Employee classification is a critical issue for businesses, especially in the construction industry. Misclassifying workers as independent contractors instead of employees can lead to costly fines, back pay, and other penalties. In Minnesota, the law takes worker classification seriously, and construction companies must understand the distinctions to ensure compliance. This guide will break down the key differences between employees and independent contractors, explain why proper classification matters, and provide essential information for construction employers in Minnesota.
Why Worker Classification Matters
Misclassifying workers as independent contractors instead of employees can have serious legal and financial consequences for businesses. Employers may be required to pay back wages, overtime, unemployment taxes, workers' compensation insurance, and other benefits if workers are found to be improperly classified.
In Minnesota, the law presumes that workers are employees unless the business can prove otherwise. Employers must be able to demonstrate that a worker meets certain criteria to be classified as an independent contractor. This distinction is especially important in the construction industry, where many projects rely on independent contractors and subcontractors to complete specialized tasks.
What Is an Employee?
An employee is a worker who performs services under the direction and control of an employer. In Minnesota, employees are entitled to specific rights and protections, including:
Minimum wage: Employees must be paid at least the state’s minimum wage for each hour worked.
Overtime pay: Employees are entitled to time-and-a-half pay for hours worked beyond 40 hours in a workweek.
Workers’ compensation: Employees are covered under workers’ compensation insurance if they suffer an injury on the job.
Unemployment benefits: Employees may qualify for unemployment benefits if they are laid off or lose their job through no fault of their own.
Safe workplace protections: Employees are protected under workplace safety laws, including the Occupational Safety and Health Act (OSHA).
Anti-discrimination laws: Employees are protected against discrimination based on race, gender, age, religion, disability, and other factors under both federal and Minnesota Human Rights Act laws.
Paid Time Off: Under the Employee Sick and Safe Time law, employers are required to give all employees paid time off.
These rights ensure that employees have legal protections in place, unlike independent contractors, who generally do not have access to these same benefits.
What Is an Independent Contractor?
An independent contractor is a self-employed individual who provides services to a business under the terms of a contract. Unlike employees, independent contractors have much more control over how and when they perform their work. Some key characteristics of independent contractors include:
No wage requirements: Independent contractors negotiate their pay, often through a flat fee, project-based payment, or hourly rate.
No overtime pay: Independent contractors are not entitled to overtime pay.
No unemployment benefits: Independent contractors are not eligible for unemployment benefits if their work with a client ends.
No workers' compensation coverage: Independent contractors are responsible for their own health and injury coverage.
No tax withholding: Businesses do not withhold payroll taxes for independent contractors; instead, the contractor is responsible for paying their own self-employment taxes.
Control over work: Independent contractors have more autonomy to set their own schedule, choose their methods, and decide how to complete the project.
Because independent contractors operate as self-employed individuals, they bear the risk of profit or loss on the projects they undertake. This independence is a key distinction from employees, who are subject to direct control and supervision.
How Does Minnesota Classify Workers?
Minnesota follows a nine-factor test to determine if a worker is an independent contractor. Starting March 1, 2025, a 14-factor test will apply specifically to construction workers. Under this new standard, a worker is presumed to be an employee unless all 14 factors are met. The 14 factors are as follows:
The business must be established and maintained independently of the person or entity for whom the services are performed.
The business must own, rent, or lease the necessary equipment, tools, vehicles, materials, supplies, or facilities required to perform construction or improvement services.
The business must offer similar services to multiple clients or the general public, not just one person or entity.
The business must comply with tax and regulatory requirements, including holding necessary tax identification numbers, filing business or self-employment tax returns, and providing W-9 forms to clients if required.
The business must be in good standing under Minnesota law, if applicable.
The business must have a Minnesota unemployment insurance account if required.
The business must have workers' compensation insurance if required.
The business must hold any required licenses, registrations, and certifications.
The business must operate under a written contract for the specific services provided, which must be signed, executed within 30 days of starting work, identify the services to be provided, specify compensation terms, and allow for control over how services are performed.
The business must submit invoices and receive payments in the business’s name, not in cash.
The business must control the means and methods of performing the services.
The business must incur the main expenses related to providing the services.
The business must be responsible for completing the services as per the contract.
The business must bear the risk of profit or loss depending on whether the costs to provide the services are less than or greater than the agreed compensation.
This classification test is more stringent than previous standards and requires that employers document and maintain evidence of compliance.
Consequences of Misclassification
Misclassifying an employee as an independent contractor can result in significant penalties for employers. Employers may be required to pay back wages, unpaid overtime, and benefits like health insurance and retirement contributions. Additionally, businesses may face fines from government agencies like the Minnesota Department of Labor and Industry (DOLI) and the Internal Revenue Service (IRS). Workers who believe they have been wrongfully classified may file lawsuits, leading to costly litigation. The state may also audit a business’s classification practices, which can result in penalties and increased scrutiny of future employment practices. These legal and financial risks make proper classification essential for employers.
How to Avoid Misclassification Issues
To avoid misclassification penalties, Minnesota construction employers should take these proactive steps:
Use Written Contracts: Have a clearly written contract with every independent contractor, specifying the terms of the work and payment structure.
Ensure Independence: Confirm that the contractor’s business operates independently. Look for signs like business registration, separate tools/equipment, and multiple clients.
Review the 14-Factor Test: Understand and review the 14-factor test for construction workers to ensure the worker qualifies as an independent contractor.
Keep Detailed Records: Document everything, including contracts, payment records, and any communication related to work performance.
Conduct Regular Audits: Periodically review your classification practices to ensure compliance, especially as laws change.
Seek Legal Guidance: When in doubt, consult with a legal professional, such as the team at Minnesota Construction Law Services (MNCLS), to review your worker classification process.
Get Guidance from Minnesota Construction Law Services
Worker classification is a complex but essential part of running a construction business in Minnesota. As laws evolve, including the introduction of the 14-factor test for construction workers in 2025, it’s critical to ensure that your business is compliant. Misclassifying workers can result in costly fines, back pay, and other legal consequences.
If you’re unsure about your current worker classification practices or need help navigating the new 14-factor test, reach out to the team at Minnesota Construction Law Services. Our experienced legal team can review your worker classifications, guide you on how to properly classify workers, and help you avoid costly penalties. Don’t wait until an audit or legal action arises — contact MNCLS today for proactive legal guidance.