Industry News

Determining Independent Contractor or Employee Status

Insights from the Minnesota Department of Labor & Industry

Understanding the distinction between independent contractors and employees is crucial, especially in the realm of building construction or improvement services. Even if an individual has ownership in a business entity, they are deemed an employee unless the business entity satisfies the Nine-Factor Test.

Statutory Guidance: A Framework for Determination

Minnesota Statute 181.723 underwent amendments in 2012, introducing a two-year pilot project for the registration of construction contractors. This legislation applies to those engaged in commercial or residential building construction or improvements. As of September 15, 2012, all contractors, including business entities like LLCs, must register, meeting the nine-factor independent contractor test.

The Nine-Factor Test: A Critical Evaluation

The Nine-Factor Test, implemented since 1996, scrutinizes various aspects to ascertain independent contractor status in the construction industry. An independent contractor, under this test:

  1. Maintains a separate business with personal office, equipment, materials, and facilities.
  2. Holds or has applied for a federal employer identification number.
  3. Operates under a contract that allows control over the means of performing services.
  4. Incurs primary expenses related to the contracted services.
  5. Bears responsibility for the satisfactory completion of services and is liable for failures.
  6. Receives compensation based on commission, per-job, or competitive bid basis.
  7. May realize a profit or suffer a loss under the contract.
  8. Bears continuing or recurring business liabilities or obligations.
  9. The success or failure depends on the relationship of business receipts to expenditures.

Additional Criteria for Business Entities

Even if an individual with a business entity (e.g., LLC) performs building construction or improvement services, they are considered an employee unless:

  • The Business Entity Meets the Nine-Factor Test.
  • Invoices are submitted in the name of the Business Entity.
  • The Business Entity is registered with the Secretary of State.
  • The Business Entity is registered with the Department of Labor and Industry.

Ensuring Accurate Classification: A Proactive Approach

To prevent misclassification, contractors should:

  • Verify that the subcontractor meets the nine-factor test.
  • Establish written contracts consistent with the nine-factor test.
  • Confirm registration (or exemption) with the Department of Labor and Industry.
  • Verify active business filing with the Secretary of State.

Addressing Workers’ Compensation and Control

Contractors should determine whether subcontractors require workers’ compensation insurance. The control factor, indicating the right to control another person’s job duties, is pivotal. One party’s control over another is a key determinant.

Five-Factor Test for Other Occupations

For occupations beyond construction, a five-factor test helps distinguish between employer-employee relationships and independent contractor arrangements. Factors include control over performance, payment mode, furnishing tools, premises control, and the right of discharge.

Regulatory Evolution: Rules and Guidelines

In 1986, the Commissioner of the Department of Labor & Industry was empowered to create “Independent Contractor” rules. Chapter 5224 contains guidelines for asserting independent contractor or employee status for specific occupations, offering clear criteria for characterization.

Conclusion

Scrub n Shine, LLC, is equipped with registration, insurance, and expertise to guide you through these complexities. Contact us to discuss your situation and ensure compliance with the evolving landscape of independent contractor and employee dynamics.