HB2594 - 492R

Be it enacted by the Legislature of the State of Arizona:

Section 1. Section 20-371, Arizona Revised Statutes, is amended to read:

START_STATUTE20-371. Rate administration

A. The director shall adopt reasonable rules and statistical plans that are reasonably adapted to each of the rating systems on file with the director and that may be modified from time to time. An insurer shall use the rules and statistical plans to record and report its loss and countrywide expense experience in order that the experience of all insurers may be made available, at least annually, in sufficient form and detail to aid the director in determining whether rating systems comply with the standards set forth in this article. The rules and plans may also provide for the recording and reporting of expense experience items which are especially applicable to this state and are not susceptible to determination by prorating of countrywide expense experience.

B. In adopting the rules and plans, the director shall give due consideration to the rating systems on file with the director, and, in order that the rules and plans may be as uniform as is practicable among the several states, to the rules and to the form of plans used for comparable rating systems in other states.

C. An insurer is not required to record or report its loss experience on a classification basis that is inconsistent with the uniform classification plan.

D. The director may designate an organization the director deems qualified, other than an insurer that has outstanding obligations under a policy of workers' compensation insurance in this state, to act as the director's statistical agent. The statistical agent shall assist the director in gathering and compiling workers' compensation experience and performing other related services as the director may specify. The compilations shall be made available subject to reasonable rules adopted by the director, to insurers and rating organizations, but no insurer shall be required to file its experience with an organization of which it is not a member.

E. Every insurer shall report its loss and expense experience to the rating organization of which it is a member. The rating organization shall report the insurer's experience to the designated statistical agent. If the rating organization is unable to report the experience of its member insurers to the designated statistical agent, every insurer that is a member of the rating organization shall directly report its experience to the designated statistical agent. If the insurer has issued a master policy, as defined in section 23-561, the insurer shall separately report its payroll classification and loss experience for each client that is covered under the master policy.

F. If there is more than one licensed rating organization that meets the requirements of section 20‑363, subsection E, the director shall designate one of the organizations as the designated rating organization for the purpose of annually making and filing with the director statewide workers' compensation insurance rates that become effective on January 1.

G. The designated rating organization shall annually file its rate filing with the director on or before August 1 for rates that become effective on January 1. The director shall disapprove the filing if it does not meet the standards of section 20‑356, paragraph 1. An insurer transacting workers' compensation insurance in this state shall adhere to the expected loss ratios, ballast factors and other experience rating factors and to the statewide rates and other rating values made by the designated rating organization for the uniform rate filing, except that an insurer may deviate from the statewide rate portion of the uniform rate filing according to section 20‑359, subsection A.

H. The director may allow the designated statistical agent and designated rating organization to charge licensed rating organizations that operate in this state a reasonable fee for their services. The licensed rating organizations shall pay the fees on a ratable basis.

I. To further the uniform administration of rate regulatory laws, the director and every insurer and rating organization may exchange information and experience data with insurance supervisory officials, insurers and rating organizations in other states and may consult with them with respect to rate making and the application of rating systems.

J. If more than one rating organization meets the requirements of section 20‑363, subsection E, the director shall designate the statistical plan, classification plan or experience rating plan adopted by the designated rating organization or any other rating organization, or the plans of another state, as the uniform statistical plan, the uniform classification plan or the uniform experience rating plan.

K. If the director does not designate a uniform statistical plan, a uniform classification plan or a uniform experience rating plan pursuant to this section, each insurer shall adhere to the statistical plan, classification plan, and experience rating plan adopted by the rating organization of which the insurer is a member in this state. END_STATUTE

Sec. 2. Section 23-561, Arizona Revised Statutes, is amended to read:

START_STATUTE23-561. Definitions

In this article, unless the context otherwise requires:

1. "Administrative fee" means the fee that is charged to a client by a professional employer organization for professional employer services. Administrative fee does not include any amount of the fee that is applied to wages, salaries, benefits, workers' compensation, payroll taxes, withholding or other assessments that the professional employer organization pays to or on behalf of covered employees under a professional employer agreement.

2. "Client" means a person who contracts with a professional employer organization under a professional employer agreement. A Client does not include a professional employer organization.

3. "Client based policy" means a standard workers' compensation policy that is issued to the client and that covers all of the client's employees, including covered employees.

