Newly proposed Minnesota legislation has made it clear that the old ways of conducting business as a contractor may soon be over. HF 4444 proposes perhaps the most expansive changes in Minnesota construction law ever. The bill alleges to do so by forming a Partnership across several government regulatory agencies in an effort put a stop to “misclassifying” workers (labeling an employee as an independent or subcontractor) and creating stiff penalties for noncompliance.
TL; DR Version
The bill authors and supporters of HF 4444 hope to implement as soon as May 20 and become effective immediately. If passed as is, the newly created and modified laws will have major implications for anyone providing building construction or improvement services (and any other business that engages the services of Independent Contractors).
For Both Residential and Commercial Contractors
- Any “Independent Contractor” you engage, including any of its employees and/or subcontractors (“IC”), will be considered your employees by default if they do not meet all of the 14 very specific requirements outlined by HF 4444 (see below for more details).
- As the hiring Contractor, you are responsible for ensuring that all lower tier ICs are in full compliance with all appliable wage laws, worker’s compensation/unemployment laws, and any other law to an employee’s benefit.
- Failure to provide an employee with a benefit they are entitled to, or misclassifying an individual as an IC when you know (or should know) they do not meet the 14 specific requirements, can result in several substantial penalties. There is a presumption against IC status, and a hiring Contractor must provide an investigating agency with the documents used to determine that an individual/entity was truly an IC. Penalties include heavy monetary fines and “stop work orders” that may force you to stop all work across your entire business.
- Penalties are binding upon successors. In other words, you cannot escape liability with a simple name change or transfer of ownership.
- Violations may create personal liabilities for not only the business owner, but also managing/supervising staff members who facilitated the violations.
- The Intergovernmental Misclassification Enforcement and Education Partnership Act (“IMEEP”), created by HF 4444, forms a Partnership across several governmental regulatory agencies (DLI, DOR, DEED, DOR, and the AG). This act encourages the Partnership agencies to share information and shows that MN is serious in ensuring compliance.
What Should Contractors Do?
- Bid any future Projects assuming that this law will pass (review your standard practices, price your labor rates accordingly, and only engage fully compliant ICs/subcontractors); and
- Look for NSLG’s supplemental updates. We will be monitoring the status and will post updates on relevant changes.
Full Version:
HF 4444 (companion: SF4483) builds upon the recent MN trend to provide more protection for employees against business practices that misclassify employees as ICs. This trend was seen last year with the changes concerning MN’s wage theft laws and has the noble goal of ensuring individuals are not forced into unfair working conditions. For Contractors, however, in addition to ensuring your own company complies with the new rules, HF 4444 places a tremendous burden for you to act diligently in ensuring your ICs/subcontractors are also in full compliance.
Intergovernmental Misclassification Enforcement and Education Partnership Act
Newly Created Act: Minnesota Statutes §§ 181.724 and 181.725 (collectively the “Intergovernmental Misclassification Enforcement and Education Partnership Act”).
The most apparent change made by HF 4444 is the creation of the Intergovernmental Misclassification Enforcement and Education Partnership Act.
The proposed Act has the purpose of preventing employers from misclassifying workers. It lists the following as “Partnership Entities”: the Department of Labor and Industry (DLI), the Department of Revenue (DOR), the Department of Employment and Economic Development (DEED), the Department of Commerce (DOC), and the Attorney General (collectively the “Partnership”). It requires that the Partnership entities communicate with each other to help detect and investigate employee misclassification. It allows information sharing and collaboration of these various entities.
The duties of the Partnership include, but are not limited to, performing whatever duties necessary to carry out the purposes of this Act and to increase the effectiveness of detection, investigation, enforcement, and deterrence of employee misclassification.
Impacted Statutes
Impacted Statutes: Minnesota Statutes § § 177.27; 181.171; 181.722; 181.723; 270B.14; 326B.081; 326B.082; 326B.701.
The impacted statutes increase the scope of the Commissioner’s investigatory powers under Minnesota Statute 177 (Labor Standards and Wages). Minnesota Statue 181.171 is expanded to allow civil claims that seek to address violations of Minn. Stat. 181.722 (proposed title: Misclassification of Employees) and 181.723 (proposed title: Misclassification of Construction Employees). Minn. Stat. 181.722 and Minn. Stat. 181.723, as proposed by HF4444, have substantial similarities but differ in how the nature of the employment relationship is determined (how they determine if an individual is an employee or an IC). Just as the proposed title implies, the changes to Minn. Stat. 181.723 (Misclassification of Construction Employees) contains the most relevant changes for Contractors. Compliance with 181.723 requires that a Contractor shall not:
- Condition an employee’s payment on their registration as a contractor under 326B.701, or force them take any action to become compliant with the IC requirements;
- Fail to classify, represent, report (when required by statute), or treat an individual who is an employee as an employee;
- Require or request an employee to enter an agreement that misclassifies the employee;
- Require an individual who is the person’s employee to register under section 326B.701.
