Legislature(1995 - 1996)
03/28/1995 08:10 AM STA
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HSTA - 03/28/95 HB 238 - NO UNEMPLOYMENT COMP FOR DIRECT SELLERS Number 139 GEORGE DOZIER, Legislative Assistant to Representative Pete Kott, reported HB 238 would amend Alaska law to exempt direct sellers from unemployment compensation coverage. The sponsor, Representative Kott, believes that outside salesmen who are direct sellers are not traditional employees, but independent contractors because they have no supervision and are not controlled by an employer. They assume the risk of their activities, earning money only when they sell. Number 169 MR. DOZIER offered a committee substitute, CS HB 238(STA) version F, for consideration. Number 184 REPRESENTATIVE GREEN asked why the CS was significantly shorter than the original bill. MR. DOZIER replied the original bill potentially excluded a significant number of sales people from its coverage, so the CS broadens the coverage with respect to the original bill. Number 204 MICHAEL LUNCEFORD, Mary Kay Cosmetics, testified via teleconference from Dallas in support of the proposed CS because it now includes many other direct sales people than the original bill, and because it is now consistent with employment statutes. Number 256 BILL JERMAIN, attorney who represented the Kirby Company in litigation regarding the employment security act, testified via teleconference from Anchorage in support of HB 238 or the CS, stating individuals covered by the bill are clearly not employees, they are independent contractors, and it will help avoid a great deal of litigation. Number 309 JAMES CROSS, a Kirby Company distributor, testified via teleconference from Anchorage in support of HB 238. He said the bill defines independent contractors and avoids many potential problems. Number 340 ROB SHUMAY, in-house counsel for the Kirby Company, testified via teleconference from Ohio in support of HB 238. He agreed with previous testifiers and stated he was available for questions. Number 340 EVELYN JARVIS-FERRIS, Vice President of Government Relations, Shaklee Corporation, testified via teleconference from San Francisco in favor of the CS for HB 238, stating it would bring Alaska law into consistency with federal law in its definition of independent contractor as it relates to direct sellers. Number 397 DIRK BLOEMENDAAL, Corporate Government Affairs Counsel, Amway Corporation, testified via teleconference from Oklahoma in favor of the committee substitute for HB 238, stating it tracks federal law. He agreed with previous testifiers that the original bill had problems in terms of location of sale as well as the definition of compensation. A bill similar to the proposed CS has passed both legislative houses in Michigan. Number 338 JOSEPH MARIANO, Vice President and Legal Counsel, Direct Selling Association, supported proposed committee substitute for HB 238. His association applauded Representative Kott's efforts for bringing Alaska law into agreement with federal law. Number 460 STEVE EGLI, Kirby Company of Southeast Alaska, testified in favor of HB 238, saying he had been in a legal dispute with the Department of Labor for three years and the laws need to be redefined to end such disputes. Number 487 REPRESENTATIVE GREEN asked Mr. Egli whether either version might stop the litigations currently in Superior Court. MR. EGLI replied "yes." Number 500 CHAIR JAMES said she had gotten a FAX from the Department of Labor and they oppose the bill, but they had prefaced that statement by saying the Department of Labor is rarely, if ever, in support of legislation removing classes of employees from coverage under any of its protective statutes. She added the committee therefore could not count on ever getting a positive response from the Department of Labor; their function is to include, not exclude, people. CHAIR JAMES added the committee substitute for HB 238 would also help independent contractors get out from under other requirements such as minimum wage and overtime. Number 525 REPRESENTATIVE ROBINSON said her understanding was the Department of Labor was against the proposed working draft, not the original bill, and in fact had worked with Senator Kelly to help draft the original Senate bill. Number 533 MR. EGLI said the Senate committee substitute says on line 11 "commissions on sales or other remuneration directly related to sales or sales performance," and this covers their concerns. He added sales people want to be independent. Selling is a skill, and successful direct sellers are never out of a job or unemployed. Unsuccessful sellers would never make enough money to pay into unemployment so could never collect it anyway and would have no benefits, so it is an unfair tax on the successful direct sellers. Number 558 CHAIR JAMES observed HB 238 is somewhat open-ended regarding employee or nonemployee status. Number 570 MR. MARIANO reinforced Chair James' comments, adding the typical profile of a direct seller is a person who is a woman who sells on a part-time basis. The most important aspect is they view themselves as independent business people, not employees, both legally and philosophically. The committee substitute clarifies this. Number 585 REPRESENTATIVE GREEN observed the Department of Labor prefers the original bill, and wondered whether the committee should adopt the committee substitute as a working draft. CHAIR JAMES noted the Department of Labor would soon be available for questions on