act relating to the control of outdoor advertising." NOT HEARD SB 186: "An Act relating to state agency publications." NOT HEARD WITNESS REGISTER DANIELLA LOPER, Committee Counsel House Judiciary Committee Alaska State Legislature Capitol Building, Room 118 Juneau, Alaska 99811 Telephone: 465-6841 POSITION STATEMENT: Testified regarding HB 376 REP. GENE THERRIAULT Alaska State Legislature Capitol Building, Room 421-C Juneau, AK 99801-1182 Telephone: 465-4797 POSITION STATEMENT: Sponsor of HB 420 CHARLES SCHUETZE, Attorney Davis & Gordon 405 W. 36th Avenue Anchorage, AK 99503 Telephone: 561-4420 POSITION STATEMENT: Testified via teleconference from Anchorage in support of HB 420. BRIAN DURRELL, Attorney Bogle & Gates; Certified Public Accountant 1031 W. 4th Street, Suite 600 Anchorage, AK 99501 Telephone: 257-7828 POSITION STATEMENT: Testified via teleconference from Anchorage in support of HB 420. BOB MANLEY, Attorney Hughes Thorsness Gantz Powell & Brundin 324 G St. Cook Anchorage, AK 99501 Telephone: 263-8251 POSITION STATEMENT: Testified via teleconference from Anchorage in support of HB 420. CRAIG INGHAM Alaska Bankers Association P.O. Box 73880 Fairbanks, AK 99707 Telephone: 452-1751 POSITION STATEMENT: Testified via teleconference from Fairbanks in opposition to HB 420. WILLIS KIRKPATRICK, Director Division of Banking, Securities and Corporations Department of Commerce and Economic Development 9th Floor, State Office Building P.O. Box 110807 Juneau, AK 99811-0807 Phone:465-2521 POSITION STATEMENT: Testified in support of HB 420. RICHARD VITALE, Staff Rep. Sean Parnell, Sponsor of HB 392 Capitol Building, Room 513 Juneau, AK 99801 Telephone: 465-2995 POSITION STATEMENT: Testified in support of HB 392. TOM WILLIAMS, Director Permanent Fund Dividend Division Department of Revenue 11th Floor, State Office Building P.O. Box 110460 Juneau, AK 99811-0460 Telephone: 465-2323 POSITION STATEMENT: Testified in support of HB 392. REP. ELDON MULDER Alaska State Legislature State Capitol, Room 116 Juneau, AK 99801-1182 Telephone: 465-2647 POSITION STATEMENT: Sponsor of HB 459 HOWARD JOYCE, Staff Rep. Eldon Mulder State Capitol, Room 116 Juneau, AK 99801-1182 Telephone: 465-2647 POSITION STATEMENT: Testified in support of HB 459. PARRY GROVER, Attorney 550 W. 7th Avenue, Suite 1450 Anchorage, AK 99501 Telephone: 257-5300 POSITION STATEMENT: Testified via teleconference from Anchorage in support of HB 459. BRUCE WEYHRAUCH, Attorney Faulkner, Banfield, Doogan & Holmes 302 Gold Street Juneau, AK 99801 Telephone: 586-2210 POSITION STATEMENT: Testified in opposition to HB 459. C.J. ZANE, Lobbyist Holland America Line-Westours, Inc. 880 H Street, #201 Anchorage, AK 99501 Telephone: 274-9019 POSITION STATEMENT: Testified in support of HB 459. KEN LEGACKI, Attorney 425 G. Street, Suite 260 Anchorage, AK 99501 Telephone: 258-2422 POSITION STATEMENT: Testified via teleconference from Anchorage in opposition to HB 459. RANDY CARR, Chief Wage & Hour Department of Labor P.O. Box 107021 Anchorage, AK 99510-7021 Telephone: 269-4913 POSITION STATEMENT: Testified regarding HB 459. PREVIOUS ACTION BILL: HB 376 SHORT TITLE: ASSIST & PROTECT VULNERABLE ADULTS SPONSOR(S): RULES BY REQUEST OF THE GOVERNOR JRN-DATE JRN-PG ACTION 01/14/94 2066 (H) READ THE FIRST TIME/REFERRAL(S) 01/14/94 2066 (H) HES, JUDICIARY, FINANCE 01/14/94 2067 (H) -4 FNS (3-DHSS, ADM) 1/14/94 01/14/94 2067 (H) -ZERO FISCAL NOTE (ADM) 1/14/94 01/14/94 2067 (H) GOVERNOR'S TRANSMITTAL LETTER 02/09/94 (H) HES AT 03:00 PM CAPITOL 106 02/09/94 (H) MINUTE(HEB) 02/09/94 (H) MINUTE(HES) 02/11/94 2341 (H) HES RPT 4DP 3NR 1AM 02/11/94 2341 (H) DP: BUNDE, TOOHEY, B.DAVIS, NICHOLIA 02/11/94 2341 (H) NR: KOTT, G.DAVIS, OLBERG 02/11/94 2341 (H) AM: VEZEY 02/11/94 2342 (H) -ZERO FISCAL NOTE (DPS) 2/11/94 02/11/94 2342 (H) -4 PREVIOUS FNS (ADM, 3-DHSS) 1/14/94 02/11/94 2342 (H) -PREVIOUS ZERO FISCAL NOTE(ADM) 1/14/94 03/11/94 (H) JUD AT 01:00 PM CAPITOL 120 03/11/94 (H) MINUTE(JUD) 03/14/94 (H) MINUTE(JUD) 03/16/94 (H) MINUTE(JUD) 03/23/94 (H) JUD AT 01:00 PM CAPITOL 120 BILL: HB 420 SHORT TITLE: LIMITED LIABILITY COMPANIES SPONSOR(S): REPRESENTATIVE(S) THERRIAULT,Mulder JRN-DATE JRN-PG ACTION 01/31/94 2206 (H) READ THE FIRST TIME/REFERRAL(S) 01/31/94 2206 (H) L&C, JUDICIARY, STATE AFFAIRS 02/24/94 2522 (H) SPONSOR SUBSTITUTE INTRODUCED-REFERRALS 02/24/94 2522 (H) L&C, JUDICIARY, STATE AFFAIRS 03/08/94 (H) L&C AT 03:00 PM CAPITOL 17 03/09/94 2676 (H) L&C RPT 1DP 3NR 03/09/94 2676 (H) DP: MULDER 03/09/94 2676 (H) NR: WILLIAMS, SITTON, HUDSON 03/09/94 2676 (H) -ZERO FISCAL NOTE (DCED) 3/9/94 03/09/94 2703 (H) COSPONSOR(S): MULDER 03/18/94 (H) JUD AT 01:15 PM CAPITOL 120 03/21/94 (H) MINUTE(JUD) 03/23/94 (H) JUD AT 01:00 PM CAPITOL 120 BILL: HB 392 SHORT TITLE: PERMANENT FUND DIVIDEND PROGRAM SPONSOR(S): REPRESENTATIVE(S) PARNELL JRN-DATE JRN-PG ACTION 01/21/94 2125 (H) READ THE FIRST TIME/REFERRAL(S) 01/21/94 2125 (H) STATE AFFAIRS,JUDICIARY,FINANCE 02/22/94 (H) STA AT 08:00 AM CAPITOL 102 02/22/94 (H) MINUTE(STA) 03/03/94 (H) STA AT 08:00 AM CAPITOL 102 03/03/94 (H) MINUTE(STA) 03/03/94 (H) MINUTE(STA) 03/03/94 (H) MINUTE(STA) 03/04/94 2605 (H) STA RPT CS(STA) 2DP 3NR 03/04/94 2605 (H) DP: VEZEY, G.DAVIS 03/04/94 2605 (H) NR: KOTT, OLBERG, SANDERS 03/04/94 2605 (H) -ZERO FISCAL NOTE (REV) 3/4/94 03/18/94 (H) JUD AT 01:15 PM CAPITOL 120 03/21/94 (H) MINUTE(JUD) 03/23/94 (H) JUD AT 01:00 PM CAPITOL 120 BILL: HB 459 SHORT TITLE: DAMAGES & ATTY FEES FOR UNPAID WAGES SPONSOR(S): LABOR & COMMERCE JRN-DATE JRN-PG ACTION 02/09/94 2321 (H) READ THE FIRST TIME/REFERRAL(S) 02/09/94 2321 (H) L&C, STATE AFFAIRS, JUDICIARY 02/22/94 (H) L&C AT 03:00 PM CAPITOL 17 02/22/94 (H) MINUTE(L&C) 02/23/94 2495 (H) L&C RPT 2DP 4NR 02/23/94 2495 (H) DP: PORTER, MULDER 02/23/94 2496 (H) NR: SITTON, WILLIAMS, GREEN, HUDSON 02/23/94 2496 (H) -ZERO FISCAL NOTE (LABOR) 2/23/94 03/10/94 (H) STA AT 08:00 AM CAPITOL 102 03/10/94 (H) MINUTE(STA) 03/11/94 2719 (H) STA RPT CS(STA) 3DP 3NR 03/11/94 2719 (H) DP: VEZEY, KOTT, OLBERG 03/11/94 2719 (H) NR: SANDERS, G.DAVIS, B.DAVIS 03/11/94 2719 (H) -ZERO FISCAL NOTE (LAW) 3/11/94 03/11/94 2719 (H) -PREVIOUS ZERO FISCAL NOTE LABOR 2/23 03/23/94 (H) JUD AT 01:00 PM CAPITOL 120 BILL: HB 367 SHORT TITLE: PROHIBITED HIGHWAY ADVERTISING SPONSOR(S): REPRESENTATIVE(S) OLBERG JRN-DATE JRN-PG ACTION 01/13/94 2052 (H) READ THE FIRST TIME/REFERRAL(S) 01/13/94 2052 (H) TRANSPORTATION, JUDICIARY 02/23/94 (H) MINUTE(ECO) 03/01/94 (H) TRA AT 05:00 PM CAPITOL 17 03/01/94 (H) MINUTE(TRA) 03/11/94 2716 (H) TRA RPT CS(TRA) NEW TITLE 4DP 1NR 03/11/94 2717 (H) DP: VEZEY, G.DAVIS, HUDSON, FOSTER 03/11/94 2717 (H) NR: MULDER 03/11/94 2717 (H) -ZERO FISCAL NOTE (DOT) 3/11/94 03/12/94 (H) MINUTE(ECO) 03/23/94 (H) JUD AT 01:00 PM CAPITOL 120 BILL: SB 186 SHORT TITLE: STATE AGENCY PUBLICATIONS SPONSOR(S): SENATOR(S) FRANK JRN-DATE JRN-PG ACTION 04/07/93 1221 (S) READ THE FIRST TIME/REFERRAL(S) 04/07/93 1221 (S) STATE AFFAIRS 04/14/93 1354 (S) STA RPT 3DP 04/14/93 1354 (S) ZERO FISCAL NOTE (ADM) 04/14/93 (S) STA AT 9:00 AM BUTROVICH RM 205 04/14/93 (S) MINUTE(STA) 04/14/93 (S) MINUTE(RLS) 04/26/93 1761 (S) RULES 4 CALENDAR 4/26/93 04/26/93 1762 (S) READ THE SECOND TIME 04/26/93 1762 (S) AM NO 1 ADOPTED UNAN CONSENT 04/26/93 1763 (S) AM NO 2 ADOPTED UNAN CONSENT 04/26/93 1764 (S) AM NO 3 FAILED Y10 N10 04/26/93 1764 (S) ADVANCE TO THIRD READING FAILED Y11 N9 04/26/93 1764 (S) THIRD READING 4/27 CALENDAR 04/27/93 1842 (S) READ THE THIRD TIME SB 186 AM 04/27/93 1842 (S) PASSED Y20 N- 04/27/93 1842 (S) DONLEY NOTICE OF RECONSIDERATION 04/28/93 1891 (S) RECONSIDERATION NOT TAKEN UP 04/28/93 1893 (S) TRANSMITTED TO (H) 05/06/93 1661 (H) READ THE FIRST TIME/REFERRAL(S) 05/06/93 1661 (H) L&C, STATE AFFAIRS, JUDICIARY, FINANCE 02/17/94 (H) L&C AT 03:00 PM CAPITOL 17 02/17/94 (H) MINUTE(L&C) 02/18/94 2455 (H) L&C RPT 5DP 02/18/94 2455 (H) DP:PORTER,SITTON,MULDER, GREEN,HUDSON 02/18/94 2455 (H) -ZERO FISCAL NOTE (ADM) 2/18/94 03/05/94 (H) STA AT 08:00 AM CAPITOL 102 03/05/94 (H) MINUTE(STA) 03/08/94 (H) MINUTE(STA) 03/08/94 (H) MINUTE(STA) 03/09/94 2681 (H) STA RPT HCS(STA) 6DP 03/09/94 2681 (H) DP:VEZEY,KOTT,SANDERS,G.DAVIS 03/09/94 2681 (H) DP:OLBERG, B.DAVIS 03/09/94 2681 (H) -PREVIOUS ZERO FISCAL NOTE(ADM) 2/18/94 03/09/94 2681 (H) REFERRED TO JUDICIARY 03/23/94 (H) JUD AT 01:00 PM CAPITOL 120 ACTION NARRATIVE The House Judiciary Standing Committee was called to order at 1:13 p.m. on March 23, 1994. A quorum was present. Chairman Brian Porter announced that the committee would begin with HB 376. TAPE 94-49, SIDE A Number 037 HB 376 - ASSIST & PROTECT VULNERABLE ADULTS CHAIRMAN PORTER said, "I would ask that the committee take the CS on HB 376 in hand. This represents, basically, the committee substitute that incorporated the items we had questions on last meeting, and one other item which I will explain. Section one is new between last meeting and the development of this CS. This was another section that was found in the statutes that deals with this issue where we wanted to change the `elder abuse' to `vulnerable adult,' which, of course, this bill incorporates. On page six, which I think is what we do have, on line 18, we have added verbiage so that the entire sentence says, beginning on the last of 17, `The Department or its designee shall conduct a face to face interview with the vulnerable adult, who is the subject of the report.' We wanted to make sure, just for clarification, that that's the person of whom we were speaking. I'll not discuss page seven, because you don't have it yet [Ed. Note: it was distributed shortly thereafter.]. On page nine, at the top, line one, we have added `life threatening' and the word `temporary,' and in line two, the word `temporarily.' This is the section that deals with the ability of the department to determine that an individual is within an emergency situation and takes steps without permission, without consent, to protect that vulnerable adult. Obviously, this is one of the sections of the bill that is of the consideration of this committee and we thought that it would be appropriate to make sure that was done in only very serious temporary situations where a department could, in effect, control someone's life without otherwise due process or permission." REP. JOE GREEN: "Did you want to discuss these now or wait?" CHAIRMAN PORTER: "We can discuss them now if you like." Number 110 REP. GREEN: "Just a point of clarification: By adding `life threatening,' does that modify the temporary nature to the point that the department will probably minimize that time in order to stay in context with this life-threatening thing?" Number 115 CHAIRMAN PORTER: "That would be my impression, yes. On line 11 of page seven, we have added `procedural status' as opposed to just `status'. The entire thing, then...`Upon request of person who made a report to the department under this statute number regarding a vulnerable adult shall be notified, shall be notified of the procedural status of the investigation conducted under (a) of this section regarding that vulnerable adult.' We wanted to make sure that this was not interpreted to mean that otherwise confidential information would be relayed to the person who made the report, but recognizing it's appropriate for that person to know the status of that report." Number 147 REP. CLIFF DAVIDSON: "So, in effect, the new word `procedural' just means that the person who made the report shall be notified of where in the procedure the status of that vulnerable adult is. Is that correct?" Chairman Porter replied in the affirmative. REP. DAVIDSON asked further: "The department - are they in full support of all these amendments?" CHAIRMAN PORTER: "It's my understanding that they are. Connie is nodding in the affirmative." Number 170 REP. PETE KOTT: "Just for clarification here. If there is some type of action that would require the appointment of counsel on any matter that would be brought before the court, who would that be? I don't see a real provision there. If I understand the system correctly, the Office of Public Advocacy would be the one that would be representing as counsel in these matters. And if that's the case, I don't see a fiscal note." Number 185 CHAIRMAN PORTER: "The appointment of counsel for a vulnerable adult initially would be determined by the financial status of that individual. If that person has, as we've listed in the bill, and I can't remember exactly which section, but we've listed that the department can seek assistance and guidance for these kinds of determinations, from relatives and spouses or even close associates. Those people would be in a position to know whether or not there are funds with which to hire their own attorney, which obviously is the law, or have to appoint a guardian (indiscernible.) If a guardian (indiscernible) is appointed, there would be a fiscal impact, but I don't think that this bill would create an additional impact; it's just defining the process for doing that which has already been occurring." Number 214 REP. KOTT: "My only question was, at least if I understand the system correctly, that if you do have appointed counsel representing these types of cases - either commitment or guardian cases - it would come from the Office of Public Advocacy. So I was just suggesting that perhaps there should be some kind of fiscal impact. I think the office also falls within the Department of Administration, if I'm correctly stating that, and that might bring about some form of conflict." CHAIRMAN PORTER invited DANIELLA LOPER, COMMITTEE COUNSEL, HOUSE JUDICIARY COMMITTEE, to comment. Number 241 MS. LOPER said and reiterated several times that the issue raised by Rep. Kott did not relate to the bill. She said only one