ARTICLES

Independent Contractor Requirements for Construction Trades in Minnesota

Effective January 1, 2009, the Minnesota Department of Labor and Industry (“DLI”) required individuals who wish to work as independent contractors in the building construction industry to obtain an Independent Contractor Exemption Certificate (“Certificate”) in order to qualify as an independent contractor. This requirement – although based upon pre-existing Minnesota law – places the burden upon laborers to obtain a Certificate or risk classification as an employee.

Obtaining the Certificate

In order to obtain a Certificate, an individual must submit a fee and supporting documentation to establish that he or she meets Minnesota’s requirements for independent contractor classification. An individual must satisfy the nine (9) part test set forth in Minnesota Statutes Section 181.723, subdivision 6, which includes requirements such as the contractor maintaining a separate business office, holding a Federal Employer Identification Number and incurring the main expenses related to the work performed, among others. However, note again that it is the independent contractor’s responsibility to obtain the Certificate; it is not the responsibility of the party engaging the services of the contractor.

Corporate Entity Exemption

Although individuals are required to obtain a Certificate, corporate independent contractors –  that is, independent contractors operating through a corporation or limited liability company where the entity is the actual independent contractor –  are not required to obtain a Certificate. This provision reinforces the value of independent contractors operating through corporations or limited liability companies as self-employed persons. Not only does an entity provide much-needed liability protection so that an individual is not personally liable for certain actions undertaken in his or her capacity as an independent contractor, an entity solidifies and provides the necessary demarcation necessary to separate employees from independent contractors. With an entity in place, most if not all of the requirements set forth by Minnesota Statutes Section 181.723, subdivision 6, are met and hence DLI and the Minnesota legislature have aptly determined that the time and expense of corporate independent contractors obtaining a Certificate is unnecessary.

Penalties

With the additional requirements, it is likely that DLI and the Department of Revenue, possibly in concert with the Internal Revenue Service, will continue their collective increased review of independent contractor classifications. To this end, DLI is prepared to impose stiff penalties upon parties who claim independent contractors who do not hold a valid Certificate, as well as upon individuals attempting to work as independent contractors without holding a Certificate. These penalties include civil penalties for workers’ compensation and unemployment insurance if individuals are retroactively classified as employees, as well as fines of up to $5,000.00 per violation. Hence, it is extremely important that businesses in the building construction industry institute procedures to ensure that any independent contractors providing services hold valid Certificates or operate through a corporation or limited liability company. Likewise, individuals who claim independent contractor status in the building construction industry are well advised to obtain a Certificate or form a corporation or limited liability company through which he or she will perform work.