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