Starting January 1, 2009, Collect Exemption Certificates for Your Independent Contractors or Face Penalties
By: JOSEPH G. SPRINGER
December 16, 2008
Under a new requirement that becomes effective January 1, 2009, all individual independent contractors performing commercial or residential building construction in Minnesota must have an “Independent Contractor Exemption Certificate” issued by the Minnesota Department of Labor and Industry. Employers using independent contractors who do not have the Independent Contractor Exemption Certificate face significant fines and penalties.
The new law is intended to address the misclassification of employees as independent contractors. Both workers and employers may be tempted to classify employees as independent contractors to avoid paying worker’s compensation, unemployment compensation, and social security. According to the Office of the Legislative Auditor, a conservative estimate shows that 14% of Minnesota employers classified at least one worker as an independent contractor when the worker should have been considered an employee. The new law is also intended to address independent contractors that only claim to be employees after being hurt or injured on the job in order to obtain worker’s compensation benefits.
Under the new law, Independent Contractor Exemption Certificates will be required for individuals performing public or private sector commercial or residential building construction or improvement services on or after January 1, 2009. Such individuals must apply for the independent contractor exemption certificate from the Minnesota Department of Labor and Industry and pay a $150 application fee. The individual must meet the following nine-factor test in order to be considered an independent contractor:
- the individual maintains a separate business with the individual’s own office, equipment, materials, and other facilities;
- the individual 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 if the person has performed services in the previous year for which the individual is seeking the independent contractor exemption certificate;
- the individual operates under contracts to perform specific services for specific amounts of money and under which the individual controls the means of performing the services;
- the individual incurs the main expenses related to the service that the individual performs under contract;
- the individual is responsible for the satisfactory completion of services that the individual contracts to perform and is liable for a failure to complete the service;
- the individual receives compensation for service performed under a contract on a commission or per-job or competitive bid basis and not on any other basis;
- the individual may realize a profit or suffer a loss under contracts to perform service;
- the individual has continuing or recurring business liabilities or obligations; and
- the success or failure of the individual’s business depends on the relationship of business receipts to expenditures.
The new law does not apply to the manufacture, supply or sale of products, materials, or merchandise. It also does not apply to landscaping services. Finally, the new law only applies to individuals and does not apply to corporations, LLC’s, or partnerships. Consequently, some individuals doing business as an independent contractor may instead choose to form a corporation or LLC instead of obtaining the Independent Contractor Exemption Certificate.
A penalty of up to $5,000 may be assessed for each violation of the new law. This penalty is in addition to the existing penalties for the failure to obtain workers’ compensation insurance, pay unemployment insurance tax, or otherwise comply with employment laws. Additionally, just because a worker has an Independent Contractor Exemption Certificate does not mean that the worker is an independent contractor—even with a valid certificate, the worker must meet the nine-factor test in order to be considered an independent contractor.
Takeaway
Starting January 1, 2009, employers using individuals as independent contractors for commercial or residential building construction in Minnesota must have an “Independent Contractor Exemption Certificate” issued by the Minnesota Department of Labor and Industry or face significant fines and penalties. If you have any questions about Independent Contractor Exemption Certificates, please contact a member of Fredrikson & Byron’s Real Estate Group.