In this post, we examine Arizona’s “DIBS” independent contractor law and whether it matters what startup companies call their employees. To be more specific, whether an emerging business can (or should) characterize its workers as regular employees or “1099” independent contractors?
The Contractor/Employee Classification Dilemma
The choice of whether a new business should call their new employee a “contractor” or an “employee” can be a difficult one, but it’s a choice that comes with very real consequences for the wrong choice.
Generally speaking, you as the employer ordinarily have the burden of proving that an actual independent contractor relationship exists by “clear and convincing” evidence.
The need for clarity on this issue is perhaps more important than ever. State and Federal misclassification enforcement efforts have been on the rise. To make matters worse, these cases tend to be highly fact-intensive and thus costly for a company to respond to and defend.
As a result, businesses frequently grapple with the question of who is an independent contractor and who is an employee? Fortunately, the Arizona State legislature has provided Arizona businesses hiring independent contractors a “safe harbor”, but only under certain circumstances.
Arizona’s “declaration of independent business status” law (or “DIBS”) allows employers to ask their independent contractor workers to sign a special declaration stating that they are, in fact, independent contractors and not “W-2” employees.
What does the DIBS language do?
Basically, this law can help an Arizona company prove the existence of an independent contractor relationship with the worker by: (1) having the worker execute a DIBS, and also (2) acting in a way that is substantially consistent with statements found in the DIBS.
The best part? You don’t need to hire an attorney or HR specialist to craft your DIBS—the Arizona legislature has laid out a sample template for you to edit as necessary.
How to prepare a DIBS
To create a valid DIBS, the declaration should contain all of the sample language provided in the statute, namely having your independent contractor acknowledge and confirm not less than six (6) of the following:
- The contractor is not insured under the contracting party’s health insurance coverage or workers’ compensation insurance coverage;
- The contracting party does not restrict the contractor’s ability to perform services for or through other parties;
- The contractor has the right to accept or decline requests for services by or through the contracting party;
- The contracting party expects that the contractor provides services for other parties;
- The contractor is not economically dependent on the services performed for the contracting party;
- The contracting party does not dictate the performance, methods or process the contractor uses to perform services;
- The contracting party has the right to impose quality standards or a deadline for completion of services performed, or both, but the contractor is authorized to determine the days worked and the time periods of work;
- The contractor will be paid by or through the contracting party based on the work the contractor is contracted to perform and the contracting party is not providing the contractor with a regular salary or any minimum, regular payment;
- The contractor is responsible for providing and maintaining all tools and equipment required to perform the services performed; and/or
- The contractor is responsible for all expenses incurred by the contractor in performing the services.
In addition, the independent contractor must acknowledge that the terms laid out in the declaration apply to the contractor’s employees and independent contractors.
In the event of a misclassification inquiry or complaint, a valid DIBS can serve as important evidence that your independent contract was properly classified. However, under the law a DIBS only creates a rebuttable presumption, meaning that your contractor will have an opportunity to bring evidence to prove that she was, in fact, an employee and was originally misclassified.
Don’t expect DIBS to be a silver bullet
While the new law offers Arizona startups and small businesses a potentially helpful tool to help cut through the fog of who is an independent contractor and who isn’t, it is nonetheless important to understand its limitations.
For one thing, a DIBS only applies to Arizona law, and will not have any effect on established Federal-level independent contractor/employee tests used by the U.S. Department of Labor, the Internal Revenue Service or the National Labor Relations Board. This is, after all, a State-specific statute and does not affect Federal laws and regulations addressing whether one is an employee or independent contractor.
In fact, the statute expressly states that the law does not affect any investigatory or enforcement authority related to the determination of the independent contractor or employment status of any relationship as provided by Arizona’s labor statute or Federal law.
Thus, even a perfectly drafted and executed DIBS cannot be expected to save your business from ever-increasing regulations and worker misclassification enforcement efforts by the Federal government.
On the other hand, it is at the State, and not Federal, level where state unemployment authorities are finding that discharged contractors were actually employees, and where they are granting unemployment benefits to such workers. This is where employers hiring (what are later re-classified as) independent contractors can get whacked with costly and time-consuming misclassification claims.
For these reasons, there is no reason not to have a DIBS readied and all of your legitimate independent contractor workers complete (I’d strongly advise against completing it for them) and sign such a declaration. Having a signed declaration in that worker’s file could give you at least some legal cover from state-level enforcement actions right when you need it most.
Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a startup, technology, and e-commerce law practice advising founders and management teams on company startup, corporate and technology transactions, e-commerce, as well as Internet privacy concerns. The firm serves corporate and individual clients throughout Arizona, the United States, and internationally. Our offices are conveniently located along the Camelback corridor in Phoenix’s financial district. For more information about our Trademark practice, feel free to reach out using the contact form on the right or call us at (602) 222-5542 to schedule a meeting. Connect with Ben on LinkedIn or Avvo.