particular section discussed petitioning the court for certain protective services by the agency. Number 250 REP. KOTT: "If I might add, maybe, for counsel to perhaps address...I'm looking at the original bill, page seven, lines 26 and 27; it deals with surrogate decision makers. It talks about...it has no attorney or guardian, in fact, to serve as the vulnerable adult's surrogate, we're covered there as well, then? That's my question." CHAIRMAN PORTER: "What's the question again?" REP. KOTT: "Well, the comments that were made earlier - I'm still looking at whether or not we're going to have to appoint counsel under this particular provision in Section three on page seven; Where there is no guardian or attorney (indiscernible) to serve as the vulnerable adult's decision- maker, will that person then have to acquire perhaps appointed counsel from the Office of Public Advocacy?" Number 291 MS. LOPER: "This section on surrogate decision makers for vulnerable adults is only honing in on the issue of whether they are going to receive protective services or not. It goes on to say that the vulnerable adult spouse is going to be the first on the priority that's going to be looked at, and on down the line to sisters and brothers and close relatives and friends. It only relates to the issue of whether there's going to be protective services or not, whether they can go ahead and do that or not. Under this bill, they don't have to petition the court at all." Number 310 CHAIRMAN PORTER: "From that standpoint, I think it would be fair to say that there is a cost reduction involved in this process, as opposed to a cost increase, because we didn't have the ability to make these kinds of decisions previously at the administrative level. Any other questions? What is the wish of the committee? Rep. James?" Number 315 REP. JEANNETTE JAMES: "I move to adopt the CS that is before us." CHAIRMAN PORTER: "The CS being for HB 376 dated 3/17/94-E. Is there objection? I see no objection." REP. JAMES: "I move that we send this bill out of committee with attached fiscal notes and individual recommendations and ask for unanimous consent." Number 324 CHAIRMAN PORTER: "Motion to move and ask for unanimous consent. Is there discussion? Objection? I see none. Thank you, the bill is moved." HB 420 - LIMITED LIABILITY COMPANIES Number 332 CHAIRMAN PORTER: "The next bill for consideration is HB 420. We are in teleconference for this bill, and we have, initially, the bill sponsor, Rep. Therriault. Welcome, Rep. Therriault. Please tell us about your bill." Number 353 REP. GENE THERRIAULT, SPONSOR OF HB 420, said, "I do have a sponsor statement that I'd like to read into the record, and then on teleconference we have a number of people that have worked extensively on drafting the language of the bill and can talk to the specific legal questions that you might have. For the record, my name is Gene Therriault, I am a State Representative to House District 33. "HB 420 proposes a new hybrid form of business structure called a limited liability company that combines the tax advantages of a partnership and the liability safeguards of a corporation. Although a combination of these two business structures is currently allowed in statute through formation of an S corporation, this structure has limitations that are avoided by LLCs. For example, S corporations do not allow ownership by certain types of shareholders. "Under current law, corporate earnings are subject to double taxation through the payment of corporate taxes and personal taxes after distribution of dividends. LLCs avoid this double taxation by allowing earnings to flow through to individual owners in the same manner partnership income is handled. Although businesses can be organized through an S corporation to avoid double taxation and encompass some of the advantages of partnerships, they do not enjoy all the advantages of partnerships when it comes to allocating income and deductions. "One of the greatest advantages is, as the name implies, the limited liability offered by the LLC structure. With LLCs, as with regular corporations, only the company's assets and not the owner's personal assets, are at risk in business- related lawsuits. In partnerships, so-called limited partners enjoy such protection, but general partners don't. And limited partners face restrictions on how active they can be in the business. LLCs are designed to protect all members while imposing no limits on their involvement in operation of the business. "Thirty-four states now permit limited liability companies, and passage in most of the remaining states is expected. Wyoming passed the first LLC act in 1977. Other states slowly followed suit until 1988, when the Internal Revenue Service issued Rev. Rul. 88-76, which classified a Wyoming LLC as a partnership for federal tax purposes, even though none of the members or managers were personally liable for any debts of the company. Following the ruling, formation of LLCs burgeoned, with two states adopting LLC acts in 1990, four in 1991, 10 in 1992 and more than 20 states introducing measures in 1993. "LLCs have tended to be family businesses, professional service firms, venture capital companies, real estate businesses and start-ups. I believe the LLC will provide these business owners with an efficient and flexible investment vehicle that allows both limited liability and federal income tax treatment as a partnership. I introduced the bill, which is based on a prototype American Bar Association draft, with the intention of generating discussion on this topic." Rep. Therriault added to this prepared statement: "Since that time, I did introduce a sponsor substitute which adopted a lot of work that was done by a subcommittee of the Alaska Bar Association. I believe some of the people that are on teleconference to be available to make comments and answer questions were involved in that re-drafting which basically took the American Bar Association draft and kind of Alaskanized it. With that, Mr. Chairman, I am available to answer any questions or we can go right to the teleconference." Number 418 REP. GAIL PHILLIPS: "Rep. Therriault, would you please tell me who was on that subcommittee? What groups were represented on the subcommittee?" REP. THERRIAULT: "I think it was a subcommittee of the Alaska Bar Association." Number 427 REP. JIM NORDLUND: "Gene, I think this is a good bill, actually. I considered introducing it myself, although--I understood--what I was looking into was limited liability partnership instead of limited liability company, and I'm just wondering - maybe you, or maybe somebody who is going to testify here could explain, if there is a difference." Number 446 REP. THERRIAULT: "I believe there is a working group in the Commerce Department, somewhere in the Administration that is working on limited liability partnerships. It's a different animal yet than this, but might be another business structure that people would have to choose from. My wife is an attorney up in Fairbanks and she has told me that she has had a number of clients come to her and have said, `We understand there is a new form of business. Is it available in the state of Alaska?' So, when people go to form businesses they have a number of options of what the business structure can be. It can be a full partnership or a sole proprietorship, limited partnership, a number of things. This would just add one more option for them to consider when forming the business structure." REP. NORDLUND: "Maybe somebody who was going to testify could explain. I just wanted to know the difference between the two." CHAIRMAN PORTER: "That was one of the questions I was going to ask, myself, so we'll hope to be edified by the testimony." REP. DAVIDSON: "Rep. Therriault, I can certainly understand the need for favorable tax treatment at the federal level. My question is, why is this limited liability company necessary? For example, would it allow for less responsible actions by companies that do not now have that option? Could you expand on why this additional option [is proposed], as far as forming a company is concerned, and how it would it affect the responsibilities or actions of such a company?" Number 453 REP. THERRIAULT: "Well, it would allow no more or no less of liability than a corporate structure does. But the corporate structure has a disadvantage in the tax consequences. So what we're doing is blending the liability advantages that you can get through a corporate structure with the tax benefit that you can get through a partnership. We're just melding those two together, basically." Number 468 REP. DAVIDSON: "And how is the public treasury impacted by this efficiency?" Number 469 REP. THERRIAULT: "I don't believe that the public treasury would be impacted at all. I think there was some concern expressed at the earlier committee that maybe we would be prompting corporations who pay a corporate tax to dissolve themselves and go into an LLC structure. If they did that, there would be some fairly serious capital gains consequences, which I think would actually preempt people from doing that. What we're really going to do, is just give those people who are thinking of forming a new company one more option. Now, they may have chosen a corporate structure, but I don't know that there's any way that you can really quantify what people may have done in the future when selecting those different business forms and what the potential impact could have been on the treasury." Number 482 REP. JAMES: "Is it possible to determine that a lot of people that may have filed corporations will now file this LLC, and so therefore we as a state might be deprived of any corporate income tax?" REP. THERRIAULT reiterated that this would be difficult to quantify. He was skeptical that corporations already in existence would be dissolving in large numbers to reform as LLCs. CHAIRMAN PORTER introduced the teleconference testimony from Anchorage. Number 501 CHARLES SCHUETZE, ATTORNEY, DAVIS & GORDON, testified via teleconference from Anchorage in support of HB 420. Mr. Schuetze was present as a member of the legislative drafting committee for the tax section of the Alaska Bar Association. MR. SCHEUTZE said, "The primary purpose of the bill is to enable these companies to reorganize to have the tax characteristics of a partnership combined with the limited liability of a corporation. In the past when business organizations have been organized they've had to make a significant compromise. If they wanted to have all the entire panoply of tax [options of] a partnership they'd choose to be general partners but then they would be unlimitedly liable. If they wanted to have most of the type of characteristics of a partnership they could organize a limited ownership, but still there would be a general partner who would be unlimitedly liable. If they wanted to have most of the type of characteristics of a partnership, they could organize a limited partnership, but still there would be a general partner who would be unlimitedly liable. With S corporations, as it's been discussed, certain restrictions are imposed, on the number, the nationality, etc., and it's not exactly treated like a partnership. C corporations of course gave unlimited liability, but the corporations could be taxed as corporations." MR. SCHUETZE went on to analyze HB 420 in detail. Testimony was often difficult to discern due to paper shuffling and other background noise. Included in his discussion was a delineation of the characteristics of an LLC as well as the advantages for estate planning for families in its use. He concluded by introducing Brian Durrell from Anchorage for continued discussion. CHAIRMAN PORTER thanked Mr. Schuetze for his testimony. Chairman Porter requested that any teleconference participants in Anchorage who had written testimony forward a copy to the committee via telefax, 465-3834. Number 577 REP. THERRIAULT acknowledged that the length of the bill might give committee members pause. He explained in detail how the bill provides default language for the formation and operation of limited liability companies. Number 600 BRIAN DURRELL, ATTORNEY, BOGLE AND GATES, AND CERTIFIED PUBLIC ACCOUNTANT, testified via teleconference from Anchorage in support of HB 420. Noting that he has served as one of the members of the working group of the joint tax and business section of the Alaska Bar Association that drafted the legislation, Mr. Durrell championed the bill as being very good for business in Alaska. He said it would help streamline and stimulate business activity in Alaska. Mr. Durrell said the LLC would not be a substitute for partnerships or corporations but rather a choice appropriate for certain circumstances. MR. DURRELL characterized the primary distinction between an LLC and a partnership as the ability of the LLC to enjoy limited liability. He acknowledged SB 348 which deals with the formation of a limited liability partnership but whose principles are different. Mr. Durrell described limited partnerships in relation to LLCs. "There are differences...primarily that a limited partnership always must have at least one general partner who would not enjoy those limitations of liability, and secondly, the management of a limited partnership would be much different because a limited partner to enjoy the benefits of the limited liability cannot be involved in the management of the limited partnership and an LLC would allow for management by the members who would also enjoy the limited liability. MR. DURRELL went on to contrast LLCs and corporations. He said, "To distinguish [LLCs] from corporations, setting aside for the moment S corporations, so we're talking about