SF4934

Purpose

This bill changes how Minnesota defines and treats independent contractors in the building construction and improvement industry. It tightens the criteria for someone to be considered an independent contractor, strengthens rules against misclassifying workers as independent contractors, and increases enforcement and penalties for violations. The goal is to ensure workers are properly classified as employees when required and to reduce misclassification in contractor relationships.

Main provisions and what the bill seeks to accomplish

• Definition of independent contractor (Subdivision 4):
  • A person can be an independent contractor only if they operate as a business entity that shows:
  • It is separate from and independent of the client.
  • It owns or leases equipment, tools, vehicles, materials, supplies, office space, or other facilities used to provide services.
  • It offers building construction or improvement services to multiple clients or the general public.
  • It complies with a detailed set of requirements (see below).
  • The entity must meet all of these items:
  • Holds or has applied for federal Employer Identification Number (EIN) and Minnesota tax ID if required.
  • Receives 1099 forms for income from services if required.
  • Files business or self-employment tax returns with the IRS and Minnesota Department of Revenue for the prior 12 months.
  • Provides a W-9 form to the client if required.
  • Is in good standing with the Secretary of State, has unemployment insurance account if required, and workers’ compensation coverage if required.
  • Holds required licenses, registrations, and certifications.
  • Operates under a written contract signed by both sides, executed within 30 days after work begins, and specifies the services, compensation basis (commission, per job, competitive bid, or time-and-materials), and other contract terms.
  • Submits invoices and receives payments in the name of the business entity (cash payments do not count).
  • The contract gives the business entity control over the means of providing the services and actually controls the provision of services.
  • Incurs the main expenses related to providing the services.
  • Is responsible for completing the services and for failure to complete them.
  • Has the potential for profit or loss based on costs and compensation, and the entity’s financial risk is tied to receipts vs. expenditures.
• Employee status and tiered involvement (Subdivision 4):
  • Anyone providing services under a person’s engagement is an employee unless the business entity meets all the independent-contractor criteria.
  • Anyone engaged by an employee at any tier is also an employee unless the intermediary entity meets the independent-contractor requirements.
• Intervening business entities (Subdivision 4):
  • No employee-employer relationship is created if an intervening entity in the contractual chain meets the independent-contractor criteria.
  • Alternatively, if the client can show the intervening entity treats the worker as an employee for purposes of specified labor and employment laws, the employee-employer relationship may still not be created.
• Prohibited activities related to independent contractor status (Section 2, Subd. 7):
  • A person cannot represent themselves as an independent contractor unless they meet the independent-contractor criteria.
  • A client cannot require an employee to register as a construction contractor or adopt/classify themselves as an independent contractor.
  • Misclassifying an employee as an independent contractor or failing to classify/report employees under applicable laws is prohibited, with separate violations for each instance.
  • It is illegal to require an employee to sign any agreement or document that misclassifies them as an independent contractor.
  • Employers must maintain and produce documentation for at least three years showing why a worker did or did not meet the independent-contractor criteria if requested by the commissioner.
  • Owners, partners, principals, officers, or agents who engaged in prohibited activities can be held personally liable.
  • The commissioner can issue orders, and a “successor person” (someone who shares a substantial connection with the previous violator) can be held liable as well.
  • Violations carry significant penalties, including:
  • Compensatory damages to the employee (including benefits the worker would have received as an employee).
  • Up to $10,000 for each individual misclassified.
  • Up to $10,000 for each violation of the subsection.
  • Up to $1,000 for delays, obstruction, or failure to cooperate with the investigation (each day counts as a separate violation).
• Recordkeeping and monitoring:
  • If an individual is classified as an independent contractor, the employer must keep detailed information for at least three years to show how the worker met the criteria.
• Enforcement framework:
  • The commissioner has authority to investigate under state law and may issue orders for violations.
  • The bill creates a potential for ongoing liability through successor relationships and ongoing enforcement.

Significant changes to existing law

• Replaces the prior flexible or broad interpretation of independent contractor status with a stringent, criteria-based test tied to specific business practices and documentation.
• Inserts a comprehensive written-contract requirement with explicit terms and control standards.
• Expands the scope of prohibitions and adds explicit penalties and damages for misclassification.
• Introduces potential personal liability for owners, partners, and officers who engage in prohibited activities.
• Strengthens enforcement by codifying recordkeeping and by defining a “successor person” for enforcement purposes.

Enforcement and penalties

• Penalties can include compensatory damages for benefits and wages that should have been provided, plus up to 10,000 per individual and per violation.
• Additional penalties for delays or obstruction of investigations (also per day).
• Personal liability for individuals in leadership or ownership roles who participated in prohibited activities.
• Enforcement may extend to successor entities connected by ownership, operation, or shared resources.

Practical impact and potential effects

• Clients and contractors may need to reassess worker classifications to ensure compliance with the new criteria.
• Businesses that previously relied on flexible subcontracting may shift to formalized contracts and documentation to demonstrate independent-contractor status.
• Increased administrative requirements, including more thorough recordkeeping and contract management.
• The bill could reduce misclassification of workers as independent contractors and increase protections for workers who should be classified as employees.

Relevant Terms - independent contractor - employee - building construction or improvement services - totality of the circumstances - written contract - control over the means of providing services - commissions, per job, time and materials - 1099 forms - EIN (federal employer identification number) - Minnesota tax identification number - W-9 form - unemployment insurance - workers’ compensation - Secretary of State (good standing) - licenses and certifications - intervention in contractual chain / intervening business entity - misclassification - representative or treated as an independent contractor - commissioner - penalty, damages, compensatory damages - successor person - documentation retention (three years)