Potential Pitfalls in Paid Leave: More Independent Contractor Confusion?

Category | Announcements

By Leon P. Wells

Leon is a shareholder of the firm’s Construction Law Department. He can be reached at 612.359.7651 or LWells@fwhtlaw.com.

On March 1, 2025, Minnesota’s construction contractors—of all tiers—will face a new regime for determining if and when an individual in the construction industry qualifies as an “independent contractor” under Minnesota law. As regular readers of our briefing papers know—and as previously explained in detail by Fabyanske shareholder, Luke Clayton—this new regime will expand the existing nine-factor test for determining independent-contractor status, set forth in Minn. Stat. § 181.723, subd. 4,  into a much more rigorous fourteen-factor test. As Luke explained back in June 2024, an individual will have to satisfy all of the fourteen factors, not just some, to qualify as an independent contractor; and several of the new factors will be almost impossible for a hiring contractor to verify.

The rigors of the new fourteen-factor test—particularly when combined with the law’s provision that a subcontractor’s employees will be considered the employees of the general contractor unless the subcontractor meets all of the requirements of the fourteen-factor test—warrant concern for many reasons:

• •  A contractor, as a practical matter, may not be able to assure downstream compliance with the law such that its subcontractor’s employees don’t become its employees.

• •  A contractor could be subject to costly stop-work orders by the Minnesota Department of Labor and Industry (“DOLI”)—permitted under an amended Minn. Stat. § 326B.082, subd. 10—for inadvertent misclassifications caused by its subcontractor’s failure to maintain independent-contractor status throughout the course of an entire project.

• •  A contractor involved in public projects may have its status as a “responsible contractor” revoked for unknowing or accidental violations of the new fourteen-part test, whether caused by the contractor or its subcontractors.

As if each of these potential pitfalls wasn’t worrisome enough, add to them one more potential problem: Accidental or unknowing violations of the new fourteen-part test under Minn. Stat. § 181.723 could expose contractors to liability under the new Minnesota Paid Leave Law.

The Minnesota Paid Leave Law (“MPLL”)—signed into law by Gov. Tim Walz in 2023 and largely codified at Minn. Stat. § 268B.01, et seq.—created a state-run insurance program to provide Minnesota workers with up to 20 weeks per year of paid time off to deal with family or medical issues. The program will be funded by through premiums (i.e., taxes) on employee wages, split between the employer and employee. The premiums themselves are calculated using quarterly employee wage data that employers are required to submit to the Minnesota Department of Employment and Economic Development (“DEED”). Among other data, an employer’s quarterly report “must include for each employee in covered employment . . . the employee’s name, the total wages paid to the employee, and the total number of paid hours worked.”

Although this reporting requirement may not raise alarms when reviewed superficially, concerns may arise when the MPLL’s broad definitions of “employee,” “employer,” and “covered employment” are examined more closely. Under the MPLL, “employee” is defined as any “individual who performs services of whatever nature for an employer.” In turn, “employer” is defined simply as “any . . . entity . . . having an individual in covered employment.” The MPLL then goes on to define “covered employment” as “performing services of whatever nature, unlimited by the relationship of master and servant known to the common law, or any other legal relationship[,] for wages or under any contract calling for the performance of services.” These definitions thus work to create a broad general reporting (and premium-payment) obligation for employers with respect to any individual engaged in any service of any nature to the employer—regardless of whether or not the relationship between the employer and individual would, traditionally speaking, be thought of as an employer-employee or master-servant relationship.

Of course, exceptions apply—one of which is an exception for “independent contractors” who, under the MPLL, are not considered an “employee” and not considered as engaging in “covered employment.” Although this exception may comfort some, the comfort it offers to employers in the construction industry may be cold, depending on how the MPLL is ultimately applied by program administrators. This is because the MPLL, in defining “independent contractor,” simply incorporates the existing statutory test or definition made applicable to an occupation or industry elsewhere in the law. For the construction industry, this means the independent-contractor test established under Minn. Stat. § 181.723, subd. 4. 

