Two-part definition emerges in N.H. independent contractor debate

But critics warn of loopholes and further misclassification

Business advocates and regulators think they’ve finally come up with a single way for state agencies to define who and what an independent contractor is.

However, labor unions and their advocates are worried that the new definition, proposed in House Bill 450, will allow some employers to more easily misclassify workers as independent contractors, avoiding paying payroll taxes and denying them benefits.

Misclassification of workers has been a bone of contention for years, particularly in the construction industry, and it has been a moving target because different state agencies each use their own shifting set of criteria, ranging from three to 11 to determine independent contractor status.

House Bill 450 also has 11 criteria, but only eight have to be met, and they will apply to numerous agencies.

On Tuesday, lawmakers held the first real public hearing for the new definition, which was a surprise amendment to a study bill that slipped through the House on the consent calendar in March.

The legislation is the outcome of legislation introduced last session by Rep. Keith Murphy, R-Bedford, who proposed that agencies hold harmless a business as long as it met one agency’s criteria.

But the agencies weren’t about to back off on enforcing their regulations, and the bill failed, but lawyers did meet to try to come up with a single definition.

Instead of picking one, they merged two, using as a guide one adopted in 2013 in Maine, while trying to use clear language that workers and businesses could understand.

That wasn’t an easy task, said Marty Jenkins, an attorney with the state Department of Labor.

“We tried to use simple words,” Jenkins said. “Unfortunately, there were a lot of them.”

The criteria

In order not to be considered an employee, an independent contractor would have to: control the manner of work; have the opportunity for profit and loss; perform services customarily engaged in as an independent established trade; hire and pay his own assistant; and get paid based on the agreed scope of work performed. Under the bill, all of those criteria would have to be met.

But, in addition, a contractor would have to satisfy three of the following six criteria: have substantial investments in facilities; own tools and instruments; be held to a satisfactory completion of work; have a written contract; perform work outside the usual course of business of the hiring unit; work outside the hiring unit’s place of business; or the Internal Revenue Service has classified him or her as an independent contractor.

But the three-of-six criteria troubled Sen. Dan Feltes, D-Concord, who testified against the bill.

The bill would mean that one of the three criteria for unemployment compensation would now be optional, and as a result, “More people will signed as independent contractors. And that means more people who lose their job won’t get unemployment insurance.”

Feltes cited a recent report on the Maine law on which HB 450 is based that shows that the law resulted in more misclassification of workers since it went into effect.

But the report said that increase could be partly due to tougher federal enforcement requirements resulting in more misclassified workers being caught.

Misclassifying workers certainly wasn’t the intent, said Labor Commissioner Jim Craig. “We are not trying to make it more difficult to chase down people who misclassify employers.”

Jenkins said that the important things were not optional. “Who controls the work – that’s the biggest test and that is still required in all cases,” he said. Later, he added, “We wanted to make sure we caught the same people.” 

Bruce Berke, state director of the National Federation of Independent Business, thought the agencies succeeded, and supported the bill because “we need consistence across agencies,” not because there was any interest in misclassifying workers.

“There are five tests, than three out of the next six. That’s a pretty high bar.”

The sentiment was echoed by David Juvet, senior vice president of the Business and Industry Association of New Hampshire. “They wanted to strike a balance, and they did so – the same balance as today.”

But Mark McKenzie, director of the state chapter of the AFL-CIO agreed with Feltes. It not only “makes it easier to misclassify workers,” he said, it makes it more confusing.”

Employers are certainly not unscrupulous when trying to take advantage of loopholes in the law, said Elliott Berry, managing attorney of the Manchester office of New Hampshire Legal Assistance.

“It’s just that a highly motivated employer will find ways to classify someone as independent. It’s not a matter of good and evil. It’s just recognizing the competitive pressures they are under,” he said.

Barry also argued that lawmakers should to take their time before changing an unemployment compensation law that has been in place since 1951.