conference call. Number 605 PAM NEAL, Executive Director, Alaska State Chamber of Commerce, stated Avon is a member of the Chamber, as are some other direct sellers. She agreed the changes outlined in HB 238 are necessary. Number 632 ED FLANAGAN, Deputy Commissioner, Alaska Department of Labor, testified via conference call, stating he was not familiar with the proposed CS for HB 238. CHAIR JAMES read the proposed committee substitute for Mr. Flanagan and asked for his comments. Number 680 MR. FLANAGAN referred to the letter he had FAXed outlining the department's position. He said the department opposes any exemption to protective statutes. He had, however, met with proponents of this bill, namely people from the Kirby Vacuum Company of Alaska, and asked why Kirby was in litigation when other direct sellers were not. It became apparent Kirby sellers are set up as distributors with their own stores, engaging also in retail sales, and thus could not meet the test of being independent contractors. MR. FLANAGAN continued the Department of Labor has problems with the draft CS. Independent contractor status has been abused, and the original bill dealt with this. The department would oppose adopting the CS or any other language similar to the federal law, which leaves too many loopholes and is too open to abuse. He urged the committee to adopt the original bill. Number 696 CHAIR JAMES referred to her own experience as a small business owner, accountant, and tax preparer. She added she believes the original bill is just as open as the federal law. MR. FLANAGAN said he did not agree; the exemption would provide a safe harbor which would be too broad and would open itself to other businesses that should not be considered independent contractors. TAPE 95-36, SIDE B Number 000 MR. FLANAGAN noted there is a difference between the Senate and House versions of the bill. The CS for Senate Bill 122 (JUD) is a little tighter, but both bills allow bogus schemes for abusing the definition of independent contractors. Number 047 CHAIR JAMES stated she thinks the Department of Labor's goal should be to include as many people as possible for benefits, and secondary to that should be collecting the tax from those people, rather than having the goal be just collecting the tax for their fund. MR. FLANAGAN replied the two go hand in hand. Concern for the trust fund is to assure there is money to pay the benefits; it is basically an insurance system for people who need it. Number 084 REPRESENTATIVE ROBINSON said it was her understanding the Department of Labor favors the bill as amended in the Senate and asked if that was correct. MR. FLANAGAN said she was correct. Number 100 MR. MARIANO observed it is vital to the direct selling industry that the CS and the federal language be adopted. It would be unfortunate to inadvertently exclude a majority of direct sellers from a direct seller exemption, which could happen without the CS. He added the federal language is very clear cut and articulate and would not allow unintended beneficiaries to take advantage of the exclusion. Number 141 CHAIR JAMES said she believed it would be most fair to include the federal language. Number 154 REPRESENTATIVE OGAN moved to accept the CS as the working document. REPRESENTATIVE GREEN asked for a delay in the vote until the back page of the CS was available. MR. EGLI said the back page was the same as the back page of the original HB 238. Number 171 REPRESENTATIVE ROBINSON asked Mr. Flanagan why the Department of Labor was opposed to the working draft. MR. FLANAGAN said it references a federal statute which lends itself to problems. True direct sellers who are truly independent contractors "aren't broke and they don't need fixing." Although Kirby needs a special exemption, others do not. Number 219 REPRESENTATIVE ROBINSON said as she understood it, Mr. Flanagan was saying the laws in Alaska have not presented a problem to date except for Kirby, and the Department of Labor wants the language narrowed to accommodate just that one problem. MR. FLANAGAN said she was correct, and the Department of Labor could only support a bill which was that narrow and limited. Number 235 CHAIR JAMES asked Mr. Flanagan how he would define "sale of services." MR. FLANAGAN this could be construed as the performance of actual labor on somebody's dwelling, which is frequently abused, and this is what he wants to avoid. A ludicrous example is when a restaurant owner tries to apply it to waiters and waitresses. Number 258 CHAIR JAMES said she recognized the exemptions are abused, and this occurs because the rules and regulations regarding employees make it impossible for many people to work and they have created a depressed economy in the country. Number 267 MR. FLANAGAN responded the statutes and regulations are "pretty basic stuff" such as minimum wage, time and a half for overtime, unemployment insurance, and workers compensation. He did not see these "basic protections" as creating excessive costs. Number 280 CHAIR JAMES gave an example of a sales person who works ten hours a day and sells nothing for three days, then on the fourth day makes a sale. If that person is an employee for those three days, he is on minimum wage plus overtime, and his employer has to pay that. That is a deterrent. There are a lot of products that can be sold by direct sale, other than Kirbys, and those direct sellers should not be treated as employees. We have been putting dampers on employment opportunities, in a depressed