What Contractors Need to Know about Minnesota’s New Independent Contractor Legislation
Category | Briefing Papers
By Lucas T. Clayton
Luke is a shareholder in the firm’s Construction Law Department. He can be reached at 612.359.7628 or lclayton@fwhtlaw.com
In its past session, the Minnesota Legislature passed a bill seeking to address employer misclassification fraud (the “Bill”). While it applies to all employers, there are portions of the Bill which uniquely affect construction businesses, most notably with respect to the classification of individuals as independent contractors. Among other things, the Bill creates a far more rigorous test for determining whether an individual in the construction context qualifies as an independent contractor, as compared with the existing statute. Moreover, the Bill provides for harsh penalties and liabilities for misclassification of such individuals. Given the stiff consequences associated with misclassification set out in the Bill, it is very important for construction companies to work now to ensure that they do not run afoul of this new legislation.
New Test for Independent Contractor Qualification
Currently, Minn. Stat. § 181.723, subd. 4, sets out a nine-factor test for determining if an individual performing or providing building construction or improvement services is an independent contractor or an employee. Effective March 1, 2025, this nine-fact test will be replaced with a fourteen-factor test. All of the factors, not just some, must be met and several are almost impossible for a hiring contractor to verify. The bolded provisions below highlight the most important requirements:
Subd. 4. Independent Contractor
(a) An individual is an independent contractor and not an employee… only if the individual is operating as a business entity that meets all of the following requirements at the time the services were provided or performed:
(1) was established and maintained separately from and independently of the person for whom the services were provided or performed;
(2) owns, rents, or leases equipment, tools, vehicles, materials, supplies, office space, or other facilities that are used by the business entity to provide or perform building construction or improvement services;
(3) provides or performs, or offers to provide or perform, the same or similar building construction or improvement services for multiple persons or the general public;
(4) is in compliance with all of the following:
(i) holds a federal employer identification number if required by federal law;
(ii) holds a Minnesota tax identification number if required by Minnesota law;
(iii) has received and retained 1099 forms for income received for building construction or improvement services provided or performed, if required by Minnesota or federal law;
(iv) has filed business or self-employment income tax returns, including estimated tax filings, with the federal Internal Revenue Service and the Department of Revenue, as the business entity or as a self-employed individual reporting income earned, for providing or performing building construction or improvement services, if any, in the previous 12 months; and
(v) has completed and provided a W-9 federal income tax form to the person for whom the services were provided or performed if required by federal law;
(5) is in good standing as defined by section 5.26, if applicable;
(6) has a Minnesota unemployment insurance account if required by chapter 268;
(7) has obtained required workers’ compensation insurance coverage if required by chapter 176;
(8) holds current business licenses, registrations, and certifications if required by chapter 326B and sections 327.31 to 327.36;
(9) is operating under a written contract to provide or perform the specific services for the person that:
(i) is signed and dated by both an authorized representative of the business entity and of the person for whom the services are being provided or performed;
(ii) is fully executed no later than 30 days after the date work commences;
(iii) identifies the specific services to be provided or performed under the contract;
(iv) provides for compensation from the person for the services provided or performed under the contract on a commission or per-job or competitive bid basis and not on any other basis; and
(v) the requirements of item (ii) shall not apply to change orders;
(10) submits invoices and receives payments for completion of the specific services provided or performed under the written proposal, contract, or change order in the name of the business entity. Payments made in cash do not meet this requirement;
(11) the terms of the written proposal, contract, or change order provide the business entity control over the means of providing or performing the specific services, and the business entity in fact controls the provision or performance of the specific services;
(12) incurs the main expenses and costs related to providing or performing the specific services under the written proposal, contract, or change order;
(13) is responsible for the completion of the specific services to be provided or performed under the written proposal, contract, or change order and is responsible, as provided under the written proposal, contract, or change order, for failure to complete the specific services; and
(14) may realize additional profit or suffer a loss, if costs and expenses to provide or perform the specific services under the written proposal, contract, or change order are less than or greater than the compensation provided under the written proposal, contract, or change order.
While the new test incorporates a number of the factors in the current statute, it includes several new factors, while also providing for more rigorous standards for a number of the holdover factors.
Dangers Ahead
The new test measures compliance “at the time the services were provided.” This is a significant change, because it makes potential misclassification an ongoing issue throughout any project, as opposed to simply at the point of contracting. This requirement could lead to situations of inadvertent misclassification if, for example, a subcontractor fails to timely renew any state required licenses, registrations, or certifications during the course of the project, or where a contractor pays its subcontractor prior to receiving an invoice. Accordingly, it will be incumbent on upstream contractors to remain vigilant throughout the construction of any project to assure that its downstream contractors always remain in compliance with the new law.