a normal corporation, C corporation subject to taxation, the primary distinction is the double taxation issue. Limited liability. Companies would not be subject to the double taxation. If they are properly formed they are going to be taxed as a partnership with flow-through taxation and avoid the double tax that is paid by corporations. And the last type of entity, the S corporation, which is for state law purposes no different than any other corporation, it's merely an election that is made under the federal tax code, to be taxed as a corporation, that has a flow-through tax structure much like a partnership. But there are limitations on who can form S corporations, the number and types of shareholders; there can not be more than 35 shareholders in an S corporation; the corporation shareholders cannot be nonresident aliens. Those types of individuals, corporations, can be members of LLC. So it has distinctions from each one of these existing business entities, and again in some instances, it may be better; in others, one of these existing entities may be a better choice. We're simply trying to provide the business community a full array of options that should be available to them in selecting the manner in which they want to structure their business." Number 678 CHAIRMAN PORTER: "Is it your understanding that the bill that we are considering is without significant difference from the bills that have been introduced in other states in the past?" Number 689 MR. DURRELL: "Well, I have not reviewed each of those 34 bills that have been passed in the other states, so I can't speak from personal knowledge. My understanding is this is very similar. I think if we looked at each one of those bills that every state made minor variations into the bill, but the general concept is the same. The concept being the limitation of liability afforded to members and the partnership tax attributes." Number 711 BOB MANLEY, ATTORNEY, HUGHES THORSNESS GANTZ POWELL & BRUNDIN, testified via teleconference from Anchorage in support of HB 420. "Thank you for letting us testify, and I mean that seriously, because after running through tort reform, I imagine you guys are just sick and tired of lawyers. I'd like to say that we're different. We're CPAs, tax and estate planning and business lawyers that are interested in the development of the law. We want to make more and better options available to our clients. "Last week I went to a legal seminar outside, and the speaker was discussing various business entities that you could offer to your client. He indicated that the count was now with 37 states with limited liability company statutes, and he boldly predicted that by 1995 we'd have all 50 states with LLC legislation. The California senate just passed an LLC bill expected to be on the governor's desk very shortly." Mr. Manley went on to express concern that Alaskans would lose business to other states from individuals desiring the formation of LLCs. "Our drafting committee worked from the ABA prototype act. That was put together by a national panel with the American Bar Association business law section, and basically, all the LLC acts throughout the country are substantially similar. And I think the ABA prototype distills the best of all of these various bills. We've got a fair amount of experience with LLC. The first was Wyoming in 1977, then Florida in 1982, so we've got a certain amount of history even though this is happening relatively rapidly. "To explain: An LLC has a blend of corporate and partnership characteristics with a flexible operating system. It meets the needs of Alaska business and provides a federal tax advantage. And, as Mr. Durrell pointed out, it facilitates foreign investment because foreign investors, nonresident aliens, cannot be in an S corporation. So accordingly, they are either subject to general partnership rules regarding liability or, in the alternative, subject to corporate double tax." MR. MANLEY posited a hypothetical Japanese consortium seeking a location to set up a timber mill in either Alaska, Washington or Oregon. He described the negative response of consortium accountants to Alaska upon learning that only Oregon and Washington offered the option of an LLC, with "pure individual one-bite taxation, and limited liability." He concluded that LLC legislation was necessary from an international point of view in order to keep up with developments in the law. Turning to the subject of revenue, Mr. Manley said he did not believe LLC legislation would have "any impact on Alaska state corporate income tax, because existing C corporations are not going to dissolve because of the tax and transfer costs. And, really, this is primarily going to replace, for the appropriate people, partnerships and S corporations that don't pay tax right now." [Concurrent conversation in hearing room reduces testimony sound quality.]. Mr. Manley finished his testimony by opining it would be a rare situation in which someone forming a corporation who had been seriously considering a C corporation, which pays corporate income tax, would elect a limited liability company. Number 780 CRAIG INGHAM, ALASKA BANKERS ASSOCIATION, testified via teleconference from Fairbanks in opposition to HB 420. "I represent the Alaska Bankers Association. I am not an attorney. I am a business person and the Alaska Bankers Association opposes this bill. We oppose it for some very fundamental reasons and some technical reasons as well." MR. INGHAM discussed the very broad spectrum of entities to be affected by the legislation, including sole proprietorships, where the risk factors in start-up are enormous. He addressed the situation of third party vendors who must sustain considerable losses in the failure of new, and especially small and sole-proprietor, businesses; the vulnerability of these vendors provided reason, he said, for sole proprietorships and partnerships to be liable personally for the debts of their business. MR. INGHAM went on to discuss management aspects of the bill. He explained that "...in a corporation, the shareholders or owners of a corporation are prohibited, are not allowed to manage the affairs of a corporation. They in turn have to elect directors who manage the affairs. And the directors manage those affairs by appointing officers of the corporation to act as agent. And they're given specific authority to corporate resolutions and so forth that carry on the business at hand for the corporation. In a partnership or a sole proprietorship, the owner is the manager." MR. INGHAM said, "Now, when you mix the two worlds together, you give the owner limited liability and not unlimited liability, you are allowing for the manager, basically to provide, from a management standpoint, the duties and responsibilities of carrying out the business of the entity without having to worry about any personal liability. That could be very confusing. Especially to other businesses that are trying to do business with this new entity. If you look at this, just look at the first paragraph under management, Section 10.51.10 on page seven, it says, `Except as otherwise provided by this chapter, the members of a limited liability company manage the affairs and make the decisions of the company unless an operating agreement of the company names a manager for the company. Management by members is subject to a provision in an operating agreement or this chapter limiting or increasing the management rights and duties of the members, including limits or increases placed on a class of members or individual members.' "So now we have this operating agreement saying who can manage the affairs of the company and what they can and cannot do. And this is for small business, that we're talking about here, as well as big business. If you go further through the section as it deals with management and you go over to page nine, at the top of the page, line three, under subsection (b), it says, unless otherwise provided in that operating agreement of the company, or by this chapter, if an operating agreement of a company means more than one manager for the company -- in other words, now we can have the operating agreement saying, well, instead of just one person appointed by the members, we can now have, you know, five or ten managers; the consent of more than one half of the number of managers of a limited liability company is required to decide the affairs of the company. Does that mean if I do business with one of these entities I better make sure that the manager has gone out there and gotten a majority rule on doing business with him? "So if we move on, here, to the section that I think is most important of all, article seven, `Relationship to Third Parties,' that's who these people will be doing business with. Their customers and other businesses. At the top of page 14: `Agency Power of Members and Managers.' It goes on to say, `Except as provided in (b) and (c) of this section, a member of a limited liability company is an agent of the company for the purpose of conducting the company's affairs. A member that, including the execution of an instrument in the name of the company, that appears to be performed in the usual way of conducting the affairs of the company, binds the company.' Well, does that mean now I need to know what is usual and customary as far as the affairs of the company? I guess I'm running out of time here. "But the big issue here is, there are a lot of big questions that have not been asked by the business community, and the people that are going to have to do business with this new entity as to how it's going to work when it comes down to relating to third party interests. And let's not think that we're treading over something brand new here. This was tried one hundred years ago, in what was called the Business Trust. And the Business Trust was originated to obtain certain advantages of corporate status, such as limited liability. It was very popular in the few years it was in existence in the 1900s. However, a number of states ruled that the partners should be held personally liable. The state legislature enacted laws requiring that. I wonder why they would do that?" [Tape ends abruptly.] TAPE 94-49, SIDE B Number 000 REP. DAVIDSON asked Mr. Ingham if he had any other points. Number 007 MR. INGHAM: "I do have other points, and I would like to have a few more minutes of time if I may." Chairman Porter invited him to continue. "I talked about the management problems here, how that could be confusing to deal with other business entities out there as far as this new business entity. Well, let's talk about the access of a particular company, or, you know the property that company owns. If you go now to ownership and transfer of property, which is Article 10, it basically says that the limited liability company can hold property in either the name of the company or the name of the individual member or manager. That could be extremely dangerous, for the simple reason that it enables someone to move assets around fairly easily. There certainly should be language prohibiting property being held in any other manner but the company's name. That's pretty clear. If you have a corporate structure and you go out there and you have vehicles or real estate, it's in the name of the corporation. It can't be in the name of the officers of the corporation or the managers. In a partnership, sure, the assets of a partnership can be flexible, but that's because those partners are personally liable for their business actions and their business dealings. That's a very important issue. And when you really sit down and look at this bill, from a business standpoint, I am sure it has all the tax benefits that they say it does have. "But if you're looking to come up with a new kind of business structure, I think it's very, very critical that not only the legal profession should be brought into this equation, but the business profession be brought in as well, and that a good amount of time is spent going through these issues and coming up with some of the fire walls that you have in a corporate structure to make sure that assets can't be moved around and the lines of management are clear and concise, people doing business with this entity can feel comfortable doing business with it. And I know we may not be the first state to adopt this sort of legislation, but I'd rather be the last state than the first state to adopt something that changes the way we've done business for the last three or four hundred years. And I'll just leave it on that note." Number 107 WILLIS KIRKPATRICK, DIRECTOR, DIVISION OF BANKING, SECURITIES AND CORPORATIONS, DEPARTMENT OF COMMERCE AND ECONOMIC DEVELOPMENT, testified in support of HB 420. "I would encourage the committee to consider HB 420 and pass it out." Describing his division, Mr. Kirkpatrick observed, "...we look at and view it as one of our goals to make Alaska one of the most easiest places in which to do business. We feel that is a paramount responsibility of the Department of Commerce and Economic Development." MR. KIRKPATRICK noted that the Department of Commerce "...is a member of what we call the International Association of Corporation Commissioners. That includes other countries besides the United States, but it primarily has to do with the old British Crown corporation type of formation. And we became aware of limited liability companies and the Wyoming experience. And so we had been looking at it and how it might be beneficial to the state of Alaska, especially with some of the activity that we've been trying to do in the Far East and eastern Russia." MR. KIRKPATRICK continued, "In early 1992 we were approached by members of the Alaska