Important Contractor Update: Changes To Employment/Independent Contractor Laws

Many contractors have been closely monitoring the status of a bill that sought to dramatically expand the criteria regarding employee misclassification in the construction industry and add new penalties for incorrectly claiming workers as independent contractors.  Originally known as House File 4444 (“HF 4444”), this bill emerged with great momentum in early 2024, and for good reason caused concern in the construction industry.

HF 4444 was tabled in late April 2024, creating hope for many that the bill had lost traction and would not be passed in 2024.  However, in the waning final hours of the legislative session, lawmakers bundled numerous bills, including HF 4444, into one 1400-page “mega” bill and quickly pushed it through the House and the Senate without debate or discussion.  Therefore, as of July 1, 2024, construction contractors will be subject to much stricter criteria and penalties for employee misclassification.

Note that the new law still allows for a potential “safe harbor” for many contractors.  Historically many contractors have used subcontractors to perform labor on projects.  Under the prior law, if the subcontractor entity met all criteria to qualify as an independent contractor, then the prime contractor would not be responsible for subcontractor’s workers.  While the new law creates more extensive criteria to qualify as an independent contractor, the law still states that if the subcontractor meets all of the new criteria, then the prime contractor is not responsible for the subcontractor’s workers.  While it will be more difficult for subcontractors to satisfy all of the new criteria, the fact remains that if a prime contractor hires a subcontractor that does meet the criteria, the prime contractor will not be responsible if the subcontractor misclassifies its workers.

The default rule is that an individual construction worker is legally an employee of the party that hired that worker unless it can be proven that the worker, or a subcontractor who hired the worker, satisfies all of the new criteria.  All the new criteria must be true at the time the services were provided.  Note that a “person” means “any individual, sole proprietor, limited liability company, limited liability partnership, corporation, partnership, incorporated or unincorporated association, joint stock company, or any other legal or commercial entity.”  To be considered an independent contractor, the individual must operate a business entity and meet all of the following criteria

  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 or perform building construction or improvement services;
  3. 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;
  4. is in compliance with all of the following:
    • holds a federal employer identification number if required by federal law;
    • holds a Minnesota tax identification number if required by Minnesota law;
    • 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;
    • 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;
    • 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;

5. Is in good standing with the Minnesota Secretary of State;

6. Has a Minnesota unemployment insurance account if required by Minnesota law;

7. Has obtained workers’ compensation insurance coverage if required by
Minnesota law;

8. Holds current business licenses, registrations, and certifications as required by Minnesota law;

9. Is operating under a written contract to provide or perform the specific services for
the person that:

    • 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;
    • is fully executed no later than 30 days after the date work commences (this does not apply to change orders);
    • identifies the specific services to be provided or performed under the contract;
    • provides for compensation for the services provided under the contract on a commission or per-job or competitive bid basis and not on any other basis;

10. Submits invoices and receives payments for completion of the specific services
provided or performed under the written contract or change order in the name of the business entity. Payments made in cash do not meet this requirement;

11. The terms of the written 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;

12. Incurs the main expenses and costs related to providing the specific
services under the written contract or change order;

13. Is responsible for the completion of or failure to complete the specific services to be provided under the written contract or change order; and

14. May realize additional profit or suffer a loss, if costs and expenses to provide the specific services under the written contract or change order are less than or greater than the compensation provided under the written contract or change order.

If a subcontractor fails to meet all of the above criteria, then every worker of the subcontractor will be considered to be an employee of the prime contractorFurther, individual owners and officers of a contractor may be held personally liable if they “knowingly and repeatedly” allow their company to engage in any of the prohibited activities.  “Knowingly” means “knew or could have known with the exercise of reasonable diligence.”  Therefore, contractors can expect that when investigating potential worker misclassification, the State of Minnesota will also investigate the personal liability of the contractor’s owners and officers.

The new law also states that:

  1. A contractor may not require a worker to register with the Department of Labor as a condition to receiving payment, or require registration by a worker who is in fact an employee.
  2. Contractors must keep records proving compliance with all independent contractor criteria for a period of three years and be able to produce all such documentation to the Department of Labor upon demand.

If a contractor is found to have misclassified a worker, or to responsible for a subcontractor’s misclassified worker, they can be liable for the following:

  1. Compensatory damages to the misclassified worker, including but not limited to:
    • Value of supplemental pay including minimum wage;
    • Overtime;
    • Shift differentials;
    • Vacation pay;
    • Sick pay;
    • 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;
    • Any other costs and expenses incurred by the worker resulting from the contractor’s failure to “classify, represent, or treat the individual as an employee.”
    • A penalty of up to $10,000.00 for each misclassified worker.
    • A penalty of up to $10,000.00 for each violation of the law.
    • A penalty of $1,000.00 for any person who “delays, obstructs, or otherwise fails to cooperate with an investigation.” Each failure to cooperate constitutes a separate violation.

The new law takes effect on July 1, 2024.  For those contractors who already carefully adhered to the prior independent contractor criteria, hopefully the “learning curve” will not be substantial and they can adjust their practices to meet the new criteria.  However, the new criteria will likely be challenging for contractors who have not been diligent regarding worker classification.  I urge all contractors to immediately review their business practices and create a checklist to follow regarding every subcontractor, which should include signing a legally compliant written agreement.

Blake Nelson is an attorney and the Chair of the Construction Law practice group at Hellmuth & Johnson, PLLC, a full-service law firm with offices in Edina and Woodbury, MN.  He may be reached at 952-746-2131 or [email protected].