3. 4. "Co-employer" means a professional employer organization or a client.

4. 5. "Co-employment relationship" means all of the following:

(a) A relationship between co-employers if the rights, duties and obligations of an employer that arise out of an employment relationship are allocated between co-employers subject to a professional employer agreement and this article, and the relationship is intended to be an ongoing relationship and not a temporary or project specific relationship.

(b) A relationship between a professional employer organization and a covered employee that is subject to a professional employer agreement and this article, that allows the professional employer organization to enforce those rights and that requires the professional employer organization to perform those duties and obligations allocated to the professional employer organization by the professional employer agreement or this article.

(c) A relationship between a client and a covered employee that is subject to a professional employer agreement and this article, that allows the client to enforce those rights and that requires the client to perform those employer obligations that are allocated to the client by the professional employer agreement or this article or that are not otherwise allocated by the professional employer agreement or this article.

5. 6. "Covered employee":

(a) Means an individual who has a co-employment relationship with a professional employer organization and a client, if the individual:

(i) Has executed a written notice of the co-employment relationship with a professional employer organization.

(ii) Is a party to a co-employment relationship with a professional employer organization and a client.

(iii) Is subject to a professional employer agreement under this article.

(b) Includes an individual who is an officer, director, shareholder, partner or manager of a client if the professional employer agreement includes the individual as a covered employee and the individual acts as a manager or performs services for the client.

7. "Master policy" means an arrangement under which a single policy issued to the professional employer organization provides workers' compensation coverage for covered employees at more than one client with whom the professional employer organization has agreements meeting the requirements of this article.

8. "Multiple coordinated policies" means an arrangement under which a separate workers' compensation policy is issued to a professional organization for each client or group of clients with whom the professional employer organization has agreements meeting the requirements of this article, but payment obligations and certain policy communications are coordinated through the professional employer organization.

6. 9. "Person" means any individual, partnership, corporation, limited liability company or other legally recognized entity.

7. 10. "Professional employer agreement" means a written contract between a professional employer organization and a client that provides for:

(a) The co-employment of covered employees.

(b) The allocation and sharing between the client and the professional employer organization of employer responsibilities with respect to a covered employee, including hiring, firing and disciplinary responsibilities.

8. 11. "Professional employer organization":

(a) Means any person who is engaged in the business of providing professional employer services whether or not the person uses the term professional employer organization, staff leasing company, registered staff leasing company, employee leasing company or any other name.

(b) Does not include:

(i) Any person whose principal business activity is not entering into professional employer agreements and who does not hold itself out as a professional employer organization.

(ii) A person who shares employees with a commonly owned company as defined by sections 414(b) and 414(c) of the internal revenue code.

(iii) Arrangements by a person who assumes responsibility for the product that is produced or service that is performed by the person and who retains and exercises the primary discretion and control over the work performed by the person whose services are supplied under the arrangement.

(iv) A person who hires temporary help for the purpose of supporting or supplementing a client's employees.

9. 12. "Professional employer services" means the service of entering into a co-employment relationship under this article in which all or a majority of the employees who provide services to a client or to a division or work unit of the client are covered employees.

10. 13. "Registrant" means a professional employer organization that is registered under this article.

11. 14. "Temporary help services" means services by a person consisting of:

(a) Recruiting and hiring the person's own employees.

(b) Finding other organizations that need the services of employees who are recruited and hired by the person.

(c) Assigning employees to perform work for other organizations to support that organization's workforces, including covering employee absences, skill shortages or seasonal workloads or performing special assignments or projects.

(d) Customarily attempting to reassign the employees to other organizations when the employees complete each assignment.END_STATUTE

Sec. 3. Section 23-562, Arizona Revised Statutes, is amended to read:

START_STATUTE23-562. Professional employer agreements; rights; notice

A. A professional employer agreement shall:

1. Govern the co-employment relationship between the client and the professional employer organization and between each co-employer and each covered employee.

2. Reserve to the client the right to direct and control covered employees to the extent necessary to conduct the client's business and to discharge any fiduciary responsibility or to comply with any licensing requirement that applies to the client or a covered employee.