Association of Certified Public Accountants to encourage us to consider drafting a limited liability company law. We got a hold of those states that did have those provisions and tried to seek out what problems they had. There was a little bit of confusion because of the IRS ruling as to what is a corporation type of organization or a partnership type of an organization. We then took a look at the state of Wyoming, which is what is called a bullet-proof state, because they were the only state at that time that had an IRS ruling, so most of the states early on then following Wyoming's law which meant that if you had the characteristics of the Wyoming law, then you were assured a proper ruling from the IRS, relying upon Wyoming's ruling. "We then were approached by members of the Alaska Bar Association and we told them of our efforts and they indicated that they were interested in working on such legislation, so we sent them our draft. What has resulted from their effort is a little different from our draft - not substantially - but they included in their draft language of our draft that had to do with the administration of the Act. So, what has been, as a Sponsor Substitute, includes those items of administration ability that we had in exercising this type of law." Noting that he himself was not a lawyer, Mr. Kirkpatrick went on to describe the extensive history of the origins of the legislation at hand. Mr. Kirkpatrick discussed the origins of the Alaska Corporation Code and the evolution of corporation law in Alaska and acknowledge a need to recognize the risks of doing business. Number 249 REP. DAVIDSON: "Mr. Kirkpatrick, you heard Mr. Ingham's comments and concerns. Could you take say one or two or three of those concerns and give us your perspective as far as - you seem to be very much for the bill and don't see any downsides. Mr. Ingham, of course, who is a banker, saw considerable downsides. I was wondering if you could give us return fire." Number 266 MR. KIRKPATRICK responded, "I think Mr. Ingham has some very good points." He compared the process of drafting the legislation at hand with protracted formulation of the controversial Alaska Corporation Code and noted there would always be room for debate in determining the nature of proposed business structures. "Maybe," Mr. Kirkpatrick suggested, "there should be somebody else taking those points [to] debate them on the other side.... I don't have any problem at all with some of the suggestions that he makes in tightening up property ownership...." MR. KIRKPATRICK recommended that some issues raised in HB 420 requiring further discussion be considered at a later date in amendments. He stated that he did not feel that in a business organization law the law could be structured to protect creditors and went on to describe the criteria courts could use in evaluating the responsibilities of debtors. Mr. Kirkpatrick concluded by reiterating that he did not see how one could structure a corporate organization that would protect creditors from risk, but that he did understand and appreciate Mr. Ingham's concerns. Number 350 REP. THERRIAULT: "I am certainly willing to consider any proposed changes to the bill. I know there have been negotiations and discussions going on between the regulator, the regulatees, the people that want to be involved in forming these new business ventures. I think one thing that's important to point out, the previous speaker just brought up, that creditors can require personal assurances, just like they can with corporations. I was involved in a business. We wanted to get a bank loan, and they required personal guarantees. They can do that, they do that right now with corporations because of the limited liability, and some concern, and being risk adverse. They can do that same thing with limited liability. So we're not forming a new structure that has any more of an ability to leave creditors hanging out there than existing business structures. I understand that Mr. Ingham represents a trade group that is severely risk averse. I think they have means at their disposal to protect themselves." MR. INGHAM asked if he might respond to that; Chairman Porter first recognized Rep. Davidson's question. Number 378 REP. DAVIDSON posed a question concerning the possibility of providing some protections under law for smaller business entities to mitigate the risk of new business organizations. Number 395 CHAIRMAN PORTER, acknowledging the extensive information and analysis yet to be prepared before the bill could be properly evaluated, referred HB 420 to a subcommittee to be chaired by Rep. James and to include Representatives Kott and Davidson. He noted, moreover, that while in general he was supportive of the legislation, he wished to know the effects of removing extant limitations of businesses - limitations for which reasons existed-before seeing them eliminated. Number 425 REP. DAVIDSON: "Mr. Chairman, thank you. In view of what you've just said, it seems to me that we are a different kind of state. We are a resource rich state. And one of the problems we see, and it's not always a problem, but we have a tremendous amount of foreign investor ownership in our state, already. For comparative purposes, it seems we're more like a third world country in terms of business practices, than part of more up to date modern societies or states, but that is a concern that I have. And I was wondering, you know, if in fact a bill like this is going to encourage additional foreign ownership of our resources. Where does that leave us protection to ensure that our children and their grandchildren are going to be in a position to control the picture up here? And that's one of my main concerns." CHAIRMAN PORTER responded that he would refer this inquiry to the subcommittee and suggest to them that they consult with Mr. Ingham and Mr. Manley on this and other aspects of HB 420. This was acceptable to the committee. HB 392 - PERMANENT FUND DIVIDEND PROGRAM Number 459 CHAIRMAN PORTER introduced discussion on HB 392, Permanent Fund Dividend Program and welcomed Richard Vitale from Rep. Parnell's office. Number 462 RICHARD VITALE, OFFICE OF REP. SEAN PARNELL, SPONSOR OF HB 392, testified in support of that bill. [Chronic background noise diminishes sound quality.] Mr. Vitale described HB 392 as a bill his office had been working on in cooperation with the Permanent Fund Dividend Division of the Department of Revenue at their request to address needs that have arisen over the years. Mr. Vitale said the bill was divided in three parts: (1) to address a recent court case nullifying the piggyback rule and affecting about 1600 Alaskans' dividends for the past two years; (2) to roll over into statute regulations which currently exist; and (3) to address loopholes. He noted that Tom Williams of the Permanent Fund Division was present to respond to questions. Number 489 REP. DAVIDSON: "Which are the loopholes that we're going to be dealing with and who's going to be on our back if we close them?" Number 496 TOM WILLIAMS, DIRECTOR, PERMANENT FUND DIVIDEND DIVISION, DEPARTMENT OF REVENUE, testified in support of HB 392. He said there were a variety of loopholes as well as areas requiring "cleaning up." Mr. Williams discussed in detail a loophole in the provision allowing a child born out of state in the first two years of its life to remain eligible for the dividend, even though the child has never been in the state. MR. WILLIAMS made reference to the situation of individuals who have received suspended impositions of sentences who are currently permanently banned from future participation in the program. He also discussed the impact of felony convictions of PFDs. MR. WILLIAMS discussed the question of limiting or prohibiting assignments of PFDs, and if permitted, under what circumstances, to individual parties or government agencies. He described an amendment clarifying the language in regulating government agency or court ordered restitution with regard to PFDs. CHAIRMAN PORTER asked if there were further questions of Mr. Williams or Mr. Vitale. Chairman Porter referred the committee to Amendment #1 and recognized Rep. Kott, who moved Amendment #1. Rep. Kott moved Amendment #1 and began to describe its intent, which was to address the needs and rights of Alaskans obliged to be out of state on excused absences, such as military personnel, who nevertheless stood to lose their PFDs after five years. He rescinded the motion at Chairman Porter's request, however, until another amendment could be discussed first. CHAIRMAN PORTER: "And we will make yours Amendment #2. I'm taking this on faith. You have in front of you another amendment that is not numbered. It says `Alaska Department of Revenue, suggested language.' Would you mark that Amendment #1, please. Tom, this is the one that you've just described?" MR. WILLIAMS: "Yes, that's correct, and that's requested by the court system." Number 620 REP. DAVIDSON: "I would move Amendment #1, and ask for unanimous consent." CHAIRMAN PORTER: "Amendment #1 has been moved. Is there discussion? Is there objection?" There being no further discussion or objection, Amendment #1 of HB 392 was adopted by the committee. Number 625 REP. KOTT: "I'll move Amendment #2." At Chairman Porter's request, Rep. Kott went on to reiterate the scope of this amendment. He explained that the amendment would eliminate the five year rule limit for individuals outside on allowable absences. REP. DAVIDSON: "Mr. Chairman, I speak against the amendment. I think, if we really want to solve this problem of who gets a dividend, I think we have to get tough. And getting tough means that you draw the line, and I think that Alaska permanent fund dividends should go to people who reside in Alaska. And for purposes of this Act, it seems to me a resident should be defined as one who spends not more than ninety days outside the state of Alaska in any given calendar year. So, while I certainly understand the need for the group of people of which Rep. Kott speaks, I think you still have to draw the line somewhere. And I think this one goes too far." Number 646 REP. KOTT: "In response to the way the bill is currently written, then we are now discriminating against two classes of individuals, which I think would be unconstitutional. Because we have a group that was out there, that will, under the provisions of the committee substitute of State Affairs, continue to receive that for five years, and now, what you have suggested, we're going to cut everybody off, maintain that if you're not living in the state, then you don't get it. In that sense, the current form that we have here in State Affairs, allows for a person to be outside for five years. So, I'm not sure, if you have an amendment to the amendment, or you're just addressing the provision where we would draw the line." REP. DAVIDSON: "I would like to hear what the agency has to say about this amendment." CHAIRMAN PORTER: "Tom, for perspective, is it a fair characterization that Amendment #2 would return us to the status quo?" MR. WILLIAMS: "Yes, it would return us to the status quo. The language that is proposed to be deleted from this amendment was not included in the original bill, and what the original bill would have done would basically have maintained the status quo. The language that is looked to be deleted was added by the House State Affairs Committee. REP. DAVIDSON: "So, a question then to Rep. Kott: the intent then was to, in fact, in State Affairs, to cut off these individuals, is that right?" Number 670 REP. KOTT: "That is the intent of the amendment to the original bill, the committee substitute of State Affairs basically established that after five years you wouldn't receive it. I think we would perhaps be facing a constitutional issue, however, if we kept this particular provision in there, beyond some other considerations and concerns I have with it." Number 680 REP. NORDLUND: "I am just wondering what the sponsor thinks of this amendment." Number 693 MR. PARNELL: "The sponsor is in support of the amendment to withdraw the five-year clause out of the bill, although there is, definitely, concern about allowable absences and how to address the problem of abuses. It's not the feeling that this does a good job of addressing it. It gets some of those that may be abusing it; and some of those who don't abuse - students, if they're out on allowable absences, would lose their PFDs that really have intent to come back - and I think there's probably other ideas that would better address the problem of allowable absences. The second point would be, we don't feel this is the proper vehicle to make a major policy change in the department. This was viewed as a bill trying to clean up a lot of the loose ends that have occurred over the years and we're thinking of bringing on a major policy decision here into a bill that wasn't addressing anything like that before. We prefer to see a 14 page document not become a longer document, and so, we support this amendment." Number 697 REP. DAVIDSON asked Rep. Kott, "Was there discussion in State Affairs that if the class of person you're talking about, a person out on an excused absence due to service to the nation, I thought it was possible for at least every three years, those people get rotated and have an opportunity to go to their home state. Is that not correct?" REP. KOTT: "There were very few discussions involving this particular issue, but I will also say, as a former military member, that you can apply to come back to the state as often as you like, [but] during your military career there is no guarantee.... Just because you say, `I want to go to Alaska,' is no guarantee that you're going to get there." REP. DAVIDSON: "But there's still, there are flights that come up here from all over, right?" REP. KOTT: "That's true. We still have the requirement to come back to the state every two years. That's still a provision. But what I'm suggesting is that after five years, we're now segregating Alaskan citizens. If you live in state, we'll give it to you. If you're outside the state, we're not going to give it to you. And I think we've got a constitutional problem there. If we're going to segregate those classes in that category in that particular way. We either treat 'em all the same, or -- " Number 720 REP. DAVIDSON: "I'll withdraw my objection, then Mr. Chairman." CHAIRMAN PORTER: "Is there any further discussion of Amendment #2? Is there any other objection?" There being no further discussion or objection, Amendment #2 of HB 392 was adopted by the committee. Number 729 REP. NORDLUND asked Mr. Williams, "What this bill will do is take out the ability of the commissioner to determine what are allowable exemptions? " MR. WILLIAMS: "Yes, that would be one effect of the bill. Because basically all of the currently allowable absences would be moved into statute and discretionary [indisc.]