Minnesota recently enacted a new rule governing contractors and employees. This rule took effect on July 1, 2024.
These new regulations will primarily impact employees in the construction industry and contractors that operate in this sector. If you misclassify employees as independent contractors, you could incur severe penalties and reputational damage.
Repeat offenders could incur personal liability. Therefore, you must familiarize yourself with what’s changing and what’s remaining the same so you can make sure workers are classified appropriately. Here’s what you need to know.
Fine Amounts Got Steeper
Minnesota increased the fines for contractor misclassification violations. These increases apply to both construction and general workers. If your business misclassifies workers, it can incur a fine of up to $10,000 per violation.
That’s not all. You could also incur personal liability for repeat violations. This means that the state could fine you directly, and misclassified workers may have grounds to file a lawsuit. Even a single lawsuit could cost your business tens of thousands in legal fees and tarnish your reputation.
What About the Five-Factor Test?
Minnesota will continue to use the five-factor test to determine whether a non-construction worker is an employee or an independent contractor. You should consider the following variables to determine how to classify a worker:
- Control over the means and manner of performance
- Mode of payment
- Furnishing of tools and materials
- Control over the location where the work was done
- Right of discharge
The Minnesota Department of Labor and Industry (DOLI) has established 34 different industry-specific tests for workers’ comp purposes. These tests are used to determine whether a person is eligible for workers’ comp benefits in the event of an injury.
It’s a good idea to consult with a legal professional to ensure that you are in compliance with state laws. Failing to classify workers correctly can lead to significant financial penalties and reputational damage.
The New 14-Factor Test
The construction industry will face the most significant changes as a result of the new rule. DOLI replaced the existing 9-factor test with a 14-factor variant that draws attention to the timing of the services provided. This new test introduces more specific rules regarding business registration and tax reporting.
To quality as an independent contractor, the person must:
- Establish and maintain a separate business from the person who received the services
- Own, rent, or lease tools and equipment to perform construction services
- Provide construction services to multiple persons
- Hold federal and Minnesota tax identification numbers, file business or self-employment income tax returns, and receive 1099 forms
- Be in good standing with DOLI
- Have a Minnesota unemployment insurance account (if required by law)
- Obtain workers’ comp insurance
- Hold current business licenses and certifications
- Operate under a written contract
- Submit invoices and receive payments
- Retain control over the means of providing specified services
- Incur the main expenses and costs
- Assume responsibility for the completion of services
- Be able to realize additional profit or suffer a loss
These additional provisions also specify that the worker must meet all of these conditions at the time they provide services. This change to the law’s verbiage is especially important because it makes misclassification an ongoing concern throughout the project.
Suppose that you hire a subcontractor to remodel a kitchen. If they fail to renew any state-mandated licenses during the project, the worker will no longer meet all 14 criteria of an independent contractor. Therefore, you must do your part to ensure that all subcontractors remain compliant with the new law.
How You Can Stay Compliant
You must be proactive about maintaining compliance with the new rules. Regularly review worker classifications and all relevant paperwork to verify that they meet the criteria of the 14-factor test. Make sure your contracts and tax reporting practices meet the new requirements as well.
If you’re unsure about how these changes will impact your business, Zabel & Co. can help. Our team of consulting professionals can identify key areas of concern and implement strategies to mitigate risks of non-compliance. Contact our team today, and let’s chat about your workforce management needs.