The main point here, is that a Contractor cannot treat an employee an IC or require employees to become ICs. This section also outlines 14 specific requirements that must be met to declare IC status.
Who is an Independent Contractor (Construction)?
An individual who provides building construction or improvement services is an IC and not an employee only if they are operating as a business entity that meets all of the following requirements at the time services were provided:
- was established and maintained separately from and independently of the person for whom the services were provided or performed;
- 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;
- 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;
- 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 in the previous 24 months; and
- 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;
- is in good standing as defined by section 5.26 and, if applicable, has a current certificate of good standing issued by the secretary of state pursuant to section 5.12;
- has a Minnesota unemployment insurance account if required by chapter 268;
- has obtained required workers' compensation insurance coverage if required by chapter 176;
- holds current business licenses, registrations, and certifications if required by chapter326B and sections 327.31 to 327.36;
- 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 before the contracted-for services commence;
- identifies the specific services to be provided or performed under the contract; and
- provides for a stipulated sum, lump sum, or fixed price in payment for completion of the specific services to be provided or performed under the contract. A cost-plus contract with or without a cap, labor and materials contract, labor contract, or any other type of contract that provides for payment for services provided or performed to be calculated in whole or in part based on an hourly rate, unit rate, or any basis other than a stipulated sum, lump sum, or fixed price does not meet this requirement;
- submits invoices and receives payments for completion of the specific services provided or performed under the written contract in the name of the business entity. Payments made in cash do not meet this requirement;
- the terms of the written contract provide the business entity sole direction and control over the means of providing or performing the specific services, and the business entity in fact directs and controls the provision or performance of the specific services;
- incurs the main expenses and costs related to providing or performing the specific services under the written contract, including labor, tools, materials, vehicles, equipment, supplies, office space or other facilities, and overhead expenses and costs;
- is responsible for the satisfactory completion of the specific services to be provided or performed under the written contract and is responsible, as provided under the written contract, for failure to complete the specific services; and
- may realize additional profit or suffer a loss, if costs and expenses to provide or perform the specific services under the written contract are less than or greater than the written contract's stipulated sum, lump sum, or fixed price.
Who Will These Laws Apply To?
If your services include constructing or improving a building, and do not fit the three exceptions below, this section applies to you.
The IC test outlined above applies to everyone who provides or performs building construction or improvement services anywhere in Minnesota. Building construction or improvement services include all public or private sector commercial or residential building construction or improvement services except for: (1) the manufacture, supply, or sale of products, materials, or merchandise; (2) landscaping services for the maintenance or removal of existing plants, shrubs, trees, and other vegetation, whether or not the services are provided as part of a contract for the building construction or improvement services; and (3) all other landscaping services, unless the other landscaping services are provided as part of a contract for the building construction or improvement services.
Additionally, any successor to a business who violates this section is liable for such violation. Successors include anyone who shares 3 or more of the following with the violating entity:
- has one or more of the same owners, members, principals, officers, managers,
supervisors, forepersons, or individuals involved in the person's direction or control; - performs similar work within the state of Minnesota;
- has one or more of the same telephone or fax numbers;
- has one or more of the same email addresses or websites;
- employs or engages substantially the same individuals to provide or perform building
construction or improvement services; - utilizes substantially the same vehicles, facilities, or equipment; or
- lists or advertises substantially the same project experience and portfolio of work.
In addition to Contractor/Entity and successors, any owner, partner, principal, member, officer, agent, superintendent, supervisor, foreperson, or other employee performing management responsibilities for the person, may be held individually liable for engaging in any of the prohibited activities of Minnesota Statute §§ 181.722 and 181.723.
What Are the Potential Penalties for Noncompliance?
The penalties for noncompliance with Minn. Stat. 181.723 would include any of the following:
- Compensatory Damages: These may include, but are not limited to, missed benefits, including wages, overtime, paid time off, insurance, retirement plans, and any other benefits an individual missed out on because they were misclassified. This also covers employer contributions to unemployment insurance, Social Security, and Medicare.
- Fines for Misclassification: Each worker incorrectly classified can result in a fine between $5,000 and $10,000.
- General Violation Fines: Each specific violation of these rules can result in up to a $10,000 fine.
- Non-cooperation Penalty: Anyone who hinders the investigation into violations under this section is subject to a $1,000 fine for each day they delay or obstruct the process.
In addition to monetary penalties, the Commissioner can issue a stop work order that can force you to stop all business operations at one or more workplaces and places of business that you control. In other words, a single violation can result in your entire business being stopped until that violation is taken care of.
Note that the penalties outlined by HF 4444 are not exclusive, meaning a single violation could result in multiple penalties from other Minnesota law provisions.
For more details, you can see the full language of the current version of HF 4444 here:
HF 4444 1st Engrossment - 93rd Legislature (2023 - 2024) (mn.gov)
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