TL;DR
The Employee Misclassification Law will transform the MN construction industry. The agencies involved have extraordinary powers to police it. Contractors need to be prepared to provide extensive documentation on demand to avoid potentially crushing fines and penalties. Contractors who fail to ensure their own compliance and properly vet their subcontractors for compliance are rolling the dice. They risk not just their businesses, but everything they have. There will be no evading responsibility for those who could have known about misclassification on the job site.
Development of the Law & Enforcement Partnership
Contractors need to understand that the coming crackdown on misclassification represents a major initiative with clearly defined objectives. We’ve tracked the development of this effort across the country for a long time. Early initiatives at the federal level and a similar bill in California became the model for Minnesota lawmakers. In 2023, they laid the groundwork, passing the Wage Theft Prevention Act and establishing the Attorney General’s misclassification task force. The task force laid out exactly what they’re after, exactly how they will accomplish it, and crafted a bill empowering the State to aggressively police contractors. Known as HF4444 for months, a newly revised version with a new number slid into the 2024 Omnibus bill, becoming law on May 20th.
The bill establishes a five-agency partnership (IMEEP) with broad powers for investigation and enforcement of misclassification violations. The five MN agencies:
Attorney General, Department of Commerce, Department of Revenue, Department of Employment & Economic Development, and Department of Labor and Industry
…have been granted enforcement and worker outreach funding, mechanisms of cooperation, authority to impose staggeringly severe fines and penalties, and a mandate to do so. The mandate to crack down on employee misclassification stretches across numerous industries. The centerpiece of the legislation, however, targets the construction industry, where misclassification is rampant.
Rollout, Documentation, and Penalties
As of July 1st, 2024, state agencies will be investigating independent contractors across the industry. They will be looking for misclassified employees at all levels. The commissioner now has the right to enter places of business and demand all documentation related to employment practices and the familiar “9-point IC checklist.” All ICs will be subject to fines and penalties -up to $10,000 per violation- not simply for willful misclassification, but for failure to provide documentation OR failure to provide it quickly enough. Contractors who delay in contesting violations will find that the commissioner’s order is final after 15 calendar days. Two weeks.
As of March 1st, 2025, the 9-point checklist becomes a much more stringent 14-point IC checklist, with all associated fines and penalties. Independent contractors who don’t get meticulous about their paperwork are risking everything. Contractors who fail to vet their subs for compliance with IC status qualification may suddenly find that their ICs are legally their employees. This would immediately obligate the employer to pay for unemployment, workers comp, backpay, sick & safe time, etc., in addition to those hefty fines. Misclassification penalties, also up to $10K a pop, flow up the contractor chain. Contractors will be subject to penalties, fines, and stop work orders caused by subs of subs.
Moreover: document requests, penalties, and stop work orders can extend to all jobs in progress during an investigation. The commissioner can examine records for every contractor and every job going back three years. Stop work orders may apply to any or all jobs involving a contractor accused of a violation. Contractors must retain three years of records and be able to provide complete documentation on demand.
Defining Employee
Perhaps most concerning for contractors, IMEEP has the power to determine employment status. Agencies can use employment criteria from any or all partner agencies to make a determination. Employment status ultimately boils down to “control over the method and manner of performance” of a worker, whether contracted as an IC or not. This means, for example: if a GC hires a theoretically self-performing contractor who hires multiple Tier-2 subs to actually do the work, the GC is likely to sustain fines and penalties for all of them as employees. Even if those Tier-2 subs are independent contractors on paper, satisfying all of the 14-point checklist in principle through documentation, the DLI will likely find them to be employees in practice. The non-compliant Tier-1 sub will make the GC subject to all the penalties incurred all the way down the chain.
The scenario above is going to play out, and as it does, it won’t simply be businesses going bankrupt. Personal liability provisions allow IMEEP to pursue any “owner, principal, member, officer, or agent” of the company to pay the bill. The standard of responsibility for personal (and successor) liability is “knew or could have known given the exercise of reasonable diligence” about the labor practices of your subs. That’s about as low a bar as it gets. If you even could have known that your sub was misclassifying, everything you have is on the line.
Get Compliant NOW
The good news is that contractors can achieve compliance for their own businesses. They can verify compliance among their subs. A TRULY compliant contractor anywhere in the chain will effectively stop the penalties and “employer” responsibilities from flowing upward. Contractors who get serious about their own compliance & recordkeeping and adequately vet their subs will be able to demonstrate that “reasonable diligence.”
The Construction Law team at North Star Law Group can be your reasonable diligence. We’ve developed a compliance review & auditing program for contractors at any level in the chain, large or small. We can help you assemble your “compliance in a can “, to satisfy the commissioner’s requests.
Contractors who delay or fail to take this seriously stand on a crumbling ledge, hoping to escape an industry-wide earthquake that has already begun.
North Star Law Group has decades of experience at all levels of the construction industry and construction law. We know what contractors are facing and how to navigate it. Let us help get you compliant and get everybody back to work. Contact us here.
