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Business Owners: Are You Misclassifying Your Workforce?

Business owners misclassifying their employees as independent contractors is a common issue, arising frequently in Minnesota and elsewhere. By following the guidelines outlined below, your business can avoid having to face some expensive headaches in this area of law.

Generally, an individual is considered an employee when an employer controls how, when, and where they work. The employee is told what hours to work and is provided the tools or equipment for the work. In essence, the employee performs work under the supervision of the employer in an effort to advance their employer’s business. Further, most employees can terminate their employment anytime without any penalty from their employer, and vice versa.

By contrast, true independent contractors generally determine when, where, and how they work. They have the ability to hire their own employees or workforce to help with their work, are compensated for the job (rather than an ongoing, per-hour basis, as would be expected for an employee), and provide their own tools needed for the job. Unlike employees, independent contractors performing a job, typically based on some form of contract or agreement, cannot unilaterally terminate that relationship without incurring some penalty.

Employee vs. Independent Contractor Legal Test In Minnesota

Misclassification occurs in all industries, but is most frequently found in the construction, trucking, janitorial or housekeeping services, homecare agencies, sales positions, some commission-only positions, and, in recent years, the “gig” economy. Here in Minnesota, Courts use different tests, depending on the industry, to assess whether an individual is an employee or an independent contractor. For example, the construction, trucking, and messenger/courier industries have their own respective tests, while other occupations or industries use a general set of factors. The following are the test/factors used in Minnesota, depending on the industry involved:

Five-Factor Test for Most Industries

  1. The right to control the means and manner of performance;
  2. The mode of payment;
  3. The furnishing of material or tools;
  4. The control of the premises where the work is done; and
  5. The right of the employer to discharge.

Of these five factors, the most important factor (although the others are important and considered as well) is the right to control the means and manner of performance.  Control plays a pivotal role in the analysis because it is at the core of the employer-employee relationship. Control speaks to whether the individual classified and an employee can, for example, go to work  whenever they want and/or work for multiple businesses or employers (even competitors) doing the same thing. Importantly, these factors pertain to issues litigated in Minnesota, under Minnesota state law. If an employee, for example, makes a claim under federal laws or statues, that claim would implicate laws such as the Fair Labor Standards Act or Title VII of the Civil Rights Act. These federal laws contain different, but broadly similar, sets of factors on the issue.

Finally, no matter what law applies, simply labeling someone as an independent contractor or having a contract stating so is not determinative of their true status. The employee or independent relationship is determined by law, not by private contract.

Construction Industry: Nine-Element Test (Minnesota Statutes Section 181.723)

In the construction industry, an individual is considered an independent contractor and not an employee only if the individual:

  1. maintains a separate business with the individual’s own office, equipment, materials, and other facilities;
  2. (i) holds or has applied for a federal employer identification number or (ii) has filed business or self-employment income tax returns with the federal Internal Revenue Service if the individual has performed services in the previous year;
  3. is operating under contract to perform the specific services for the person for specific amounts of money and under which the individual controls the means of performing the services;
  4. is incurring the main expenses related to the services that the individual is performing for the person under the contract;
  5. is responsible for the satisfactory completion of the services that the individual has contracted to perform for the person and is liable for a failure to complete the services;
  6. receives compensation from the person for the services performed under the contract on a commission or per-job or competitive bid basis and not on any other basis;
  7. may realize a profit or suffer a loss under the contract to perform services for the person;
  8. has continuing or recurring business liabilities or obligations; and
  9. the success or failure of the individual’s business depends on the relationship of business receipts to expenditures.

Although not listed as one of the elements, there is sometime a registration requirement under Minnesota Statutes Section 326B.701. Any individual who is not registered, if required by section 326B.701, is presumed to be an employee. However, this presumption is rebuttable if it is shown that the would be employee met all nine elements above at the time services were performed.

Trucking and Messenger/Courier Industry: Seven-Element Test (Minnesota Statutes Section 176.043)

Within the trucking industry, an individual operating a car, van, truck, tractor, or a truck-tractor licensed and registered by a governmental motor vehicle agency is an employee unless each of the following elements are present:

  1. the individual owns the equipment or holds it under a bona fide lease arrangement;
  2. the individual is responsible for the maintenance of the equipment;
  3. the individual is responsible for the operating costs, including fuel, repairs, supplies, vehicle insurance, and personal expenses. The individual may be paid the carrier’s fuel surcharge and incidental costs, including, but not limited to, tolls, permits, and lumper fees;
  4. the individual is responsible for supplying the necessary personal services to operate the equipment;
  5. the individual’s compensation is based on factors related to the work performed, such as a percentage of any schedule of rates, and not on the basis of the hours or time expended;
  6. the individual substantially controls the means and manner of performing the services, in conformance with regulatory requirements and specifications of the shipper; and
  7. the individual enters into a written contract that specifies the relationship to be that of an independent contractor and not that of an employee.

Why Knowing the Difference Is Important For Your Business

Not knowing the legal difference between an employee and an independent contractor can have severe legal consequences and penalties. Legal consequences can be lawsuits from workers (individually or through class or collective actions). Business owners can also face legal consequences through governmental investigations resulting in server penalties. Penalties for misclassifications may include penalties for failure to provide or have workers’ compensation insurance (under Minnesota, unless an employer is excluded, employers must provider workers compensation liability insurance. Penalties for non-compliance can be up to $1,000 per employee per week during the time an employer was not in compliance), tax penalties, penalties for not paying unemployment insurance, wage issues (e.g. not paying at least minimum wage; recordkeeping penalties for failure to provide certain required notices) and penalties for violating other state or federal employment statutes and regulations.

Additionally, Minnesota governmental agencies such as the Minnesota Attorney General (broad authority to investigate violations of Minnesota’s wage-related laws, including worker misclassification); the Department of Labor and Industry (authority to investigate violations of and enforce wage related issues as well as enforce the workers’ compensation insurance requirement under the department’s Special Compensation Fund division); the Department of Employment and Economic Development (enforces worker misclassification laws as part of its authority to administer the unemployment insurance program); and the Minnesota Department of Revenue (authority to enforce employers’ compliance with tax issues) have authority to investigate your business.

Investigations by these agencies can be overwhelming to employers, requiring the investment of time, effort, and resources to adequately address them. Worse still, the liability can often extend to individual business owners in their personal capacity, even if the owner has a limited liability entity in place. Thus, the best course of action is to take care that your workforce is properly classified at the front end, particularly if your business relies heavily on independent contractors to handle its operations.

To learn more about employee and independent contractor classifications, or if you have other employment and labor law questions or issues, Daniel K. Asiedu can be reached at [email protected] or by calling (952) 746-2137. Hellmuth & Johnson’s Employment Law Attorneys can be reached at (952) 941-4005.