3. Require the professional employer organization to pay the wages of covered employees, to withhold, collect, report and remit payroll-related and unemployment taxes and to make payment for employee benefits for covered employees. For the purposes of this paragraph, wages do not include obligations between a client and a covered employee that exceed a covered employee's salary, bonuses, commissions, severance pay, deferred compensation, profit sharing or vacation, sick or other paid time off pay unless the professional employer organization expressly agrees to assume liability for the additional obligations in the professional employer agreement.

4. Permit both the professional employer organization and client to have a right to hire, terminate and discipline covered employees.

5. Specify whether the client or the professional employer organization will purchase and maintain the workers' compensation policy for covered employees from a carrier that is licensed to conduct business in this state. If the professional employer organization purchases the workers' compensation policy, the professional employer organization shall comply with the requirements of section 23-577 and shall maintain and, if requested by the client on termination of the agreement, be able to provide to the client records regarding the loss experience related to the workers' compensation insurance that is provided to the covered employees.

B. A professional employer agreement shall not:

1. Affect, modify or amend any collective bargaining agreement or any rights or obligations of any client, professional employer organization or covered employee that are required under the federal national labor relations act, the federal railway labor act or this title.

2. Affect, modify or amend any state, local or federal licensing, registration or certification that is required by any client or covered employee.

3. With respect to a bid, contract, purchase order or agreement entered into with this state or a political subdivision of this state, affect the status of a client's company as a small, minority-owned, disadvantaged or woman-owned business enterprise or as a historically underutilized business because the client entered into a professional employment agreement with a professional employer organization.

4. Diminish, abolish or remove any rights of covered employees to any clients or obligations of clients to any covered employees that existed before the effective date of a professional employer agreement.

5. Terminate an employment relationship that existed before the effective date of a professional employer agreement.

6. Establish new or additional enforceable rights of a covered employee against a professional employer organization that are not specifically allocated to the professional employer organization under the professional employer agreement or this article.

C. Unless specifically provided in a professional employer agreement or this article:

1. The client shall perform all responsibilities that otherwise apply to an employer in an employment relationship.

2. The professional employer organization shall perform only the responsibilities that are specifically required under this article or a professional employer agreement. The rights, duties and obligations of a professional employer organization as a co-employer with respect to any covered employee are limited to the responsibilities that are contained in the professional employer agreement and that arise during the term of co‑employment by the professional employer organization for the covered employees.

D. Every professional employer organization that enters into a professional employer agreement shall provide notice to each covered employee who is affected by the agreement. The notice may be included in the form of the employment documents that a covered employee completes for the professional employer organization. END_STATUTE

Sec. 4. Title 23, chapter 3, article 4, Arizona Revised Statutes, is amended by adding section 23-577, to read:

START_STATUTE23-577. Workers' compensation policies; types; requirements

A. If a professional employer agreement does not provide for the professional employer organization to purchase workers' compensation for covered employees, the client is responsible to purchase a client based policy for all employees, including the covered employees.

B. If the professional employer agreement provides for the professional employer organization to purchase the workers' compensation for covered employees pursuant to section 23-562, the professional employer organization shall fulfill the responsibility through an individual policy, a master policy or multiple coordinated policies obtained from a carrier or carriers licensed to do business in this state.

C. If an employer is placed in the assigned risk plan under section 23‑1091, the employer is not eligible for coverage under a master policy.

D. If the professional employer organization fulfills its responsibility under this section through a master policy or multiple coordinated policies, in addition to the requirements applicable to carriers set forth in sections 23-961 and 23-963, the professional employer organization shall:

1. Provide to each client a certificate of insurance coverage in a form prescribed by the carrier.

2. Notify the carrier and the commission of the termination or nonrenewal of any professional employer agreement within ten days following the termination or nonrenewal.

3. On request of a carrier, maintain and submit individual client records to the carrier in order to assist the carrier in complying with section 20-371, subsection E.

E. If the commission determines that a client that is insured through a master policy has been the subject of two or more claims for no coverage within the preceding twenty‑four month period that are eligible for payment from the special fund established by section 23-1065, the client is not eligible to be covered by a master policy for a twenty-four month period following the determination date. On written or electronic notice of the determination and disqualification by the commission to the professional employer organization, the professional employer organization shall terminate the client's coverage within thirty days under the master policy and immediately notify the client and the carrier that the coverage was terminated. END_STATUTE

Sec. 5. Section 23-961, Arizona Revised Statutes, is amended to read:

START_STATUTE23-961. Methods of securing compensation by employers; deficit premium; civil penalty

A. Employers shall secure workers' compensation to their employees in one of the following ways:

1. By insuring and keeping insured the payment of such compensation with the state compensation fund or an insurance carrier authorized by the director of insurance to write workers' compensation insurance in this state.