." REP. NORDLUND: "Is that just a hot potato that you didn't want to have to handle anymore? I'm just wondering...it seems to me like there might be situations, like the Olympic athletes one that came up that seemed reasonable, to allow an exemption, that you won't have that authority any more where you have to go back to the legislature to do that." MR. WILLIAMS: "You must remember that when the original dividend program was enacted, there were five or six allowable absences listed there. I think that the legislature said, well, we really don't know what all might come up. I think the dividend program has matured sufficiently in the last 12 years to really consider a whole variety of allowable absences. You're right that the commissioner did adopt, has recently adopted one other allowable absence, but I think as a practical matter, those are policy issues with regard to the expansion of allowable absences that are properly addressed by the legislature." Number 747 REP. KOTT made a motion for HB 392 to be moved out of Judiciary Committee with individual recommendations. CHAIRMAN PORTER: "Is there further discussion? Is there objection?" There being no further discussion or objection, HB 392 was moved out of committee. HB 459 - DAMAGES & ATTY FEES FOR UNPAID WAGES CHAIRMAN PORTER introduced discussion of HB 459, noting that testimony had been taken in the Labor and Commerce Committee. He acknowledge that four people were present to testify before the Judiciary Committee and invited the bill's sponsor, Rep. Mulder, to discuss the bill. Number 763 REP. ELDON MULDER, SPONSOR OF HB 459, said he was unable to speak at length due to illness and requested that one of his staff be permitted to read the sponsor statement. Prior to Mr. Joyce's presentation of the statement, Rep. Mulder did remark, "I would like to point out to the Committee that we have been working with members of organized labor, the Department of Labor, and representatives from the employer's groups to coalesce or come together on a compromise piece of legislation which you see before you as the proposed committee Judiciary substitute. It has been a cooperative effort. I'm glad that it's worked together and has come together and with that, I'll let Howard read the statement." HOWARD JOYCE of Rep. Mulder's office delivered the sponsor statement: "This legislation addresses the awarding of punitive damages in claims of underpaid overtime compensation or statutory minimum wages under the Alaska Wage and Hour Act (AWHA). State statute imposes the payment of unpaid minimum wages or overtime compensation to an employee by an employer who has violated provisions of the AWHA. In addition to this, the employer may be liable for mandatory liquidated damages of an equal amount (AS 23.10.110(a)). "The Alaska Supreme Court in McKeown v. Kinney Shoe Corp., 820 P.2d 1068 (Alaska 1991), ruled that liquidated damages are mandatory and that any individual settlements out of court that did not include liquidated damages were invalid. "Prior to the Kinney Shoe ruling, an employee with a claim for underpaid overtime or minimum wages had a few options for redress. One, they could file complaint with the Alaska Dept. of Labor, who was able to negotiate a settlement. Two, the employer could attempt to reach a private settlement with the employer in question. In either of these cases, a settlement could be reached for an amount below full liquidated damages. Finally, if a settlement could not be reached in the above options, the case could be taken to court, where liquidated damages would be awarded in full if the case was found for the plaintiff. "As the law stands currently, an employer who is in violation of the state's minimum wage or overtime compensation laws is automatically liable for liquidated damages, regardless of the circumstances. Though this is intended as a deterrent to the employer in these instances, it creates an imbalance in certain situations. Under the current law, an employer who makes an "honest mistake" is punished as severely as an employer who knowingly violates the law. In these situations, the employer either takes his case to court, facing the possibility of paying full liquidated damages plus court costs or settling out of court for the claim plus full liquidated damages. "The Federal Labor Standards Act, upon which AWHA is based, contains identical language to AS 23.10.110(a), but also contains the following language: `....if the employer shows to the satisfaction of the court that the act or omission giving rise to such action was in good faith and that he had reasonable grounds for believing his act or omission was not in violation of the Fair Labor Standards Act, . . . the court may in its sound discretion, award no liquidated damages or award any amount thereof not to exceed the amount specified in [29 U.S. Code Section 216].' 29 U.S. Code Section 260 "This additional language in the FLSA creates some flexibility for employers when an honest mistake is made. The discretion is left to the courts to decide to award partial or no liquidated damages where the employee shows it acted in good faith and it had a reasonable basis for believing it was not violating the law. "CSHB 459 (JUD) also adds a provision in Section 2 that provides the payment of court costs and attorney fees to the prevailing party in a claim decided by the court. Previous statute only provided payment of these costs to the plaintiff (employee) in these cases. This change would help to prevent erroneous claims against an employer from being brought to the court. If the Commissioner of Labor was the prevailing party in an action under this section, any court or attorney fees awarded would be remitted to the Division of Revenue for deposit into the General Fund. The House State Affairs committee added some further clarification to this provision in their committee substitute, by adding the word `recovered.' (Page 1, line 14 now reads `..commissioner shall remit the recovered attorney fees to the Dept. of Revenue.') "CSHB 459 (JUD) would also provide some protection to the employee during a compensation claim in settlements that are not supervised by the Dept. of Labor or the courts. In Section 3 (f), an employee may enter into a written settlement agreement with the employer waiving the right to receive full or any liquidated damages. CSHB 459 (JUD) requires that this settlement meets five qualifications: (1) the settlement is written in a manner that is understood by the employee; (2) specifically waives the rights or claims in AS 23.10110(a); (3) advises the employee to consult with an attorney or with the Dept. of Labor before entering the agreement; (4) allows the employee seven days to consider the settlement and (5) gives the employee five days after they enter into the settlement to revoke agreement. "The goal of HB 459 is to change the state standards regarding the awarding of liquidated damages to be congruent with federal standards. This results in a more equitable situation for both parties; protection is still provided to the employee and flexibility is afforded to the employer who makes a mistake in good faith, providing they meet the burden of proof." Number 845 REP. DAVIDSON: "A couple of questions, if I may. You talked about, on page One, line 14, that the fees shall be remitted to the Department of Revenue. Is that because [it's] the Department of Revenue out of whose budget fees for the attorneys would have come? Or does it come from the Department of Labor's budget?" REP. MULDER: "It comes from the Department of Labor's budget. If the commissioner is the person who is the party who is the defendant, or the plaintiff [inaud.], as the case may be, if they are the ones who are found in their favor in court, it would just require that the funds that go to the commissioner go back to the General Fund simply because they are the ones who are expending the funds." Number 857 REP. DAVIDSON stated that he was trying to ensure that the Department of Labor, in doing its job, was not caused to expend funds from its diminishing budget only to have them absorbed into the budget of another department. He observed, "It appears to me that there are losers and gainers here, in terms of rights, who wins and who loses; in terms of dollars, who wins and who loses, in this legislation." REP. MULDER: "The purpose of the bill is to make the playing field even or level as it was before, pre-Kinney. Certainly there is very little tolerance or forgiveness considered within this bill or within many people in the legislature that I see, for those employers who are knowingly trying to defraud employees out of overtime. That's not the folks we're trying to address in this legislation. And those people are not addressed in this legislation. If an employer is knowingly cheating his employees out of overtime, they ought to be punished through liquidated damages, which is double the claim for back overtime. What is being attempted here is to cover those employers who are honest employers, who make a sincere mistake. It was not intentional. And they have to demonstrate that, through good faith, that they did not intentionally try to defraud or hurt or damage their employees. So, in terms of winners and losers, I wouldn't put it really on that playing field as much as trying to say that we're trying to make the field level and equitable for those employers who made an honest mistake." Number 884 REP. DAVIDSON: "Then, are we trying to make it easier for these people to cover their mistakes? Why aren't they more careful? There's a lot of questions here about this bill, Mr. Chairman. It makes me uneasy. Thank you very much." TAPE 94-50, SIDE A Number 003 PARRY GROVER, ATTORNEY, testified via teleconference from Anchorage in support of HB 459. "I am an attorney practicing law in Anchorage. I've practiced here for approximately 14 years. Most of my practice is representation of management in all aspects of employment law, including wage and hour. I also do some work for some public entities as a hearing officer, a neutral dispute resolver, if you will. "I'm speaking in favor of CS 459. The reason I do it is this: I have, over the years, had occasion to talk to my counterparts in other states, all over the United States. I would say I've talked to maybe 12 to 15 labor law practitioners in other states. I probably know that west coast states better than the other ones. And what I found, through these discussions with other lawyers, and a few cases with judges, with labor law professionals, that our Alaska Wage and Hour Act is harsher for Alaska employers with respect to liquidated damages than the laws of most other states and the Federal Fair Labor Standards Act. And it really has always been a mystery to me as to why Alaska should have a harsher law on liquidated damages. For any reason, many of our businesses have a more difficult time keeping a stable, uniform workforce because of the seasonal fluctuations where they may be very busy in the summer months and just die for business in the winter. And the seasonal fluctuation that other working conditions peculiar to Alaska, I think, have made compliance with the Wage and Hour Act more difficult in this state than it is in many other states where labor performance really doesn't vary from month to month significantly. But the essence of this bill as I think Mr. Joyce and Rep. Mulder said, is not to really tip the scales, but to simply bring back a level playing field. And I'd like to just talk about the four major substitute provisions and give you my view as to why I think that is the case. "In Section two, the existing law simply allows a prevailing plaintiff to recover attorney's fees. The amendment would bring this legislation into compliance with what is more common in Alaska, Alaska Civil Rule 82, where the prevailing party recovers at least partial attorney's fees. That's the rule that we're used to in Alaska. Most litigation, including most employment litigation, is governed by Civil Rule 82. And again, it just equalizes the playing field. If the plaintiff wins, he or she recovers at least partial fees. If he loses, he may have to pay, at least partial attorney's fees. That same rule applies to both sides. Right now the rule is one-sided. That's one of the aspects of the law that is harsh. "In Section three of the CS, there are three substantive provisions. Each of them accomplishes a distinct function I would like to mention. Section three (e) we bring into