New Minnesota Independent Contractor Rule Penalties Taking Effect

July 3, 2024

2024 law could bring big changes to your workforce over the next year

New Minnesota Independent Contractor Rule Penalties Taking Effect

Earlier this year, the Minnesota Legislature passed new regulations and penalties on the use of independent contractors. Notably, the law significantly expands penalties for misclassification of workers as independent contractors and overhauls the independent contractor test for the construction industry. NFIB vigorously opposed the new law, and we were successful in rolling back some of the most egregious terms. However, we continue to believe the law as passed will have a detrimental impact on small businesses in our state, particularly those in the construction industry. We took a brief look at these changes in the second volume of our 2024 Minnesota Legislative Recap, but this post goes into greater detail about the changes coming to every industry in the state. For more information on Independent Contractors, check out the NFIB Small Business Legal Center’s Guide to Independent Contractors. This is part of a series on common legal issues for small businesses. Effective July 1, 2024, employers in all industries are subject to substantially increased penalties for worker misclassification, including the following (Minn. Stat. 181.722):

Compensatory damages to the worker, such as the difference between what the worker would’ve been paid under the applicable minimum wage, overtime owed to the worker as an employee, shift differentials, vacation and sick pay, health insurance, the value of other employee benefits, and Unemployment Insurance, Social Security, and Medicare taxes.
A penalty of up to $10,000 per person for the failure to properly classify a worker under the applicable unemployment insurance or workers’ compensation test.
A penalty of up to $10,000 for each failure to follow applicable local, state, or federal laws governing worker classification.
A penalty of $1,000 for each instance of obstructing DLI investigations into alleged worker misclassification violations.

In addition, the law imposes individual liability on an owner, partner, principal, member, officer, or agent who “knowingly or repeatedly” violates any local, state, or federal worker classification law. “Knowingly” is defined as a person knew or could have known that a violation was occurring. The general industry penalties above are also repeated in state laws that apply to construction firms. Further, the law clarifies that any Minnesota Department of Labor and Industry (DLI) order imposed for worker misclassification violations applies to a successor entity or person. What constitutes a successor entity is determined by meeting three or more of seven criteria in the law. The general industry successor entity test can be found in Minn. Stat. 181.722, Subd. 1 (c) and the construction industry successor entity test is found in Minn. Stat. 181.723. Finally, the law establishes an “Intergovernmental Misclassification Enforcement and Education Partnership” to more consistently and aggressively enforce laws in this area. The partnership consists of the Minnesota Attorney General’s Office, DLI, Minnesota Department of Revenue, Minnesota Department of Employment and Economic Development, and Minnesota Department of Commerce. NFIB members have expressed a need for more consistent guidance and enforcement of misclassification laws across state agencies, but we have serious reservations about the lack of transparency and accountability in this new partnership. Effective March 1, 2025: The new law makes significant revisions to the construction industry worker classification test, which will take effect next year. The test transforms from nine factors to 14 factors, which are copied in full below. Some of the sections are carried over from the nine-factor test that was found in Minnesota Statutes and Rules, but there are several notable new requirements: Tax Forms. Independent Contractors will have to demonstrate that they’ve received 1099 forms for construction or improvement services, have filed business or self-employment income tax returns, and has completed and provided a W-9 tax form to the person for whom the services were performed. The statute does not make clear how an IC or a contracting entity should demonstrate compliance with this requirement. We expect DLI to offer guidance prior to 3/1/2025. Written Contracts. Contracting entities and independent contractors must work on a written and signed agreement (excluding change orders). Materials/Equipment. The new test places greater emphasis on the independent contractor furnishing their own (by purchase, rent or lease) equipment, tools, vehicles, materials, supplies, office space, or other facilities used to perform building construction or improvement services. In addition, the new law gives the Minnesota Department of Labor and Industry (DLI) greater authority to issue stop work orders for worker classification violations. Most significantly, DLI can issue a stop work order for all job sites of an employer alleged to have committed a classification violation, not just the job site(s) where the alleged violation is occurring. This new power has the potential to grind construction to a halt in our state. For more about the 2024 Independent Contractor Law here, check out the brief prepared by Minnesota-based attorneys at Littler Mendelson. NEW CONSTRUCTION INDUSTRY WORKER CLASSIFICATION TEST (Effective 3/1/2025. Underline = New Language Passed in 2024) (a) An individual is an independent contractor and not an employee of the person for whom the individual is providing or performing services in the course of the person’s trade, business, profession, or occupation 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. (b)(1) Any individual providing or performing the services as or for a business entity is an employee of the person who engaged the business entity, unless the business entity meets all of the requirements under subdivision 4, paragraph (a). (2) Any individual who is determined to be the person’s employee is acting as an agent of and in the interest of the person when engaging any other individual or business entity to provide or perform any portion of the services that the business entity was engaged by the person to provide or perform. (3) Any individual engaged by an employee of the person, at any tier under the person, is also the person’s employee, unless the individual is providing or performing the services as or for a business entity that meets the requirements of subdivision 4, paragraph (a). (4) Clauses (1) to (3) do not create an employee-employer relationship between a person and an individual if: (i) there is an intervening business entity in the contractual chain between the person and the individual that meets the requirements of subdivision 4, aragraph (a); or (ii) the person establishes that an intervening business entity treats and classifies the individual as an employee for purposes of, and in compliance with, chapters 176, 177, 181, 181A, 268, 268B, 270C, and 290.

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State:

Minnesota

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