Minnesota has enacted legislation that amends state laws governing the misclassification of employees as independent contractors, including adopting further restrictions, larger penalties for misclassification, and a new test for the construction industry. The changes are a result of enactment of House File 5247.
The Details
All Industries Except Construction
Effective July 1, 2024, employers are expressly prohibited from:
1. Failing to classify, represent, or treat an individual as an employee in accordance with the requirements of any applicable local, state, or federal law.
2. Failing to report or disclose to any person or to any local, state, or federal government agency that an individual is an employee when required to do so under any applicable local, state, or federal law.
3. Requiring or requesting that an individual who is an employee enter into any agreement or complete any document that misclassifies, misrepresents, or treats the individual as an independent contractor or otherwise doesn’t reflect that the individual is their employee.
4. An owner, partner, principal, member, officer, or agent who knowingly engaged in any of these prohibited activities may be held individually liable.
Each misclassification of an employee as an independent contractor may be subject to a fine of up to $10,000. Each violation of the ban on the three activities above may result in another fine of up to $10,000.
For the purposes of this law, whether an individual is an employee or an independent contractor is determined using the same tests and in the same manner as employee status is determined under the applicable workers' compensation and unemployment insurance program laws and rules.
Construction Industry
Effective March 1, 2025, the construction industry must use a new 14-part test to determine whether an individual is an employee or independent contractor.
Under this test, an individual is an independent contractor 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:
· Was established and maintained separately from and independently of the person for whom the services were provided or performed;
· 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;
· 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;
· Is in compliance with all of the following:
o Holds a federal employer identification number if required by federal law;
o Holds a Minnesota tax identification number if required by Minnesota law;
o 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;
o 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
o 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; · Is in good standing as defined by section 5.26, if applicable;
· Has a Minnesota unemployment insurance account if required;
· Has obtained required workers' compensation insurance coverage if required;
· Holds current business licenses, registrations, and certifications if required;
· Is operating under a written contract to provide or perform the specific services for the person that:
o 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;
o Is fully executed no later than 30 days after the date work commences (this provision doesn’t apply to change orders);
o Identifies the specific services to be provided or performed under the contract; and
o 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;
· 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 don’t meet this requirement;
· 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;
· Incurs the main expenses and costs related to providing or performing the specific services under the written proposal, contract, or change order;
· 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
· 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.
Construction industry employers that classify or treat an individual as an independent contractor must maintain, for at least three years, all the information and documentation upon which the person based the determination that the individual met all the requirements of the 14-part test at the time the individual was engaged and at the time the services were provided or performed.
The construction industry is also subject to the ban on the three activities noted above that applies to other industries. Additionally, the construction industry is prohibited from:
· As a condition of payment for services provided or performed, requiring an individual who is an employee to register as a construction contractor, or to adopt or agree to being classified, represented, or treated as an independent contractor.
· Requiring an individual who is an employee to register as a construction contractor.
An owner, partner, principal, member, officer, or agent who knowingly engaged in any of the prohibited activities may be held individually liable.
Each misclassification of an employee as an independent contractor under the test above may be subject to a fine of up to $10,000. Each violation of the ban on the five activities above may result in another fine of up to $10,000.
Next Steps
Review policies and practices to ensure compliance with House File 5247.