IC Laws Explained
New IC Laws Explained
New IC Laws Explained
Wild Changes In Independent Contractor (IC) Program
As seen in Main Street Montana, Fall 2005 Edition
By Wade Wilkison
The Wild Decision
The Montana State Supreme Court, in its 2003 decision Kelly Wild vs Fregein Construction , significantly changed the status of independent contractor (IC) exemptions that have been issued by the Montana Department of Labor since 1984. Until 2003, IC exemptions from workers' compensation insurance were considered to be conclusive, that is to say, legally determining, in cases of injury and other liability issues. Put another way, if you as an IC had an exemption document, you were personally liable for any accidents you were involved in, and in contrast those who employed you were free of liability. With the Supreme Court decision in 2003, however, suddenly IC liability became a much broader and more complex legal issue, so the 2003 Montana Legislature established a study committee through Senate Bill 270 to recommend ways to clarify IC relationships and thereby minimize litigation. By creating a strengthened set of new IC laws, the 2005 Montana Legislature has re-established the conclusive status of the IC exemption certificate.
The AB Test
How can you tell if an individual is an independent contractor (IC) or an employee? An IC is a worker who has the IC exemption certificate and meets the following conditions when he or she renders service in the course of an occupation: he or she (A) has been and will continue to be free from control or direction over the performance of the services, both under contract and in fact; and (B) is engaged in an independently established trade, occupation, profession or business, and further acknowledges no coverage under the Workers' Compensation and Occupational Disease Act. To obtain the IC exemption certificate, each applicant needs to supply sufficient documentation to the Department that B requirements are satisfied. Through monitoring and auditing, the Department determines that A requirements are satisfied. This two-pronged determination of IC status is commonly referred to as the AB test. The 2005 Legislature strengthened and clarified the process for determining how individuals are measured by the AB test, including putting in place an objective point system to rank the individual business components of IC applicants. The AB test is more objective, specific and documented, and the new IC law also specifically re-establishes the conclusive status of the IC exemption certificate.
2005 Legislative Changes to IC Law
Based on over a year of research, discussions and committee recommendations on how to deal with the impact of the Supreme Court's Wild vs Fregein decision, the 2005 Montana Legislature strengthened our state's independent contractor (IC) statutes. Senate Bill 108 became effective on April 28 of this year, and its associated statutes clarify who is actually operating as an IC.
Research findings used to write the new IC statutes identified Montana as having the highest percentage (eight percent) of independent contractors as a portion of the state workforce of any state that registers independent contractors.
During the public hearings on IC rules, several business owners talked about the problems created by a process that was too relaxed in the way it issued IC exemption certificates, pitting the contract bids of employers who were properly covered with workers' compensation insurance against the contract bids of others not properly covered but who thereby had an unfair competitive advantage. These kinds of issues should be resolved by the Legislature's new IC law.
Important Elements of the new IC Law
The law now requires that independent contractors either have the exemption certificate or purchase workers' compensation insurance coverage on themselves. Failure to obtain the exemption certificate or workers' compensation insurance will result in the state treating the worker as an employee of the hiring agent. Hiring agents will be responsible for claims for injuries or occupational diseases and for payment of premium on the wages of those considered their employees.
To be conclusively presumed to be an independent contractor, the Department of Labor & Industry (DLI) must approve an application for an IC exemption certificate based upon a submission of a complete application after April 28, 2005, and the person must be working under the IC exemption certificate.
The new law states that a "Person" means a sole proprietor, a working member of a partnership, a working member of a limited liability partnership, or a working member of a member-managed limited liability company. To be “working under” an IC exemption certificate, the worker must be performing the occupation listed on the certificate and the hiring agent and the independent contractor must not have a written or an oral agreement that the independent contractor's certificate holder's status is that of an employee.
The Department has the authority to investigate the working relationship between an independent contractor and his/her hiring agent. The Department may suspend or revoke an independent contractor exemption certificate. Fines may be assessed against the hiring agent if control is exerted to the extent it creates an employer/employee relationship.
IC certificate holders are required to keep the information on their certificate current. For more information about these changes, please refer to our website at www.mtcontractor.com