As noted above, the coming amendments to Minn. Stat. § 181.723 create a situation in which a contractor’s subcontractor’s employees could be deemed the employees of the contractor if the subcontractor fails the fourteen-factor independent contractor test. If that were to happen, it could give rise to a situation where a contractor inadvertently or unknowingly misreports quarterly wage data under the MPLL because, at the time of reporting, it did not (and arguably could not) know that its subcontractor’s employees were actually its employees. Such misreporting—even if subsequently corrected—can expose the employer to several financial and legal risks, including, among other things, the imposition by DEED of per-employee late fees and per-employee administrative fees (including late fees of up to 2% of the total wages for an employee whose data goes completely unreported). Additionally, because an employer’s premium payments are calculated using the employer’s quarterly wage reports, an employer that inadvertently reports incorrect information could face surprise premium assessments when the error is discovered. An employer’s failure to pay any amount due under the MPLL also exposes the employer to automatic liens, levies, and civil lawsuits by the State.

In light of this possibility, and to allay the fears of construction industry participants, administrators of the paid leave program may point to the MPLL’s statement that whether an individual is an independent contractor or not is determined by the “Minnesota statute or rule applicable . . . as of the date of enactment of [the MPLL]”—i.e., in the construction industry, the soon-to-be defunct nine-part independent-contractor test would continue to govern who qualifies as an independent contractor under the MPLL. But, at best, this will simply create a dual regime requiring construction-industry employers to maintain one foot in the past for purposes of MPLL compliance, while simultaneously keeping up with separate independent-contractor requirements elsewhere. At worst, aggressive administrators could argue that Minn. Stat. § 181.723, subd. 4, already existed and governed the construction industry when the MPLL was enacted, and that it is this general statutory rule—and not the specific substance of the rule at any given point in time—that governs.

Program administrators may also point to the new fourteen-factor independent-contractor test itself and note that a subcontractor’s employees will not be deemed a contractor’s employees if the contractor can show that the subcontractor “classifies the individual as an employee for purposes of . . . [chapter] 268B”—i.e., the MPLL. But this, too, may be of little help to concerned contractors if their subcontractors, outside of the contractor’s control, fail to properly report their employees for MPLL purposes.

Given the exposure to fees, surprise premium payments, liens, levies, and lawsuits that improper reporting can create under the MPLL—and uncertainty in precisely how adminstrators will interpret and apply the law—contractors engaging with subcontractors should review the newly-enacted MPLL along with the current and future independent-contractor tests imposed under Minn. Stat. § 181.723; and they should take steps to minimize the risk of incurring inadvertent liability for misreporting employee data under the MPLL. A logical first step will be to review contracts with downstream contractors to ensure—to the greatest degree possible—that the downstream contractors meet all potentially applicable independent contactor tests and fulfill their separate obligations under the MPLL. If you have questions about how best to review your contracts or business processes for this kind of compliance, please contact Fabyanske, Westra, Hart & Thomson’s experienced construction attorneys.

Announcements

Hugh Brown was appointed to the Steering Committee of Division 10 of the American Bar Association’s Forum on Construction Law.  The mission of Division 10, whose formal name is “Infrastructure, Energy and the Environment,” is to provide education, resources and a forum to discuss infrastructure, energy and environmental aspects of construction projects and related solutions and strategies. For more information click here.

Dean Thomson was selected by Finance and Commerce and Minnesota Lawyer as a 2024 Legal Icon honoree for his contributions to the community and the profession. For more information click here.

Congratulations to the seven attorneys from Fabyanske, Westra, Hart & Thomson, P.A. who have been named 2024 “Minnesota Super Lawyers”. The polling, researching, and selecting of “Super Lawyers” is designed to identify Minnesota lawyers who have attained a high degree of peer recognition and professional achievement. Only five percent of Minnesota attorneys receive this honor. FWHT’s 2024 “Minnesota Super Lawyers” include Mark Becker, Matt Collins, Julia Douglass, Gary Eidson, Kyle Hart, Jesse Orman, and Dean Thomson.  Dean Thomson was also selected as a Top 100 “Super Lawyer”. For more information click here.

This discussion is generalized in nature and should not be considered a substitute for professional advice. © 2024 FWH&T