Cost-Benefit Analysis

In performing a cost-benefit analysis, each rulemaking entity must provide the information requested for the cost-benefit analysis to be considered a good faith effort.  The cost-benefit analysis must be submitted to the Office of Policy, Research and Regulatory Reform at least ten (10) days before the administrative hearing on the proposed rule and posted on your agency’s web site.  For all questions, please attach all underlying data that supports the statements or figures stated in this cost-benefit analysis.

Department:	Department of Labor & Employment		Agency:	Division of Unemployment Insurance	

CCR:	7 CCR 1101-2		Date:	02/24/2017	

Rule Title or Subject:	
Worker Classification	

Per the provisions of 24-1-103(2.5)(a), Colorado Revised Statutes, the cost-benefit analysis must include the following:

1.	The reason for the rule or amendment;
	The Colorado Department of Labor and Employment (CDLE) and stakeholders from various industries convened to analyze and propose improvements to the Unemployment Insurance Audits (UI Audits) process. The goal was to engage stakeholders with an open and transparent approach in an effort to build a stronger foundation between CDLE, the labor-advocate community, and the employer community. The impetus for the gathering was that the UI Audits process was not well understood; therefore, there was a strong belief that a joint Department-labor-and-employer collaboration could yield benefit. 
The workgroup conducted three workshops, in which eight practical, short-term recommendations were developed with the intent to enhance the performance of the unemployment insurance audit program. In order to ensure that the recommendations were implemented, Senate Bill (SB) 16-179 was put forth; the bill contained both a declaration of intent and list of the specific changes to be enacted. The bill went into effect in August 2016, in which a section of law was added to C.R.S. 8-70-115. As outlined in the legislative declaration, CDLE shall develop guidance for employers on the factors specified in 8-70-115 (1) (c), C.R.S. In accordance with the statute, the amendment to the rules is necessary.
The determination of whether a worker is an employee or an independent contractor is defined by statute, not by a business and the worker. The rules proposed will assist employers with guidance towards a uniform definition in determining if the worker is an employee or an independent contractor.	
2.	The anticipated economic benefits of the rule or amendment, which shall include economic growth, the creation of new jobs, and increased economic competitiveness;
	Ensuring the proper classification of workers is an important issue for Colorado businesses, as well as workers. In fact, it is critical that a business correctly determines whether each worker is providing services as an employee or an independent contractor. The benefits of using an independent contractor in lieu of hiring an employee is that it is less costly to the business and allows the worker more freedom to act as he or she sees fit within the marketplace; however, there are significant consequences if a business is erroneously treating a worker as an independent contractor. The benefit of correctly classifying the worker at the beginning of the work relationship levels the playing field for all businesses within an industry, improves economic competitiveness, and establishes a clear business-worker understanding, as well as protects the rights of the workers. 
By providing guidance up front in the form of the proposed rule, the business and labor communities will have access to the information to classify workers appropriately from the onset. Establishing a culture of compliance assistance and proactive education with regard to worker classification is a priority. 

3.	The anticipated costs of the rule or amendment, which shall include the direct costs to the government to administer the rule or amendment and the direct and indirect costs to business and other entities required to comply with the rule or amendment;
	The proposed amendments will not result in additional costs to the Division. The changes do not add new factors. Instead, the proposed rules provide clarification to the factors considered when determining worker classification, as described in section 8-70-115, C.R.S. The proposed rules are designed to provide employers with more robust guidance with respect to establishing a worker’s status as employee or an independent contractor. CDLE will continue to perform audits in accordance with the mandated federal requirements. There will not be an increase in the number of employers audited nor in Audits staff as a result of the proposed rule. In addition, it is anticipated that audits will take less time because more businesses will be better informed in advance and correctly classifying workers. It is also expected that by providing many of the common factors in determining whether a worker is an employee or independent contractor in the rules, fewer appeals will be filed as a result of audit results
Similarly, there are not any foreseeable added costs to a business, as long as the business already includes in its business model a process to review the factors considered in determining whether a worker is an employee or an independent contractor at the beginning of the worker-business relationship. If a business is not already performing this review and incorrectly classifying a worker who should be an employee as an independent contractor, and should an audit find an improper classified worker, the costs to the business would increase on average by an estimated $500 in unemployment premiums annually for each worker deemed to be an employee.
There is an adverse effect on employees when they are not properly classified because they are not covered by the state and federal laws that are designed to protect workers, e.g., worker’s compensation coverage, unemployment insurance benefits, minimum wage and overtime, work place discrimination, and the Family and Medical Leave Act. In additional, these workers are not afforded health insurance, retirement plans, vacation and sick leave, or any other benefit that is typically offered to employees. Similarly, given the employer does not withhold federal, state, and local taxes from payments, the worker is responsible for satisfying all tax obligations. 	
4.	Any adverse effects on the economy, consumers, private markets, small businesses, job creation, and economic competitiveness; and 
	The Colorado economy as a whole is adversely affected by inappropriate worker classification; when one or more businesses classify those workers who should be employees as independent contractors, the result is that the remaining employers will overpay. In times of economic downturn, not only does misclassification of employees take a toll on workers and law-abiding employers, but also the unemployment insurance trust fund. When employers have not paid their portion of unemployment insurance premiums, it can cause the trust fund to become unstable and potentially insolvent.  
When the trust fund is negatively impacted and more monies are going out than coming in, the state’s first defense is to add a solvency surcharge to each employer’s premium rate. If the surcharge still does not cover the shortage, the State is forced to take out loans or similar measures. The loans, fees, and interest charges are passed on to the employer, in addition to the regular payment required for premiums, until the State’s loan has been repaid.
When some employers are not paying their fair share, compliant employers must make up the difference. Reducing the occurrence of misclassification will increase fairness in the unemployment insurance program for workers, premium-paying employers, and the state trust fund; therefore, it is in the best interest of Colorado for CDLE to educate and provide guidance to businesses, as well as workers that truly wish to act as independent contractors within the marketplace.	
5.	At least two alternatives to the proposed rule or amendment that can be identified by the submitting agency or a member of the public, including the costs and benefits of pursuing each of the alternatives identified. 
	Option 1:  Do not make proposed changes to the rules. Existing rules would remain in place with no change. Currently there is no specific guidance within the rules for proper worker classification. This fails to meet the intent of SB 16-179 and does not provide up-front guidance to businesses. There are no added costs related to this option.

Option 2:  Since the rules are proposed as a result of a statute change, make legislative changes to allow CDLE to meet and be compliant with the law.