Alaska law something that has never been here - and again, I don't know why that is the case. But under the Federal Fair Labor Standards Act, which has been the law in the Federal Government since the 1930s, an employer who fails to pay overtime or minimum wages if they are due, is subject to liquidated damages. But the federal government has for many years provided a limited defense - let me emphasize, limited defense - if the employer can show to the satisfaction of the court; and that means bear the burden of probing, that it acted in good faith and had reasonable grounds for believing that the person was not entitled to overtime, then the court may in its discretion, award no liquidated damages or partial liquidates damages. Now, as I said, that is a limited defense. The employer must show that it acted in good faith, which under Alaska law means honestly; that the employer actually honestly believed that the position of them not paying overtime was exempt. And it must have reasonable grounds for believing that. It can't just stick its head up in the air and say, well, I think this is a salary-exempt position so I won't pay overtime. It would have to have some good reason for treating the position as being exempt. "Now, if the court, or the jury, later finds out that the person in the position was not exempt and that overtime is owed, the overtime is going to have to be paid. The plaintiff is going to be the prevailing party. So they are going to get at least partial attorney's fees. They are also going to get prejudgment interest in Alaska, so they have a fairly substantial recovery. But, again, if the employer can show-and this is true under federal law, and this is true under the law in many other states, that it had a good faith basis and acted reasonably in believing that the position was not entitled to overtime, then the court in its discretion can decide not to award liquidated damages. That's a very limited defense, but it's one that Alaska doesn't have, and it makes our playing field quite uneven when compared to other states under the federal government. "Subsection (e), Section three (e), [is] something that the Commissioner of Labor asked for early on when we proposed this legislation, and we thought this was fine. In the Kinney Shoes case, or at least let's say by the time of the Kinney Shoes case, the Department of Labor concluded that it could no longer settle overtime claims brought to it out of the mandatory assessments of liquidated damages, that it had no discretion in light of Kinney, not to demand liquidated damages. Prior to Kinney, it was the practice of the Alaska Department of Labor, to waive liquidated damages when in its judgment it thought they should be waived; it could not be required to do so. But when in the commissioner's judgment the commissioner felt that liquidated damages should be waived, they could do so. Since Kinney they haven't been able to do that. Section (e) restores to the commissioner the power to take that action. It doesn't require the commissioner to waive liquidated damages, but it allows them to. "Section (f) has to do with private settlements. One of the, I think, unfortunate things about the Supreme Court's decision in Kinney is whoever drafted the decision may have used language a little more - I'm searching for the right word - but the point I'm going to make is, they said that all settlements are void. They used the language a couple of times in the decision, that the type of settlements of overtime claims and liquidated damages claims are void. Now, I don't object to that, in the facts of the Kinney case, and if you apply that just in the facts of that case, that probably was a reasonable result. The problem with the language is, they didn't limit it to the facts, they just said private settlements for these types of claims are void. "The result has been, and my office has actually had to participate in this, when we've had cases where we had competent counsel on the other side, a claim hadn't been filed but we had discussed the claim, reached a compromise, which included all or partial liquidated damages, and looking at Kinney Shoes, we did not think that the settlement would hold up if challenged unless we took it to court. And we've actually had to tell in some cases the plaintiff to go file the complaint so we could turn around and settle it. That sort of result I think is bad policy, because it simply encourages litigation where the parties have reached private settlement. Section (f) will allow private settlement, and as you will notice in the CS, there were concerns raised by the Department of Labor on behalf of employees, that employees could be taken advantage of by their employers. We recognized the validity of what the Department of Labor was saying, and we then built in to it five hurdles an employer must jump through to make a private settlement. "These hurdles are taken out of comparable federal legislation, specifically, the Age Discrimination and Employment Act, which requires a very clear settlement agreement, a clear waiver of liquidated damages, written advice to the employee that he or she should consult with an attorney or the Department of Labor, a period of seven days to consider the settlement agreement before it's signed, and five days after it to revoke it. In other words, giving a lot of deference to the employee and encouraging the employee to get competent advice either to the Department of Labor or an attorney before a private settlement is entered into. This will, again, allow private settlements, and I think at the same time, protect employees from being taken advantage of by those few employers who may not be so inclined. Thank you." Number 245 REP. DAVIDSON: "I have this image in my mind of the `equal playing field,' with a summer employee, part-time bus driver or waitress on one end of the field, and all the expertise of the legal beagles - and that very small company, the Holland America Line - on the other, and somehow it just doesn't seem like we're playing on an equal playing field here." CHAIRMAN PORTER: "That's why we've got a Department of Labor." Number 262 BRUCE WEYHRAUCH, ATTORNEY, FAULKNER, BANFIELD, DOOGAN & HOLMES, representing a number of hourly workers, testified in opposition to HB 459. After expressing appreciation for the efforts of those involved in the legislation he stated: "Alaska is very unique. We are a seasonal state, we have a lot of seasonal workers, we're resource based, there's a lot of hourly workers here. Why should Alaska have a harsher law than other states? Because we are such a state, because we rely on hourly workers to do the work for businesses." MR. WEYHRAUCH cautioned against the constitutional issues which could be expected to rise if the legislation were deemed retroactive. "If the intent is not to tip the scale here, this retroactive date on here would probably tip the scales significantly in favor of those who haven't been paid their wages and who are due them, and those who are owed wages. And I think there may be significant constitutional problems with this retroactive date here. We think that it should read, instead of application of the Act, this action will apply only to work performed after its effective date. "Also, this statute is intended to act like a private attorney general. Instead of having to hire a bevy of bureaucrats and Department of Law investigators, it gives an incentive to the worker to get an attorney to pursue their claims for them. It puts the rights right in the hand of the individual to pursue the claim. That's why you have liquidated damages, to make sure that people get the wages that they're owed and you make it so that they don't go bankrupt pursuing their claims. So instead of having reasonable attorney's fees or determined according to court rule on the first page in (c), if you make it according to prevailing party and make sure the prevailing party gets their actual attorney's fees, then both sides benefit. If the person who says, `I have a wage that I'm owed,' and they in fact are owed that wage, they should get their actual attorney's fees, not reasonable fees set by court rule. Same way, if their claim isn't valid, then the prevailing party, which would be the employer, gets their actual fees. So it works both ways. That seems to be a more level playing field. "Finally, we talked about who had input on this bill, the employer groups, organized labor, Dept. of Labor. I think, at least I understood, that Mr. Carr from the Dept. of Labor would be here to testify, no one representing the hourly worker, Joe Doakes, was in on these negotiations, and we'd like an opportunity to participate in these negotiations. We think there could be language that adds a provision that if somebody is going to waive liquidated damages, that the amount of those liquidated damages being waived should be specified so that they fully understand what's going to be waived and that some language be put in the bill, that if a waiver is knowing and voluntary, that should depend on all the circumstances, not just these specific six or five provisions set forth in this bill. I've provided your staff with those edits and also Rep. Mulder's staff, and we'd be glad to discuss that further with anyone that you wish, Mr. Chairman." Number 331 REP. MULDER: "Concerning Bruce's point that no one was there representing the interests of the Wage and Hour person, I take offense to that, because I think the Department of Labor does a very good job in that regard. They were an advocate, a very strong vocal advocate for the Wage and Hour individual. And, as it currently exists, if you have a dispute with your employer, you can go to the Department of Labor free of charge, no attorney's fees, and ask for their assistance and their intervention, and they will help you. So, there is representation, there is allowance here for the little guy, in fact." REP. PHILLIPS: "Mr. Weyhrauch, did you say you were an attorney?" MR. WEYHRAUCH: "Yes." REP. PHILLIPS: "And are you an attorney lobbying on behalf of a specific group of people, or -- what is your relationship, if you wouldn't mind." MR. WEYHRAUCH: "We represent individual wage earners from around the state." REP. PHILLIPS: "And how do you do that? Through individual-I mean, are you representing them here today as a lobbyist on their behalf or are those legal cases that you are dealing with in your company?" MR. WEYHRAUCH: "Both. There's one specific. I'm registered for one specific person on this, but we represent numbers of people around the state." REP. PHILLIPS: "And who are you registered to lobby for?" MR. WEYHRAUCH: "It's an individual, I can provide you that name after this..." REP. PHILLIPS: "Well, it is a matter of public record, would you please state it for the record, who you are lobbying for." MR. WEYHRAUCH: "I can't state it right now." REP. PHILLIPS: "Okay. I will get the information, and we will put it on public record. The lobbyist record is a matter of public record." MR. WEYHRAUCH: "Yes, it is." Number 363 REP. NORDLUND: "I'm just glad that Bruce has stepped forward and offered an opinion for a group of people who are affected by this legislation. I think it's entirely appropriate that there is a representative for that person; whether they work for him or not, I think is irrelevant." REP. PHILLIPS: "Nothing in this committee in debate is irrelevant. Nothing. That has been pointed out time after time after time in this committee by everybody." CHAIRMAN PORTER: "No, but opinions can be stated, so...and they can be refuted." REP. PHILLIPS: "Which I just did." CHAIRMAN PORTER recognized Rep. James. REP. JAMES: "I just wanted to comment on the comment made by Rep. Mulder regarding the Department of Labor. And since my business has been dealing with small businesses, accounting, I can verify that the Department of Labor does an excellent job of handling claims of people who have a problem. They go to the end of the world to try to help them and do help them tenaciously, so I believe that if the Department of Labor was involved in this bill, that those people have been represented." Number 387 C.J. ZANE, LOBBYIST, HOLLAND AMERICA LINE-WESTOURS, INC., testified in support of HB 459. "My name is C.J. Zane. I am registered to represent Holland America Line. We are one of several corporations that have formed a coalition to support this legislation. There are in your packets, I think there are letters of support from the Providence Hospital Group, from the State Chamber of Commerce, from the Carr-Gottstein food chain, from Tesoro Petroleum...the point is, we have a broad based range of Alaskan employers, and we count ourselves among the group of Alaska employers, and I am here to testify in favor of the bill, and in favor of the CS which we have worked out. This bill has been around for several weeks now. The process has been open. We have negotiated with legislators, with staff, with the Department of Labor, with members of organized labor; we have had an open process. And I want to assure the members of the committee that this compromise is a solid one, and one that does protect the employees in this state. "And what we sought to do was two very simple things with this legislation: We wanted to, one, go back to the pre- Kinney Shoe decision as it related to private settlements and as it relates to the department's authority and ability to settle cases, not necessarily imposing liquidated damages. They can still do that but in some cases where it's warranted this bill will allow them to waive some or all of that. "The other thing that we sought to do was something that should be just very common sense, man or woman in the street