Minnesota Employers Face Possible Liability for Using Independent Contractors

Gov. Tim Walz, D, has signed into law significant changes to Minnesota’s independent contractor and employment laws. Effective July 1, all employers, as well as their owners, risk significantly increased penalties for misclassifying employees as independent contractors. Construction industry employers should be especially vigilant in ensuring their independent contractors are properly classified. 

All Industries Except Construction

Classification tests: For all industries except construction, Minnesota’s Department of Labor and Industry (DOLI) uses the state’s workers’ compensation or unemployment compensation test to determine if a worker is an independent contractor or employee. These tests focus on five factors: 1) the right to control the means and manner of performance; 2) the mode of payment; 3) the furnishing of tools and materials; 4) control over the premises where the work was done; and 5) the right of discharge. For workers’ compensation, DOLI also refers to 34 different tests based upon the industry in which the individual works. See 5224 - MN Rules Chapter. Given these varying tests, determining whether an individual is properly classified is not always easy.

Types of general industry violations: Under the new law, all employers are subject to liability for: 1) failing to classify, represent or treat an individual as an employee under local, state or federal law; 2) failing to report or disclose a person as an employee to any local, state or federal government agency when required; or 3) requiring an individual who is an employee to enter into an agreement or complete any document that misclassifies an individual as an independent contractor.

Significantly higher penalties available in general industry: Effective July 1, employers may face penalties of up to $10,000 for each individual violation. As an example, if 100 employees were misclassified as independent contractors, DOLI could issue a fine of up to $1 million to the employer for the misclassifications. If the employer also failed to report the individuals as employees to a state agency, such as to the unemployment insurance division, it could face additional penalties. Individual owners, officers or agents who knowingly or repeatedly engage in any of the prohibited activities may also be held liable.

As a remedy for misclassification, DOLI may order the employer to pay compensatory damages to each affected worker in the form of: minimum wage, overtime, shift differentials, vacation pay, sick pay, health insurance, life and disability insurance, retirement plans, savings plans and other employment benefits, as well as employer contributions to unemployment, Social Security, and Medicare.

Construction Industry

New classification test: Effective March 1, 2025, determining whether a construction industry worker is an employee versus independent contractor will be based upon a new 14-factor test that focuses on the time at which the services were provided. 

Some new or clarified factors in the test could lead to unintended misclassifications. For instance, since the new test focuses on the time at which services are provided, a contractor could be found to have misclassified subcontractors who inadvertently allow their state required licenses, registrations or certifications to lapse. Similarly, if the contractor pays its subcontractors prior to receiving an invoice, it could be found to have misclassified the workers.

The new test requires that any written proposal, contract or change order provide that the business entity controls the means of providing the services and in fact, controls the provision or performance of the services. Further, the contract must be signed and dated by both an authorized representative of the business providing the service and the person for whom the services are provided, and provide for compensation on a commission, or per-job or competitive bid basis, not any other basis.

Types of construction industry violations: In addition to the types of general industry violations set forth above, construction contractors may also incur liability by: 1) misrepresenting themselves as independent contractors when they fail to meet the 14-factor test; 2) as a condition of payment, requiring an individual who is an employee to register with DOLI as a construction contractor or agree to be classified as an independent contractor; or 3) requiring an employee to register as a construction contractor.

Significant higher penalties available: In addition to the penalties available in general industry, construction contractors may also face penalties of up to $10,000 each time a person is misclassified under the 14-factor test or for each employee they require to register as a construction contractor. As with general industry, construction contractor owners, officers, or agents who knowingly or repeatedly engage in any of the prohibited activities may be held individually liable.

General contractor liability: Under the new law, general contractors also face increased liability for misclassifying workers. For instance, if a subcontractor fails to meet each of the 14 factors at the time the services were provided, all its employees will be considered employees of the business entity with whom it contracted. Additionally, if that business entity also fails to meet the 14-factor test and contracts directly with the general contractor, the general contractor will be liable for all misclassifications.

Stop orders: As of March 1, 2025, DOLI will have significantly enhanced enforcement powers, including the issuance of stop orders in the construction industry. With a stop order, DOLI may order a business to cease operating at one or more of its workplaces if DOLI determines the business violated one or more laws, including those related to misclassification. The stop order will remain in existence until the commissioner lifts it upon finding the business has come into compliance with applicable law and paid any damages and penalties.

What Now?

Employers operating in Minnesota should carefully evaluate whether the independent contractors with whom they conduct business are properly classified under state law. In particular, in the construction industry, contractors have until March 1, 2025, to review their business models and contracts to ensure that their subcontractors meet the new 14-factor test. With the new 14-factor test focused on the time at which the services were provided, construction contractors will want to be extra vigilant to ensure that their subcontractors’ registrations and licenses remain valid through the entire time when they are performing work for the contractor. Inadvertent lapses in registrations/licensure could lead to significant misclassification liabilities. 

Thomas R. Revnew and Kurt J. Erickson are attorneys with Littler in Minneapolis. © 2024 Littler. All rights reserved. Reposted with permission.