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What All Business Owners Should Know About Minnesota’s Classification Law for Independent Contractors

In 2024, Governor Walz signed into law significant changes to Minnesota’s independent contractor and employment laws. Here’s what you need to know to navigate these changes successfully.

Why Does Worker Classification Matter?

Improperly classifying employees as independent contractors can result in steep penalties—up to $10,000 for each violation. This misclassification can also trigger back taxes, legal disputes, and damage to your company’s reputation. This makes it critical to evaluate your classification practices, especially as enforcement measures tighten.

Key Changes for Most Industries

For the majority of industries, worker classification will now hinge on five key factors:

  1. Control: Does the business control how and when work is done?
  2. Payment Mode: Are workers paid hourly, or is there a flat rate for services?
  3. Tools and Materials: Who provides the equipment needed for the job?
  4. Work Location: Does the business control the location of the work?
  5. Right to Terminate: Can the business end the relationship at will?

These factors underscore the importance of documenting the nature of your working relationships to avoid ambiguity.

Additional Rules for the Construction Industry

Construction crew looking at a computer

Starting March 1, 2025, Minnesota’s construction industry will follow a 14-factor test to assess independent contractor status. Some of the most notable requirements include:

  • Contractors must furnish their own tools and equipment.
  • A written and signed agreement between the contractor and contracting entity is mandatory.
  • Independent contractors must maintain compliance with all business licenses, registrations, and certifications throughout the contract period. Lapses could lead to misclassification penalties.
  • Both contractors and subcontractors must file the appropriate tax forms, including 1099s and business income tax returns.

General contractors should note that they can be held liable for their subcontractors’ misclassification errors, and the Department of Labor will have the authority to halt projects over violations.

Pitfalls to Avoid

While these changes aim to provide clarity, they also introduce new challenges. Common missteps include failing to maintain proper documentation, neglecting written contracts, or assuming verbal agreements are sufficient. The Minnesota Department of Revenue emphasizes the importance of understanding the distinction between control over the work and autonomy—a key element in classification decisions.

Preparing for the Changes: Action Steps for Employers

To comply with the new laws and avoid costly mistakes, consider the following steps:

  1. Review and Update Contracts: Ensure all agreements with independent contractors are in writing and meet the new legal standards.
  2. Conduct an Internal Audit: Reassess the classification of all workers using Minnesota’s updated criteria and address any discrepancies proactively.
  3. Train Your Team: Educate managers and HR staff about the updated rules to ensure compliance during hiring and contracting processes.

By preparing now, you can protect your business from penalties and ensure smooth operations under Minnesota’s evolving employment laws. For more detailed guidance, visit the Minnesota Department of Revenue’s website or reach out to the professionals at Christianson PLLP.