kind of thing, which is the federal law upon which I don't think there's any disagreement that the state wage and hour law is largely based, does provide for something called a good faith and reasonable belief defense. Not a defense against the original claim or the base amount of the claim; it's a limited defense that can be invoked on the issue of the doubling of liquidated damages, and that good faith and reasonable belief standard is not an easy one to meet, but it is one that is allowed under federal law and it is one that is allowed in all the Pacific coast states. We have done research on this: Washington State, Oregon and California; Idaho, we've subsequently found, also, provides for this basic sort of common sense, good faith reasonable belief defense. With that, Mr. Chairman, I just want to say again that we have worked long and hard to reach a viable compromise, one that still protects the interests of employees and brings some measure of balance back to the equation as far as employers are concerned." Number 448 KEN LEGACKI, ATTORNEY, testified via teleconference from Anchorage in opposition to HB 459. "Obviously, there has been a lot of discussion about this bill. I would like for the committee to try to envision an employee who makes $4.75/hr. or $5/hr. trying to negotiate with his employer. A wage earner who is dependant on the employer for his job, dependent on his employer to make payment, dependent on his employer to feed his children, and the employer hands him an agreement and says, `Here, sign this.' An employee has no choice but to sign that agreement. If everybody is commenting about the Department of Labor being such an advocate, why don't we change that language in the bill and make it mandatory that the Department of Labor approve of the settlement? If it's such a fair and honest deal, and if the employer is dealing in such good faith...if they have nothing to hide?" He introduced three of his clients who were present with him. "The employer of Mr. Pat Bliss told him to take seven and a half cents on the dollar. When Mr. Bliss said, that's not fair, the employer then harassed him and terminated him. What's his remedy? He's been out of work for a year and a half. He's a man in his fifties. Mr. Stewart went to five attorneys. They all said his claim was not worth enough money because `I only get a percentage of your claim, your claim's not that high.' "I've looked at the federal law, which said that the employer has to pay attorney's fees if it's a good case. We won at the Supreme Court, and that's the law they're now trying to change. But try and imagine somebody who, like Mr. Stewart, who made $4.75/hr, going to an attorney who charges anywhere from $125 to $150/hr. to ask him to look at a piece of paper. Is that fair to the employee? Mr. Harris complained to the employer that they were violating the Wage and Hour Act. The employer then told Mr. Harris that they were `downsizing' and asked if he would either be terminated or moved to California. To keep his job he moved to California. Shortly thereafter he was terminated by the company." MR. LEGACKI presented further testimony concerning workers who were being deprived of wages and who feared retaliatory treatment by employers in pursuing their claims. [Underlay of whispered conversation damages sound quality.] He noted in particular one individual who was afraid to appear before the committee because his employer was a major proponent of the legislation. "There's a lot of people who would like to testify and tell stories on how this bill would impact. It is not a level playing field. If you have someone like Holland America Inc., or any big company, it is in their best interests to fight these cases tooth and nail, because they know if they have to pay one, they will probably have to pay another one. And it is a gamble that they take." You're encouraging them to take a gamble.... "You'll hear a lot of stories about people who file complaints with the Wage and Hour, that the employers, even though the Department of Labor tells them they are in violation, still will not pay the wages. So what you're encouraging for these big companies with the good faith defense is to try to gamble, and if they get caught, they can negotiate that. It's a calculated risk, a business risk for them. "There's a lot of work that has to be done with this bill, a lot of testimony, a lot of input that still needs to be done.... The Department of Labor's hands are tied, because they can only address certain issues.... I know lots of people who would like to put more input into this bill, and a lot of people who would like to testify. I request that you hold up this bill...get more people to testify and tell you about their stories, tell you what it's like to be threatened. As I said, I have Mr. Harris, Mr. Bliss and Mr. Stewart here with me, they'd be happy to tell you their experiences in dealing with their employers and the results. Thank you." REP. JAMES: "My question is, these three people that you're talking about there, that have had such bad luck, did each one of these people take their claim to the Department of Labor in the beginning?" Number 560 MR. LEGACKI: "Yes, all three of them did." Mr. Legacki described the saga of Mr. Harris, who had indeed gone to the Department of Labor but whose case had undergone some considerable, concealed manipulations by the national corporation for whom he had worked, and the story of Mr. Bliss, whose employer, in spite of a written ruling from the Department of Labor, had independently determined what it was willing to pay. CHAIRMAN PORTER interjected a question. "Ken, before you leave the first one. Are you saying that this bill would change the situation on that first case? It seems to me that was certainly something less than good faith." MR. LEGACKI: "Oh, absolutely. But [the employee has] to hire an attorney. And now you're saying that instead of paying my actual attorney's fees, for example...they have three attorneys in Chicago - " CHAIRMAN PORTER again interrupted, saying, "Just a second, yes. But that's a different issue, really, than compensation for your client." MR. LEGACKI: "Not necessarily. Not if he has to pay his attorney out of his wages at the end of the rainbow." CHAIRMAN PORTER: "Well, that's generally a court rule." MR. LEGACKI: "Yes, the court has ruled and this bill will change [indisc.], the court has ruled that the employer has to pay the actual attorney's fees. [Underlay of conversation amongst committee members again detracts from sound quality.] Now, this employer has taken me all around the country, and costs and attorney's fees [increase]. Now, if the claim is only worth $100,000, after a while the attorney says, `I can't work any more for free and I'm going to take 1/3 of your wages that you earned.' The employee is left with less than what he is entitled to. And that's one of the things [the] company is doing, it's trying to make an example, they're trying to push the gamble up as much as possible, make it as difficult as possible, so the employees will cave in. [Consider] the seasonal employees. Look at a bunch of seasonal employees working for Holland America, for example. Now, at the end of the season if an employee fights, the company is going to put all of its resources against that employee because it does not want to set a precedent for the other employees. They may even offer some of these kids, you know, 25, 50 cents on a dollar, than what they normally should pay them to go away. If you take away the attorney's fees provision, the attorney has got to get paid out of the employee's wages, and that's wrong, because the employee earned that money, and he should be paid that money. The attorney's fees are over and above what the wages should be." CHAIRMAN PORTER: "Okay, Ken, thank you. Are there any other questions? Rep. Mulder?" REP. MULDER: "What Mr. Legacki doesn't point out to you is the fact that nothing in this bill prohibits employees or former employees who have wage disputes from taking it to court. We're not restricting that ability at all. If you have a gripe and cannot get it solved through DOL, your recourse is to take it to court. And we're not prohibiting that option from you. You're fully allowed to do that." MR. LEGACKI: "First of all, the Department of Labor does not take claims over $5,000. They have a policy there now, and I think there's a state statute that says to that effect, that the department claims jurisdiction only up to $5,000. Second, you are forcing them to take it to court because you want to litigate the good faith issue. And [indisc. - when?] we have to take that to court, you do not want to pay the full attorney's fee. That's why this package that's being introduced, it's actually harmful to employees, and more beneficial to the employer because it gives the employer an advantage. An employer who has a lot of money has an advantage to try to oppress the employee. This bill with the private settlement, as I mentioned before, if an employer hands a wage earner who is dependent upon that employer to feed his wife and children, what other option does the employee has? He has to sign that. That's the reality." CHAIRMAN PORTER: "I saw some shaking of heads on that $5,000 plateau. Is that - ? " Number 633 RANDY CARR, CHIEF, WAGE AND HOUR ADMINISTRATION FOR THE ALASKA DEPARTMENT OF LABOR, responded to Chairman Porter's question. "The representation by Mr. Legacki is correct, but misguided. The statutes divide wage and hour authority into two sections. One section deals solely with the Wage and Hour Act; that is, minimum wage and overtime violations. That section does not have a statutory limit with regards to the amount of claim that the Department of Labor may pursue. There is a separate section of the statutes that deals with general wage claims and contract enforcement. That has a $5,000 cap. So the only statutory limit applies to issues other than overtime. The overtime cases that we take now are not limited in any way by statute, but we have practical limitations placed upon us by budgetary considerations." REP. DAVIDSON: "You spoke about budgetary limitations, so...if someone were to try to get back wages for last summer, when could that person, with your backlog and diminishing resources with which to deal with these kinds of things, when could that person reasonably expect to resolve this dispute with their employer through your offices?" MR. CARR: "We track our closure time frames on cases on an annualized basis, and the average length of time to process a case through collection now is six and one-half months, presently." REP. DAVIDSON: "Thank you." CHAIRMAN PORTER asked if there were further questions; there being none, he requested the wishes of the committee. Number 660 REP. NORDLUND: "I have an amendment I would like to offer." Number 668 REP. KOTT: "I would move that we adopt CS for HB 459 dated 3/14/94-J." CHAIRMAN PORTER: "We have a motion to adopt the CS. Is there objection? Seeing none, the CS is in front of us, and the amendment is coming around. Will you mark this Amendment #1, please." Number 670 REP. NORDLUND: "I drew up this amendment based on some of my conversations with Mr. Weyhrauch who testified for us today, and it's my understanding that the Department of Labor would not have any problem with these two changes to the bill. What the first one would do is state that, under the conditions by which a waiver is written, the five points that are in the bill right now, the conditions of the waiver, would not be limited to those five points, but that other circumstances could be considered. "My concern here is that you've got to keep in mind the intimidation that a large employer has over an employee. And where they might be willing to sign all of these things on a statement, that there might be other conditions or circumstances that the court might want to take into consideration that might be to the detriment of the employee or might be able to discern some way in which the employee was intimidated into signing such a statement. "The other part of that is adding a fifth element to that list that sets out the amount of liquidated damages that the employee would be waiving. I think it's important that they know exactly how much money they would be giving up. With that, Mr. Chairman, I would move the amendment." Number 703 REP. PHILLIPS: "Object." Number 705 REP. DAVIDSON: "I certainly support this amendment. I think it's fair for people at this level of the economic ladder to understand more fully what it is they're giving up when they're competing on such an equal playing field." Number 708 REP. MULDER: "I would speak against the amendment because, in a nutshell, all it's going to do is encourage further litigation, which is what we're attempting to diminish or overcome to begin with; second, in relation to--sets off the approximate amount of liquidated damages--there's really no way to determine that. It's a very ill-defined term in relation to a quantifiable amount. I think Mr. Grover could highlight that point if you will give him the opportunity to respond." REP. NORDLUND: "My understanding of liquidated damages is, it's just double. It's again the amount that was owed. So, if you know the amount that's owed, you know what the liquidated damages are." REP. MULDER inquired if Mr. Grover was still on-line. Mr. Grover responded affirmatively. REP. MULDER asked, "Parry, this is Eldon. They have proposed the amendment first to, whether a waiver is knowing and voluntary depends on upon all of the circumstances, however a waiver is not knowing and voluntary unless the settlement agreement includes all the following; and then, also, the