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