Minnesota is taking a strong approach to combating the ongoing misclassification of workers as independent contractors, rather than true employees. New legislation took effect on July 1, 2024, in the form of amended Minn. Stat. § 181.722, which (1) prohibits misclassification of workers; (2) identifies clear tests for classifying workers; and (3) imposes strict and broad liability for misclassification. This article reviews key components of the new law and steps to minimize liability exposure.
Misclassification of Workers Prohibited
Employers always faced potential liability for improperly classifying workers as independent contractors. The difference is there was not an explicit law imposing liability solely for misclassification of non-construction employees, absent repeat or willful misclassification and involvement of the Minnesota Department of Labor and Industry (MNDOLI). The law prohibited an employer’s misrepresentation of “the nature of its employment relationship with its employees,” but provided limited remedies to misclassified construction workers.[1] The MNDOLI otherwise had authority to issue a compliance order against employer misclassifying employees and, in the event of repeated or willful misclassification impose civil penalties up to $1,000 per violation and employee.[2] Absent MNDOLI involvement, liability primarily stemmed from the employer’s failure to provide the misclassified worker with rights afforded to employees or the imposition of liability on the employer for a worker’s actions that the employer improperly classified as an independent contractor. Examples of the liability exposure that already existed with misclassified workers includes, but is not limited to, liability for: violation of minimum wage and overtime; failure to provide statutory leave, worker’s compensation benefits, and reasonable accommodations; and taxes.
As of July 1, 2024, Minn. Stat. § 181.722, makes it is unlawful for any person to:
- Misclassify a worker as an independent contractor;
- Treat or represent a worker determined by law to be an employee as anything other than an employee;
- Fail to report or disclose any worker as an employee when such report or disclosure is required by applicable law and the law determines the worker is an employee; and
- Request or require any worker determined by law to be an employee to enter into any agreement or complete any document that misclassifies, misrepresents or treats.
(individually and collectively, “Misclassifying Activities”). The prohibition expands beyond just the employer as an entity.
Individual and Successor Liability for Misclassification of Workers
By the use of the term “person” in the prohibition, the legislature establishes that it is unlawful for any individual to engage in these Misclassifying Activities. Any person (irrespective of their status as the employer or an owner, officer, agent, or just someone working on the employer’s behalf) that “knowingly or repeatedly” engages in any Misclassifying Activities may be individually liable for the unlawful practices. An individual is deemed to knowingly engage in unlawful Misclassifying Activities when the individual “knew or could have known with the exercise of reasonable diligence” that the worker constituted an employee under applicable law.[3] This would include, but is not limited to, human resources professionals and payroll personnel handling payroll and reporting requirements to government agencies regarding employees.
Persons engaging in Misclassifying Activities may be individually liable for:
- Compensatory damages;[4]
- Penalties up to $10,000 per misclassified worker and individual represented or improperly treated as anything other than an employee;
- Penalties up to $10,000 per Misclassifying Activities; and
- Daily $1,000 penalties for delaying, obstructing or otherwise failing to cooperate with MNDOLI’s investigation of Misclassifying Activities.
Employers cannot obviate liability by dissolving their business entity following the issuance of an MNDOLI order for Misclassifying Activities. The new law establishes successor liability that attaches to any successor.[5] Further, employees have the right to file a lawsuit against any person engaging in Misclassifying Activities.[6]
Proper Classification of Employees
The new law also clarifies the proper tests to be used when determining a worker’s status as an employee or independent contractor. Except for construction employees,[7] the worker’s status for purposes of this law shall be determined according to the tests established under the Minnesota’s unemployment insurance and worker’s compensation laws and rules. Those tests are set forth in Minn. Admin. Rules 3315.0555 and chapter 5224.
Determining a worker’s status under the Minnesota unemployment insurance program requires the evaluation of five factors of the worker and employing entity’s relationship: (1) the right or lack of the right to control the means and manner of performance; (2) the right to discharge the worker without incurring liability; (3) the mode of payment; (4) furnishing of materials and tools; and (5) control over the premises where the services are performed. Minn. Admin. Rule 3315.0555, subp. 1. The first two factors are most important. When the employing entity has the right to control performance and discharge without liability those factors favor the finding of an employee-employer relationship. Likewise, the payment of a worker on a schedule without invoicing, furnishing the worker’s materials and tools, and having control over the premises where the individual performs work all arrangements that generally exist in employee-employer relationships.