second part of the amendment, it sets up the approximate amount of liquidated damages that is being waived. Could you talk about those two amendments?" Number 729 MR. GROVER: "Sure. As to the first one, I believe that's implicit. It simply says that a waiver shall not be considered knowing and voluntary unless the five conditions are met. You've got to meet those five conditions. As I listened to Mr. Legacki talk, he talked about employer threats and intimidation. I don't know of any court in Alaska that they found in fact that an employee was intimidated by the employer, in the manner that he described, would find that a knowing and voluntary waiver. So I think the existing language already addresses that. "Now, in terms of the second amendment that I heard described, about putting in the amount of liquidated damages, the amount may be uncertain. In fact, it usually is because if the employer thinks they've acted in good faith and fairly, they may believe they owe no liquidated damages. It's like any other claim. If you have an employment discrimination claim, an employee may believe a very large figure, the employer may believe a small figure. And the whole essence of the settlement is, having those different points of view, they compromise. And they reach a middle ground and settle. The same thing is true here. It could be as much as double or the employer could believe, `No, I've got an opinion from the Dept. of Labor, I thought the position was exempt, I owe you zero liquidated damages.' So we're just adding another factor that I don't think makes the settlement any fairer or makes it any more knowing and voluntary, but makes it more likely to be challenged by a lawyer who finds some defect in what the employer wrote down." Number 752 REP. NORDLUND: "I thought it would be implicit also that if the employee is willing to sign an agreement, that they are signing an agreement on the amount of wages that they are owed. That is a determined amount, and that they are just also being made aware of the fact that they are waiving the opportunity to collect double that amount, that specific amount. The amount that was agreed upon." MR. GROVER: [Loud paper shuffling in foreground damages sound quality of Mr. Grover's testimony.] "I have handled many, many cases in this category. Quite often, there are a number of things that are uncertain. Whether it be the Department of Labor - and most courts look at these exemptions on a week by week basis - there may be a question of whether the employee was exempt, say, during the summer months, throughout the winter months, how many hours he works; there can be all sorts of factual issues that bear upon how much is owed. So frequently, just like any employment claim, be it a wrongful termination claim, a sexual harassment claim, there may be any number of factors which make the figure imprecise. And that's to say that's true with wage and hour claims. And that's certainly true with settlement of wage and hour claims with the Department of Labor. So the parties may not know exactly the amount that is owed. The employer may think it's low, the employee may think it's high. That's the essence of a settlement, is a compromising of disparate views." Number 774 REP. DAVIDSON: "In the discussion by Mr. Grover, at the first part of this amendment - and I've learned to be very careful as far as dealing with these kinds of situations - he did say `a waiver shall not be considered to be' saying it was about the same. I am pretty sure he meant to say, as the bill says, `a waiver may not be considered to be.'" MR. GROVER: "Unless it makes the five criteria. That's right. Thank you." CHAIRMAN PORTER: "I think in that context `may' and `shall' are synonymous - but usually they're not, that's correct." Number 784 REP. NORDLUND: "For Mr. Grover: The first part of my amendment, then, you say it's implied. What would be the danger in putting this language in there just so it's instructive to the attorneys as well as to the employee that those are not the only conditions?" MR. GROVER: "I don't really have any quarrel with that first change, sir. Would you mind reading back that language? I'm not sure I heard you, I want to make sure I understood exactly what that was." CHAIRMAN PORTER: "I think, if I may, if I understood Rep. Nordlund's first statement of explanation of the amendment, I don't know if it says what it is that you intended. If I am not mistaken you want the ability to bring up any other criteria to determine whether or not the statement was knowing or voluntary, not just all of the five." REP. NORDLUND: "That is correct." CHAIRMAN PORTER: "You want a sixth or a seventh or an eighth if you..." REP. NORDLUND: "All of the circumstances that...yes, that's right." CHAIRMAN PORTER: "Do you understand that, Parry?" MR. GROVER: "Yes. I believe that what Rep. Nordlund is talking about is language that Mr. Weyhrauch had proposed, and he had the other day presented language to us that reads as follows: `Whether the waiver is knowing and voluntary depends on all of the circumstances,' and then it goes on and says, `but is not considered knowing and voluntary unless the settlement agreement...,' and then it's one, two, three, four, five. If that's the language -" CHAIRMAN PORTER: "That's substantially the language, yes." MR. GROVER: "I think we're on the same plane." REP. MULDER: "So, Parry, I'm still trying to get back from you, when we had discussed it earlier, your feeling was that it has the potential of leading to further litigation. Is that still your point? Or do you think that that's not a great concern." MR. GROVER: "The language that I just read to you, I think, if the committee feels it's necessary, I think it would be acceptable. What I object to is adding additional points to the laundry list of things that employers must do, the one, two, three, four, five. I was objecting specifically to the proposal that you list the amount of liquidated damages, for the simple reason you're going to have different views on what those are. And the figure may not be right. It may simply open up another avenue for attack. Frankly, ladies and gentlemen, lawyers are nitpickers. Look at any kind of agreement, anything that's done, is to find one little thing that is wrong with it, blow it up and convince the judge to throw it all out. I am very reluctant to see additional subpoints added. I think that just increases the chance that the entire settlement will be thrown out." Number 825 REP. NORDLUND: "I move that we divide the question so that we can vote separately on the additions to page two, line 27, and then a separate question on the additions to page three, line two." CHAIRMAN PORTER: "Is there objection to a motion to divide? Seeing none, we have before us then Amendment #1 as amended, which only would affect page two, line 27." REP. NORDLUND: "So I'll move Amendment #1A, do you want to call it that?" CHAIRMAN PORTER: "We'll call it 1A." REP. PHILLIPS and REP. JAMES objected. CHAIRMAN PORTER: "There is objection. Is there further discussion? Could we have a roll call vote, please?" A ROLL CALL VOTE WAS TAKEN by the committee. REPRESENTATIVES NORDLUND, DAVIDSON VOTED YEA; REPRESENTATIVES KOTT, GREEN, PHILLIPS, JAMES AND PORTER VOTED "NAY.".Amendment #1A to HB 459 was therefore not adopted by the committee. Chairman Porter asked for a motion on Amendment #1B. REP. NORDLUND: "Mr. Chairman, I wish Mr. Weyhrauch was here, because I frankly don't have the knowledge to rebut Mr. Grover's comments about whether or not liquidated damages can be determined or not, so...I know, Rep. Davidson had the same amendment, unless you want to pursue that..." Number 844 CHAIRMAN PORTER: "For what it's worth, these are settlements that would happen before that would be determined. And the only way that would be determined really, would be by an outside agency, if there was agreement or if there was disagreement, on how much was owed. We could be talking about a situation where he forgot to punch out but has a friend who said he really did work, and those kinds of things that, somebody would just have to make up their mind how much actual overtime was going to be considered, DOL or a court. Then you'd have an absolute number for liquidated damages. But if you're trying to settle it beforehand, that's the whole idea. If there's a dispute, that you would not be able to know...at least, reach an agreement on what kind of damages it would be." Number 855 REP. NORDLUND: "There might be a better way of arriving at this, then. The point here is that to agree to sign a waiver like that without knowing within at least some range, let's say, of how much money that they're giving up, might make the person change their mind on signing the waiver. And that's the point of it. And I don't have the expertise to know what the experience has been to determine what kind of range you're talking about." Number 861 CHAIRMAN PORTER: "I think it has to be a knowing waiver, and generally knowing that liquidated damages means twice the amount of disputed overtime, is part of knowing what you're waiving." REP. MULDER: "Rep. Nordlund, your concern was one that we did discuss in great length and detail; in fact, did compromise on. And those concerns related to the five points under Section (f). And specifically, number three, under (f), says, part of that agreement, that settlement agreement, advises the employee to consult with an attorney or with the department before entering into an agreement. In other words, if they have any misunderstanding, any misgivings about it, talk to someone who may have better information. If you are at all unclear about it, the department, you know, that's what they exist for in terms of that specific division. So that was part of the give and take in this whole process. To try and make adequate concern for the employee. To make sure that they weren't being coerced, they weren't being hoodwinked in a sense of the way, shape or form, that they were being adequately informed about what they could potentially be owed." CHAIRMAN PORTER: "I particularly like the fail-safe of five days after the signing." REP. NORDLUND: "Just a point on hiring an attorney: they'd probably have to pay the attorney more than they'd ever collect, in some cases, so -- I wish I could figure out a better way of structuring my intent here. I can't do that, so at this point I guess I'll just withdraw the amendment, unless, Cliff, you want to go ahead with it?" REP. DAVIDSON: "No, I agree." CHAIRMAN PORTER: "Amendment #1B is withdrawn. What is the wish of the committee?" REP. JAMES: "I move that we move - do we have the CS before us?" REP. NORDLUND: "Mr. Chairman, I do have one other amendment." [Side A ends abruptly.] TAPE 94-50, SIDE B Number 000 CHAIRMAN PORTER: "...We're off teleconference." Number 004 REP. NORDLUND: "This deals with the effective date of the Act and the retroactivity aspect of the bill, rather. I have some concerns about that. It seems to me that if we're going to create new legislation to put everybody on notice, that it should apply to cases that happen after the effective date of the Act. To go ahead of that time, I think, causes possible constitutional problems regardless of the language in here, and even if it is constitutional, you can be absolutely sure that this is going to be a point that's going to be litigated in every case. If the intent of this is to lessen the amount of litigation, I think making this basically a retroactive effective date is counter-productive to the intent of the bill." CHAIRMAN PORTER: "Do you want to move the amendment?" REP. NORDLUND: "I'll move the amendment." Number 032 REP. PHILLIPS: "Object. Just on the point of retroactivity, certainly in the history of Alaska legislative deliberations and statutes being passed, etc., etc., the issue of retroactivity has been constitutionally upheld time after time. And it is argued on a case by case basis, but it has been upheld many times in many laws that we've written." Number 045 CHAIRMAN PORTER: "If I could speak to it just quickly, this is even a different kind of situation than a standard retroactive provision, because the situation that requires the Department of Law to only settle with limited liquidated damages, has only come about as a result of this court case. Before that, that wasn't what they were doing. So, we've had different standards. And actually making it retroactive would give the department a little more leeway and employers and employees a little more leeway, than they have right now. I would speak against the amendment." REP. NORDLUND: "You can see that this is inviting further litigation on the issue of constitutionality in those cases, and it doesn't seem like a good idea to me." CHAIRMAN PORTER: "The objection is maintained. Could we have a roll call vote please on Amendment #2 - we will call this J.4, dated 3/23." A ROLL CALL VOTE WAS TAKEN by the committee. REPRESENTATIVES DAVIDSON AND NORDLUND VOTED YEA; REPRESENTATIVES PHILLIPS, GREEN, KOTT, JAMES AND PORTER VOTED NAY. Amendment #2, J.4, of HB 459 was therefore not adopted by the committee. CHAIRMAN PORTER: "We have in front of us then CS HB 459." Number 094 REP. JAMES: "Mr. Chairman, I would move this bill out of committee, with individual recommendations, and ask for unanimous [indisc. due to paper shuffling noise -- agreement?]." CHAIRMAN PORTER: "And attached fiscal notes, which are zero." REP. JAMES: "And attached fiscal notes." CHAIRMAN PORTER: "The motion has been made to move. Is there objection? Seeing none, the bill is moved." ADJOURNMENT No time was given in notes for adjournment. BILLS NOT HEARD HB 367: PROHIBITED HIGHWAY ADVERTISING SB 186: STATE AGENCY PUBLICATIONS