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Business owners have a legal obligation to properly classify their workers in Arizona.  The two most common classifications are independent contractors and employees.  Since it is illegal to incorrectly classify workers, and various legal implications arise depending on what type of worker an individual is found to be, it is vital for all Arizona business owners and managers to understand how to legally classify their workers.  We put together a simple guide for any business owner to quickly understand the basic general definitions and requirements of worker classifications.

Employee Classification in Arizona

The main factor in determining whether a worker should be classified as an employee or an independent contractor is the amount of supervision or control that the business retains over the worker.  Aspects of control include the worker’s schedule, daily activities, and where she works.  If you control most worker decisions on a daily basis, then you will generally need to classify them as an “employee.”

This might not seem like an appealing decision for a business owner, especially considering the need to cover payroll taxes, workers’ compensation insurance, and unemployment insurance for all workers classified as an “employee.”  Classifying a worker as an independent contractor might seem like a better way to cut financial obligations and liabilities, but wrongfully misclassifying a worker can cost your business much more.

Independent Contractor Classification in Arizona

The state of Arizona has recently enacted new laws for businesses that utilize independent contractors with Arizona Revised Statutes Section 23-1601, known as the Declaration of Independent Business Status (“DIBS”).  This clarifies and defines exactly what an Arizona business should do to properly inform its workers they are independent contractors.

A business should request the worker to sign, date, and provide copies of a declaration regarding its status as an independent contractor.  Any such declaration should state that the worker understands that she is providing services as an independent contractor and that she is operating her own independent business.  A business can utilize the form provided in subsection (B) of that Section to accomplish this.  The declaration should also state the independent contractor knows they are not an employee and they understand they will not receive benefits like unemployment insurance.  It should also be stated the independent contractor is responsible for all tax obligations from the payments received for her services.

Compliance with this Section creates a rebuttable presumption that a worker has an independent contractor relationship with the business owner/manager.

Consequences for Misclassification in Arizona

There are varying fines and penalties for misclassification of workers in Arizona.  First and foremost, the business will typically have to pay back taxes for payroll and possibly backpay for unpaid overtime.  The Internal Revenue Service and Arizona Treasury are unlikely to provide any breaks or settlements to businesses found in major violation of worker classification laws to avoid taxes.

These cases have faced increased scrutiny from the state of Arizona and the Department of Labor.  Your business can face many additional penalties if there is evidence of a systemic misclassification of your workforce to avoid taxes and obligations.

Find an Experienced Business Law Attorney in Arizona

MacQueen & Gottlieb have significant experience with how to legally classify workers in Arizona.  Our firm can help your business properly classify your current workforce and review and update any employment or contractor agreements.  Our attorneys can also help new businesses and startups draft all necessary employment and contractor agreement and define their work classification strategy.  Contact us today at 602-533-2840 to schedule an initial consultation or make an appointment online.

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