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Workers' compensation -- Determining independent contractor or employee status

Note:  The following information is a general outline, subject to statutory change and is not intended to serve as a substitute for the advice of a private attorney. The terms "employer" and "worker" are used in the following information and are not to be given a literal meaning nor do they correspond to "employer" and "employee" as defined in the Minnesota Workers' Compensation Act. They are used as a manner of convenience to distinguish between one who pays to have a service performed and one who is paid to perform the service.

Independent contractor in construction

Effective Jan. 1, 2009, determination of independent contractor status for many individuals who perform commercial or residential building construction or improvements in the public or private sector is governed by Minnesota Statutes 181.723. This law was amended in 2012 to replace the independent contractor exemption certificate program with a two-year pilot project for registration of construction contractors. Under the amendments, as of Sept. 15, 2012, all contractors, including independent contractors and other types of business entities (such as limited liability companies -- LLCs) that perform building construction or improvement services must register with the Department of Labor and Industry (or be exempted from registration) and meet the nine-factor independent contractor test.

Under the nine-factor test, an individual is considered an independent contractor only if he or she:

  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.

Even if an individual performing building construction or improvement services is an owner or partial owner of a business entity (such as an LLC), the individual is considered an employee of the general or hiring contractor unless:  the business entity meets the nine-factor test; invoices are submitted in the name of the business entity; and the business entity is registered with the Secretary of State and the Department of Labor and Industry (DLI), if required by law.

To avoid misclassification, building construction or improvement contractors should verify that the individual or business entity they intend to subcontract with meets the nine-factor test; have written contracts that are consistent with the nine-factor test; verify registration (or exemption from registration) with DLI; and verify that the subcontractor has an active business filing with the Secretary of State (if required for the type of business).

Building construction contractors should also be aware that a general contractor or intermediate contractor is liable for all of the workers' compensation benefits due to the injured employee of a subcontractor if the subcontractor does not have workers' compensation insurance. Therefore, contractors should determine whether a subcontractor might be required to have workers' compensation insurance.

More information

Independent contractor in the trucking and messenger/courier industries

Effective Aug. 1, 2009, a person operating a car, van, truck, tractor or truck-tractor that is licensed and registered by a governmental motor-vehicle agency is an employee unless the seven factors specified in Minnesota Statutes 176.043 are present.

Independent contractor for other occupations

Individuals who are independent contractors with no employees are not covered by workers' compensation insurance unless the entity contracting with the independent contractor elects to purchase insurance for that individual or the independent contractor chooses to purchase coverage for him or herself. The workers' compensation statute does not contain a definition of "independent contractor."

When a question arises about whether a particular relationship is that of employer-employee or that of two entities contracting independently, a five-factor test has developed through case law that generally allows an employer or employee to make some judgments concerning the appropriate characterization. This test involves analyzing the following five factors.

Five-factor test concerning employee, independent contractor characterization
1. The right to control the means and manner of performance
2. The mode of payment
3. The furnishing of tools and materials
4. Control over the premises where the work was done
5. The right of discharge; Guhlke v. Roberts Truck Lines, 128 N.W.2d 324 (1964)

The degree of control one party has the right to exert over another has become the primary factor to consider. One party's right to control over another's job duties is an indication that the first is an employer. Hunter v. Crawford Door Sales 501 N.W.2d 623 (1993). To analyze the control factor in a particular situation, it may be helpful to ask the following questions, bearing in mind the factors that show evidence of control must be weighed against those that show an absence of control. The answers are not meant to compel a particular conclusion but should be used merely as a guide.

Analyzing the control factor
Is the worker required to comply with instructions about when, where and how the work is to be done? The control factor tends to be present if the employer has the right to instruct.
Has the worker been given any specific training by the employer? If so, this may be an indication the employer wants the services completed in a particular manner, giving rise to an employer-employee relationship.
Is there a requirement that the worker must perform the work personally and not hire a substitute without the permission of the employer? The element of control may then be present, indicating the employer is interested in both the methods and the results.
Does the worker have a continuing relationship with the employer or is the contact sporadic or infrequent? If the arrangement contemplates continuing or recurring work, this may indicate evidence of control.
Does the worker devote full time to the employer or is the worker free to work for others during the same time period? If the worker is restricted from accepting other gainful employment, the control factor may be present.
Is the worker required to make reports to the employer? This indicates the worker must account for his or her actions and may be an element of control.
Does the employer pay for business and travel expenses? If so, it appears the employer may be concerned about controlling the worker's business activities and expenses.
Is the worker in a position to realize a profit or suffer a loss as a result of doing this job? If not, he tends to appear more like an employee than an independent contractor.
Is the worker the master of his or her own time? If the employer sets the hours and days of work, this may be an indication of control.

The other four factors then are to be given weight in this determination.

In 1986, the commissioner of the Department of Labor and Industry was authorized by the Legislature to create rules to further define the term "independent contractor." Minnesota Rules Chapter 5224 contains guidelines for asserting independent contractor or employee status for 34 specific occupations. The rules define the particular occupation and then list certain criteria that must be substantially met for the person in that occupation to be characterized as either an independent contractor or an employee. If all of the criteria are not met, Minnesota Rules, part 5224.0320 provides additional general criteria to evaluate whether the person is an employee or an independent contractor.

The occupations identified within the rules include artisans*, barbers, bookkeepers and accountants, bulk oil plant operators, collectors, consultants, domestic service, babysitters, industrial homeworkers, laborers*, commission salespeople or manufacturers representatives, traveling salespeople, house-to-house dealer salespeople, agent drivers, photographers' models, professional persons, doctors of medicine -- part time for industrial firms, real estate and securities salespeople, registered and practical nurses, unlicensed "nurses," taxicab drivers, timber fellers, sawmill operators, truck owner-drivers*, waste materials haulers*, messenger/couriers*, variety entertainers, sports officials, jockeys and trainers, Minnesota Rules, Parts 5224.0020 through 5224.0312. Where the occupation is not listed the rules give general criteria and factors to consider, Minn. Rules Parts 5224.0302 through 5224.0340.

*Note:  The factors in M.S. 181.723, rather than Minn. Rules, parts 5224.0020 and 5224.0110, govern the independent contractor status of artisans and laborers doing commercial or residential building construction or improvement for a contractor. The factors in M.S. 176.043, rather than Minn. Rules, parts 5224.0290, 5224.0291 and 5224.0292, govern the independent contractor status of truck owner-drivers, waste materials haulers and messenger/couriers.

Further information

For further information, call DLI Alternative Dispute Resolution at (651) 284-5005 or 1-800-342-5354. If you have questions about construction contractor registration, call DLI at (651) 284-5074.

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