Furthermore, revised Minn. Stat. § 181.273 states that an individual who is providing or performing services for a subcontractor is an employee of the general contractor unless the subcontractor meets all of the requirements of the fourteen-point test. The revised statute does provide, however, that no employer-employee relationship is created if: (1) “there is an intervening business entity in the contractual chain between the [contractor] and the individual that meets the requirements” of the fourteen-point test; or (2) the contractor “establishes that an intervening business entity treats and classifies the individual as an employee. . . .” While these exceptions prevent unfettered liability down the entire contractual chain, the possibility that an individual providing work for a subcontractor could ultimately be classified as an employee of the upstream contractor is real. In such an instance, the upstream contractor would then be held responsible for the proper payment, insurance, and withholdings of all employees of the misclassified downstream contractor. In short, all these individuals would be considered employees of the contractor. This further highlights the importance of an upstream contractor making sure its downstream contractors comply with the new test for determining independent contractors.
Some of the tests will be almost impossible for upstream contractors to verify. How, for example, will an upstream contractor ensure its downstream contractors have properly filed their state and federal taxes? Moreover, the new statute appears to restrict contracting options as payments can only be on “a commission or per-job or competitive bid basis.” It is unclear what this means or whether negotiated compensation rates or unit price contracts now violate the statute. Subcontracts must be executed within 30 days of starting work. While this sounds good in theory, in practice many subcontracts or POs remain unsigned, and if that practice continues, liability will result.
Violations of Minn. Stat. 181.723 and Penalties
Effective July 1, 2024, under revised Minn. Stat. § 181.723, construction contractors are subject to liability for the following:
1. Misrepresenting oneself as an independent contractor when they do not meet all of the requirements of the fourteen-point test described above;
2. As a condition of payment requiring an individual who is an employee to register with the Minnesota Department of Labor and Industry (“DOLI”) as a construction contractor or agree to be classified as an independent contractor (with each instance of conditioned payment being a separate violation);
3. Failing to classify, represent, or treat an individual as an employee in accordance with the requirements of any applicable local, state, or federal law;
4. Failing to report or disclose a person as an employee to any local, state, or federal government agency when required to do so under any applicable local, state, or federal law;
5. Requiring or requesting an individual who is an employee to enter into any agreement or complete any document that misclassifies, misrepresents, or treats the individual as an independent contractor;
6. Requiring an employee to register as a construction contractor.
Contractors may face a penalty of up to $10,000 for each individual violation. Moreover, individual owners, officers, or agent of an employer may be held individually liable if they “knowingly or repeatedly engage[ ] in any of the prohibited activities” set forth in the revised statute. Further, the employer may be ordered by DOLI to pay compensatory damages to each affected individual through: minimum wage, overtime, shift differentials, vacation pay, sick pay, health insurance, life and disability insurance, retirement plans, savings plans and other benefits, employer contributions to unemployment insurance, Social Security and Medicare, and any costs and expenses incurred by the individual resulting from the employer’s failure to classify, represent, or treat the individual as an employee.
Stop Work Orders
Effective March 1, 2025, DOLI’s enforcement powers with respect to independent contractor misclassification will be greatly expanded to include, among other things, the power to issue stop work orders. Specifically, as of that date, DOLI will have the authority to order a contractor to cease business operations at one or more of its workplaces if DOLI determines that the contractor violated one of more laws, including violations of Minn. Stat. § 181.723. Any such stop work orders will remain in effect until lifted by the Commissioner, upon finding that the business has come into compliance with the law and has paid any remedies, damages, and penalties. The Commissioner is also vested with the authority to assess a civil penalty of up to $5,000 per day against a business for each day the business conducts business operations in violation of a stop work order.
Relationship to Responsible Contractor Legislation
The changes in the law set forth above also tangentially affect other legislation, such as the Responsible Contractor Law (“RCL”), Minn. Stats § 16C.285. Under the RCL, in order to be considered a responsible contractor, capable of being awarded a public construction contract in Minnesota, a contractor must, among other, verify that it meets certain minimum criteria. Among those criteria is the following:
(3) the contractor or related entity is in compliance with and, during the three-year period before submitting the verification, has not violated section 181.723 or chapter 326B. For purposes of this clause, a violation occurs when a contractor or related entity has been issued a final administrative or licensing order.
Minn. Stat. § 16C.285, subd. 3 (3). Accordingly, as part of the verification required by a contractor under the RCL, it must confirm that in the three-year period prior to the contractor’s verification, it has not been found in violation of Minn. Stat. § 181.723 by misclassifying an alleged independent contractor. If a contractor is found to be in violation of Minn. Stat. § 181.723, through the issuance of a final administrative or licensing order, then, under the RCL, that contractor will be ineligible to be awarded a public construction contract in Minnesota for three-years following such an order. Obviously, given the draconian penalty of the RCL set forth above, it is incumbent on contractors to be aware of, and comply with, the changes to Minn. Stat. § 181.723 described in this Briefing Paper.
Conclusion
Although several of the changes set forth above do not come into effect until March 1, 2025, it is important for contractors to begin putting things in place now so they are prepared and ready to ensure compliance from their downstream contractors. In particular, given the severe consequences for non-compliance, upstream contractors need to put processes in place and amend their contract forms to ensure that their subcontractors meet the new fourteen-point test set forth above. If you have questions about how to best set up your business to comply with this new legislation, please contact Fabyanske, Westra, Hart, & Thomson’s construction attorneys.
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