2. By furnishing to the commission satisfactory proof of financial ability to pay the compensation directly or through a workers' compensation pool approved by the commission in the amount and manner and when due as provided in this chapter. The requirements of this paragraph may be satisfied by furnishing to the commission satisfactory proof that the employer is a member of a workers' compensation pool approved by the commission pursuant to section 23‑961.01. The commission may require a deposit or any other security from the employer for the payment of compensation liabilities in an amount fixed by the commission, but not less than one hundred thousand dollars for workers' compensation liabilities. If the employer does not fully comply with the provisions of this chapter relating to the payment of compensation, the commission may revoke the authority of the employer to pay compensation directly.

B. An employer may not secure compensation to comply with this chapter by any mechanism other than as provided in this section. No insurance, combination or other program may be marketed, offered or sold as workers' compensation that does not comply with this section. An employer violates this chapter if the employer purchases or secures its obligations under this chapter through a substitute for workers' compensation that does not comply with this section.

C. Insurance carriers that transact the business of workers' compensation insurance in this state shall be subject to the rules of the director of insurance.

D. The director of insurance shall not issue to an insurance carrier a certificate of authority that authorizes the insurance carrier to transact workers' compensation insurance until the insurer deposits with the state treasurer, through the director of insurance, cash or securities. The state compensation fund shall also deposit cash or securities with the state treasurer, through the director of insurance, before transacting the business of workers' compensation insurance. The amount of cash or securities required under this subsection shall be at least equal to the greater of the following amounts:

1. One hundred thousand dollars.

2. The sum of subdivisions (a) and (b) of this paragraph less credits for approved reinsurance computed as of the preceding December 31 or other time as requested by the department of insurance for workers' compensation insurance written subject to the laws of this state:

(a) The aggregate of the present values at six per cent interest of all determined and estimated future direct reported loss and loss expense payments on compensation claims incurred more than three years immediately before the preceding December 31 or other time as requested by the department of insurance.

(b) The aggregate of the amounts determined for each of the three years immediately before the preceding December 31 or other time as requested by the department of insurance which equals the greater of the following:

(i) Sixty‑five per cent of the earned premiums for the year less all direct reported loss and loss expense payments made on compensation claims incurred in the corresponding year.

(ii) The present value at six per cent interest of all determined and estimated future direct reported loss and loss expense payments on compensation claims incurred in that year.

E. On or before April 15 and on any date that the department of insurance specifically requests, an insurance carrier shall file with the department of insurance the information necessary to compute the required amount to be deposited pursuant to subsection D of this section and shall deposit any required additional amount.

F. An insurance carrier shall maintain at all times a deposit of cash or securities with the state treasurer, through the director of insurance, in an amount that is not less than the amount required under this section.

G. Cash or securities deposited pursuant to this section are subject to approval by the director of insurance at all times. The director of insurance shall hold the cash or securities for fulfillment of the obligations of the insurance carrier, including an insurance carrier acting as a reinsurer, under this chapter. The commission shall have a lien against the cash or securities deposited to the extent the special fund is liable to pay the obligations secured by the cash or securities.

H. Except in the event of nonpayment of premiums, each insurance carrier shall carry a risk to the conclusion of the policy period unless the policy is cancelled by the employer or unless one or both of the parties to a professional employer agreement terminate the agreement. The policy period shall be agreed upon by the insurance carrier and the employer.

I. At least thirty days' notice shall be given by the insurance carrier to the employer and to the commission of any cancellation or nonrenewal of a policy if the cancellation or nonrenewal is at the election of the insurance carrier. The insurance carrier shall promptly notify the commission of any cancellation by the employer or failure of the employer to renew the policy. The failure to give notice of nonrenewal if the nonrenewal is at the election of the insurance carrier shall not extend coverage beyond the policy period. An insurance carrier shall notify the commission on a form prescribed by the commission that it has insured an employer for workers' compensation promptly after undertaking to insure the employer. If the insurance carrier provides coverage under a master policy or multiple coordinated policies, as defined in section 23‑561, the insurance carrier shall send any notice of cancellation or nonrenewal of the master policy or multiple coordinated policies to the professional employment organization and each client of a professional employer organization that is insured under the master policy or multiple coordinated policies.