economic situation, and including direct sellers under the federal law might solve the problem. Number 320 MR. FLANAGAN replied the language the Department of Labor supports would accomplish the same goal, if a seller is truly an independent contractor. CHAIR JAMES responded she has done federal audits, and they are just as stringent as the state, and they are not likely to allow restaurant workers. Number 335 REPRESENTATIVE OGAN reminded the Chair there was a CS on the table. CHAIR JAMES said the discussion was about whether to accept the CS as a working document. REPRESENTATIVE GREEN requested the maker of the motion to withdraw it, because he was not ready to vote. REPRESENTATIVE OGAN withdrew his motion to accept the CS as the working document. Number 350 REPRESENTATIVE GREEN disclosed his wife had been a dental hygienist and had worked as an independent contractor. When her boss realized the criteria was whether she had to work at the direction and discretion of someone else, it became apparent to the dentist that she did not qualify as an independent contractor but was actually an employee. Representative Green asked if this would be a criteria in the case of network marketing organizations such as Shaklee: do the organizations exercise any direct authority or instruction over their network people, or are they completely independent in their marketing. Number 374 REPRESENTATIVE OGAN said his wife used to sell Shaklee, and she was a completely independent business person, setting her own hours. He added the language in the federal law is pretty clear on this issue. Number 391 REPRESENTATIVE ROBINSON noted sales people for companies like Avon and Amway are already exempt. CHAIR JAMES agreed, adding the Department of Labor said they never audit them because they do not have retail establishments and have no employees. REPRESENTATIVE ROBINSON referred to Merle Norman make-up sales people, for example, who can either sell independently or set up a retail business. She believes that once a person sets up a retail business, all the laws should be followed. Number 412 MR. MARIANO agreed, adding the reason the federal government exempted people in his industry was because it was clear no controls were imposed on the sellers. He would like to see the committee substitute passed to include all who should be included in the exemption. Number 455 REPRESENTATIVE GREEN asked Mr. Flanagan if the independent sellers excluded would later be subject to unemployment compensation. MR. FLANAGAN said they are not subject to it now and would not be under the proposed bill. He referred to the "ABC test" for employees: A. The individual is free of control and direction in the performance of service; B. The service is performed outside the places of business; and C. The individual is engaged in an independently established business of the same nature. MR. FLANAGAN said sellers for Avon, Shaklee, and the others, meet this test now and had no problems in the first place. Number 495 REPRESENTATIVE ROBINSON noted the bill has a referral to the Labor and Commerce Committee. She believes it is in the state's interest to address the problem and would recommend moving HB 238 as written and let the next committee decide the best direction to go. Number 514 MR. DOZIER said he believed Representative Kott would not have a problem with passing it on to Labor and Commerce, which he Chairs. CHAIR JAMES listed the committee's options: They could move the original bill without the CS, or they could move the CS, or they could do a conceptual amendment similar to SB 122 in accordance with the Department of Labor's wishes. Her personal opinion was, in an effort to put more people to work and allow businesses to profit, and to lessen rules and regulations which strangle employment opportunities, a change needed to be made and the CS needed to be adopted. Number 551 REPRESENTATIVE OGAN commented people in direct sales are one of "the last of a dying breed of true capitalists in this country," where everyone is regulated by government intervention in all aspects of life. He moved the committee substitute for HB 238. Number 567 REPRESENTATIVE GREEN said, after hearing all the debate, he tended to learn toward the CS. He observed that a large number of the direct sellers affected were women with children at home, and he was in favor of the motion. Number 580 REPRESENTATIVE WILLIS said he agreed with the Department of Labor and favored the Senate version of the bill because it addressed the specific concerns of Alaska as opposed to the federal law. He did not want to see Alaska tied to regulations and laws at the federal level. Number 604 CHAIR JAMES said there already is a direct tie to the federal law, because all income is reported to the federal government. So it is imperative we define employees the same way the federal government does in order to avoid penalties. Number 625 REPRESENTATIVE ROBINSON observed SB 122 is already in Rules, so the House will probably be seeing that version soon anyway and it will probably be the vehicle. Number 630 CHAIR JAMES repeated the motion, to use the CS as the working document. There were objections. A roll call vote was taken. Representatives Ogan, Green, and James voted yes. Representatives Robinson and Willis voted no. The motion passed 3 to 2. REPRESENTATIVE OGAN made a motion to move the CS from committee with individual recommendations and zero fiscal note. Hearing no objection, CSHB 238(STA) passed out of committee.