Administrative tests established under Minnesota’s worker’s compensation program are instructive and provide several safe harbors for employers classifying workers in certain occupations. Minn. Admin. Rules 5224.0020 through 5224.0312, provide itemized criteria for identifying independent contractors and employees in the following occupations: artisans, barbers, bookkeepers, accountants, bulk oil plant operators, collectors, consultants, domestic service, babysitters, industrial homeworkers, laborers, cooperative orchestra musicians and leader, traveling and house-to-house salespeople, agent drivers, photographers’ models, professional occupations requiring a level of education and compliance with certain licensing or registration standards, doctors and nurses, real estate and securities salespeople, taxi drivers, timber fellers and related workers, sawmill operators, variety entertainers, sports officials, jockeys, and certain licensed horse trainers.
Employers seeking to determine the status of non-construction workers performing services in occupations not identified in the safe harbor administrative rules (Minn. Admin. Rules 5224.0020 through 5224.0312), shall analyze the following factors to determine whether the worker provides services as an independent contractor or employee:
- Control over the method and manner of services performed.
- Right to discharge.
- Availability of the worker’s services to the public.
- Manner of payment (e.g. per job or by the hour, week, or month).
- Realization of profit or loss resulting from services provided.
- Termination with or without consequence.
- Worker’s substantial investment to perform services versus purported employer’s furnishment of such items.
Detailed illustration of each factor in the administrative rules help employers understand which circumstances are more indicative of an employee-employer relationship than the use of an independent contractor’s services. “The more control there is the more likely the person is an employee and not an independent contractor.”[8] Minn. Admin. R. 5224.0330 is instructive in outlining criteria and circumstances evidencing the purported employer’s level of control. These administrative rules create a full picture and clear guideposts for properly classifying non-construction workers as employees or independent contractors. A separate listing of criteria and requirements for the classification of construction workers as independent contractors is set forth in Minn. Stat. § 181.723, subd. 4, to take effect on March 1, 2025.
Employers and their agents should be mindful of how workers are classified. Titles used and even written agreements referring to a worker as an “independent contractor” are not controlling in the determination of the worker’s classification. To minimize liability exposure employers should take precautions and analyze these tests before classifying any worker as an independent contractor.
Nothing in this article should be construed as legal advice. The article serves to highlight the prohibitions against misclassification of non-construction workers, related damages and penalties, and the legal tests for classifying such workers. Employers are encouraged to review this guidance and consult with a Gislason & Hunter LLP attorney to ensure best practices are used.
[1] Minn. Stat. § 181.722, subd. 4 (“A construction worker . . . who is not an independent contractor and has been injured by a violation of this section [181.722], may bring a civil action against the violator.”) (2023).
[2] Minn. Stat. § 177.27, subd. 7.
[3] Minn. Stat. § 181.722, subd. 1a(e).
[4] “Compensatory damages includes but is not limited to the value of supplemental pay including minimum wage; overtime; shift differentials; vacation pay, sick pay, and other forms of paid time off; health insurance; life and disability insurance; retirement plans; savings plans and any other form of benefit; employer contributions to unemployment insurance; Social Security and Medicare; and any costs and expenses incurred by the individual resulting from the person’s failure to classify, represent, or treat the individual as an employee[.]” Minn. Stat. § 181.722, subd. 1a, subd. 4(a)(1).
[5] A successor is broadly defined in Minn. Stat. § 181.722, subd. 1(c).
[6] Minn. Stat. § 181.171, subd. 1.
[7] A construction employee is “an individual who provides or performs building construction or improvement services for a person that are in the course of the person’s trade, business, profession, or occupation” and is not “an individual operating as a business entity that meets all” of the requirements of an independent contractor itemized in Minn. Stat. § 181.723, subd. 4 at the time services are performed or provided. Minn. Stat. § 181.723, subd. 3.
[8] Minn. Admin. R. 5224.0330, subp. 1.