J. Every insurance carrier, including the state compensation fund, on or before March 1 of each year shall pay to the state treasurer for the credit of the administrative fund, in lieu of all other taxes on workers' compensation insurance, a tax of not more than three per cent on all premiums collected or contracted for during the year ending December 31 next preceding, less the deductions from such total direct premiums for applicable cancellations, returned premiums and all policy dividends or refunds paid or credited to policyholders within this state and not reapplied as premiums for new, additional or extended insurance. Every self‑insured employer, including workers' compensation pools, on or before March 31 of each year shall pay a tax of not more than three per cent of the premiums which would have been paid by the employer if the employer had been fully insured under a plan available from the state compensation fund during the preceding calendar year. The commission shall adopt rules that shall specify those methods to be used for the calculation of rates and premiums and that shall be the basis for the taxes assessed to self‑insured employers. The tax shall be not less than two hundred fifty dollars per annum and shall be computed and collected by the commission and paid to the state treasurer for the credit of the administrative fund at a rate not exceeding three per cent to be fixed annually by the industrial commission. The rate shall be no more than is necessary to cover the actual expenses of the industrial commission in carrying out its powers and duties under this title. Any quarterly payments of tax pursuant to subsection L of this section shall be deducted from the tax payable pursuant to this subsection.

K. An insurance carrier may reduce the amount of premiums paid by an employer by up to five per cent if all of the following apply:

1. The insured employer complies with the drug testing policy requirements prescribed in section 23‑493.04.

2. The insured employer conducts drug testing of prospective employees.

3. The insured employer conducts drug testing of an employee after the employee has been injured.

4. The insured employer allows the employer's insurance carrier to have access to the drug testing results under paragraphs 2 and 3 of this subsection.

L. Any insurer which, pursuant to this section, paid or is required to pay a tax of two thousand dollars or more for the preceding calendar year shall file a quarterly report, in a form prescribed by the commission, accompanied by a payment in an amount equal to the tax due at the rates prescribed in subsection J of this section for premiums determined pursuant to subsection J of this section or an amount equal to twenty‑five per cent of the tax paid or required to be paid pursuant to subsection J of this section for the preceding calendar year. The quarterly payments shall be due and payable on or before the last day of the month following the close of the quarter and shall be made to the state treasurer.

M. If an overpayment of taxes results from the method prescribed in subsection L of this section, the industrial commission may refund the overpayment without interest.

N. An insurer who fails to pay the tax prescribed by subsection J or L of this section or the amount prescribed by section 23‑1065, subsection A is subject to a civil penalty equal to the greater of twenty‑five dollars or five per cent of the tax or amount due plus interest at the rate of one per cent per month from the date the tax or amount was due.

O. Neither the state compensation fund nor an insurance carrier authorized to write workers' compensation insurance may assess an employer premiums for services provided by a contractor alleged to be an employee under section 23‑902, subsection B or C, unless the fund or carrier has done both of the following:

1. Prepared written audit or field investigation findings establishing that all applicable factors for determining employment status under section 23‑902 have been met.

2. Provided a copy of such findings to the employer in advance of assessing a premium.

P. Notwithstanding section 23‑901, paragraph 6, subdivision (i), a sole proprietor may waive the sole proprietor's rights to workers' compensation coverage and benefits if both the sole proprietor and the insurance carrier of the employer subject to this chapter for which the sole proprietor performs services sign and date a waiver which is substantially in the following form:

I am a sole proprietor, and I am doing business as ( name of sole proprietor ). I am performing work as an independent contractor for ( name of employer ). I am not the employee of ( name of employer ) for workers' compensation purposes, and, therefore, I am not entitled to workers' compensation benefits from ( name of employer ). I understand that if I have any employees working for me, I must maintain workers' compensation insurance on them.

_________________________ _________________________

Sole proprietor Date

_________________________ _________________________

Insurance carrier Date END_STATUTE