Independent Contractors

Reference: Minnesota Law, §3315.0555 (2008) and §268.035 Subd. 25b(2008)

Proper classification of workers can be a complex task for any business. The Minnesota Unemployment Insurance (UI) Program reserves the right to determine whether services performed by a worker constitute employment.

Independent contractors are common in certain industries, construction being the most familiar example. However, it is not unusual to find full time clerical workers, janitors, managers, and nurses, as well as employees who are performing services on a part time, temporary or probationary basis in a variety of job classifications being misclassified as independent contractors. The following paragraphs summarize the key elements involved in determining whether a worker is an employee or an independent contractor.

Common Law Factors
Minnesota state agencies use a common law factor analysis similar to the Internal Revenue Service to determine the status of a worker. Minnesota’s common law factors have been defined by the Minnesota court system. Of the twenty factors defined by the courts, the five factors that carry the most "weight" are:

1. Control. Does the firm or does the worker control the means and manner in which the services are performed?
2. Discharge. Can either party sue for breach of contract or can the firm or worker terminate at will without incurring any legal liability?
3. Payment. Does the firm or the worker dictate the value placed on these services? Is the worker paid by the job or in a regular and routine manner?
4. Investment. Does the firm or does the worker furnish any car or truck; tools or equipment; and/or materials or supplies necessary to perform these services?
5. Premises. Does the firm or does the worker control the premises where these services are performed?

Essential Characteristics of Employment

• The firm has the right to control the means and manner in which the services are performed.
• The firm has the right to discharge the worker without incurring legal liability.
• The worker is paid in a regular and routine manner for services performed.
• The firm furnishes the worker with:
  • Company car or truck,
  • Tools or equipment, or
  • Materials or supplies.
• The firm controls the premises where services are performed.

Essential Characteristics of Independence

• The firm's only concern is the end result.
• The firm and worker are in a binding contract, where failure to complete services is a breach of contract in which a legal remedy may be pursued by either party.
• The worker is paid by the job, on a bid basis, by percentage completion, etc.
• The worker furnishes all tools, equipment, materials and supplies necessary to complete the work.
• The worker has substantial investment in the tools and equipment used to perform the services.
• The worker makes his or her services available to the public on a continuing basis.

Unique Treatment of Independent Contractors in the Construction Industry
Reference: Minnesota Department of Labor & Industry Law, §181.723 (2008)

Legislation passed in 2007 requires that, effective Jan. 1, 2009, certain individuals who wish to work as independent contractors in the construction industry in Minnesota must apply for and be granted an "independent contractor exemption certificate" from the Department of Labor and Industry. Refer to the Department of Labor and Industry Web site for details www.dli.mn.gov/CCLD/ICEC.asp

A worker doing commercial or residential building construction or improvement, in the public or private sector, performing services in the course of the trade, business, profession, or occupation of the employer, is considered an employee and not an "independent contractor" unless the worker meets all the following conditions:

1. Maintains a separate business with the independent contractor's own office, equipment, materials, and other facilities,
2. Holds or has applied for a federal employer identification number or has filed business or self-employment income tax returns with the federal Internal Revenue Service based on that work or service in the previous year,
3. Operates under contracts to perform specific services or work for specific amounts of money under which the independent contractor controls the means of performing the services or work,
4. Incurs the main expenses related to the service or work that the independent contractor performs under contract,
5. Is responsible for the satisfactory completion of work or services that the independent contractor contracts to perform and is liable for a failure to complete the work or service,
6. Receives compensation for work or service performed under a 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 contracts to perform work or service,
8. Has continuing or recurring business liabilities or obligations, and
9. The success or failure of the independent contractor's business depends on the relationship of business receipts to expenditures.

For additional information about independent contractors, contact:

MN Unemployment Insurance Program
651-296-6141 | www.uimn.org

Internal Revenue Service
1-800-829-1040 | www.irs.gov

MN Department of Labor & Industry
651-284-5005 | 1-800-342-5354 | www.dli.mn.gov

MN Department of Revenue
651-282-9999 | www.taxes.state.mn.us

      

This handbook is based on current UI legislation; statements are intended for general information and do not have the effect of law. The Minnesota Unemployment Insurance Law - MN Statutes §268.001 to §268.23 and Administrative Rules 3310 and 3315 - can be accessed through our Web site at www.uimn.org; by clicking on the UI Law link.