In Minnesota, as in other states and with the federal government, employers who wrongly classify workers as independent contractors are subject to significant penalties, interest, and taxes. The 2024 legislature enacted a number of changes to the various statutes that discuss the classification of workers as independent contractors.

All Industries (Except Construction)

Outside of the construction industry, the Minnesota Department of Labor and Industry evaluates worker classification using the state’s tests outlined by the Workers Compensation statute and the Unemployment Compensation statute. Additionally, certain industries have differing tests integrated into the evaluation process.  The changes enacted by the 2024 legislature clarify that an employer can be found liable if they:

  1. Fail to classify or treat an individual who is an employee as an employee in accordance with the requirements of any applicable local, state, or federal law.
  2. Fail to report or disclose to any person or to any local, state, or federal government agency an individual who is the person’s employee when required to do so under any applicable local, state, or federal law.
  3. Require or request an individual who is the person’s employee to enter into an agreement that misclassifies or treats the individual as an independent contractor.

These new laws increase the penalties for each violation. An employer can now face a penalty of up to $10,000 for each violation. Additional penalties will be imposed for employers that, in addition to misclassifying a worker as an independent contractor, fail to report the individual as an employee to a state agency. Importantly, individual officers, partners, principals, and owners can be held personally liable for knowingly or repeatedly engaging in these violations. In addition, employers may be required to pay compensatory damages to each affected worker. Compensatory damages may include insurance, vacation pay, savings plans, and other employment benefits.

Construction Industry

Effective March 1, 2025, the nine-factor test which was previously in place for workers in the construction industry will be replaced with a new 14-factor test.

In the construction industry, an individual is an independent contractor and not an employee of the “person” (which may be a sole proprietor, limited liability company, corporation, or other legal entity) for whom the individual is providing or performing services only if, at the time the services were provided or performed, the individual is operating as a business entity that:

  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 building, construction or improvement services;
  3. Provides or offers to provide 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:
    1. Holds a federal employer ID number, if required by federal law;
    2. Holds a Minnesota tax ID number, if required by Minnesota law;
    3. Has received and retained 1099 forms for income received for building, construction or improvement services performed, if required by Minnesota or federal law;
    4. Has filed business or self-employment income tax returns including estimated tax filings with the federal IRS and the Minnesota Department of Revenue; and
    5. Has completed and provided a W-9 federal income tax form to the person for whom the services were provided, if required by federal law;
  5. Is in good standing with the Minnesota Secretary of State, if applicable;
  6. Has a Minnesota unemployment insurance account, if required by the Unemployment Compensation law;
  7. Has obtained required workers compensation insurance coverage, if required by the Workers Compensation statute;
  8. Holds current business licenses, registrations and certifications, if required by applicable statutes;
  9. Is operating under a written contract to provide or perform the specific services for the person that:
    1. Is signed and dated by both an authorized representative of the business entity and of the person for whom the services are being performed;
    2. If fully executed no later than 30 days after the date the work commences;
    3. Identifies the specific services to be performed under the contract;
    4. Provides for compensation from the person for the services provided under the contract on a commission or per job or competitive bid basis and not on any other basis; and
    5. The requirements of item b shall not apply to change orders;
  10. Submits invoices and receives payments for completion of the specific services performed under the written proposal, contract or change order in the name of the business entity;
  11. The terms of the written proposal, contract or change order provide the business entity control over the means of performing the specific services and the business entity in fact controls the performance of the specific services;
  12. Incurs the main expenses and costs relating 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 performed under the written proposal, contract or change order and is responsible for failure to complete the specific services; and
  14. May realize additional profit or suffer a loss if costs and expenses to 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.

The individual’s business must meet all 14 of these requirements for the worker to be properly classifiable as an independent contractor. The statute provides for significant damages, penalties (up to $10,000 for each individual misclassified as an independent contractor) and compensatory damages for each violation.

The new law makes general contractors potentially liable for a subcontractor’s misclassification of workers. A general contractor can be found liable for all misclassifications made by a subcontractor.

And finally, the Department of Labor will have increased enforcement powers, including the ability to stop a construction project. Having this authority means that the Department of Labor can order a business to cease operating at a workplace until the Commissioner finds that the employer has made all required payments and is now in compliance with applicable law.

What Does this Mean?

Companies face significantly higher penalties for misclassifying a worker. All employers using independent contractors should review their relationships to confirm its workers are properly classified. Additionally, although construction employers have until March 1, 2025, before the new 14-factor test becomes effective, construction companies should do the same review of their independent contractor relationships. If a worker or a company does not meet all 14 factors, they will be deemed an employee.