Many contractors find out the hard way that the subcontractors they regularly utilize for projects and treat as independent contractors are deemed employees in the eyes of the Minnesota Department of Labor and Industry. It is important as a general contractor to be aware of the factors the Minnesota Department of Labor and Industry uses to classify workers and that as a general contractor, you correctly classify those persons who work for you to prevent later liability for back taxes, interest and other penalties.
Minnesota statute provides that a person performing public or private sector commercial or residential building construction or improvement services is an independent contractor and not an employee of a general contractor only if the person:
- maintains a separate business with his or her own office, equipment, materials, and other facilities;
- (i) holds or has applied for a federal employer identification number or (ii) has filed business or self-employment income tax returns with the IRS (if the person has performed services in the previous year);
- is operating under contract to perform specific services for the general contractor for specific amounts of money and under which he or she controls the means of performing the services;
- is incurring the main expenses related to the services that he or she is performing for the general contractor under the contract;
- is responsible for the satisfactory completion of the services that he or she has contracted to perform for the general contractor and is liable for failure to complete the services;
- receives compensation from the general contractor for the services performed under the contract on a commission or per-job or competitive bid basis and not on any other basis;
- may realize a profit or suffer a loss under the contract to perform services for the general contractor;
- has continuing or recurring business liabilities or obligations; and
- the success or failure of his or her business depends on the relationship of business receipts to expenditures.
In addition, if the person is not registered with the Minnesota Department of Labor and Industry, he or she is presumed to be the general contractor’s employee. The only way to rebut this presumption is to prove that the person meets all of the nine factors outlined above at the time the person performed the services for the general contractor.
Be aware that generally any persons who perform construction services in Minnesota must register with the Minnesota Department of Labor and Industry before performing construction services for another person unless the person: (i) is a licensed contractor; (ii) provides a bond to the state under Minn. Stat. 326B.197 (HVAC/Mechanical) or Minn. Stat. 326B.46 (Plumbing); (iii) is an employee of a person performing construction services; (iv) is an architect or engineer engaging in professional engineer services or architectural services; (v) is a school district or technical college; (vi) is a volunteer; or (vi) is a person whose total gross annual receipts for licensed activities does not exceed $15,000.
If your subcontractor is an entity such as a limited liability company or a corporation, you still need to be aware of the above factors. Minnesota statute requires that when hiring a business entity the above nine factors plus registration (if required) still must be present in order for your subcontractor to be considered an independent contractor and not your employee. In addition to the nine factors and registration, as a general contractor, you also must invoice and make payments to the actual business entity you hire and the business entity must be registered with the Minnesota Secretary of State (if required).
It is important that if you are a general contractor regularly hiring subcontractors that you verify that the subcontractors meet the above nine factors and are registered (if required) and that the factors and your business relationship with the subcontractor are properly documented in writing to prevent later issues and allegations of misclassification. Oftentimes general contractors fail to properly document in writing the terms upon which they are hiring a subcontractor, making it much harder to prove the requisite factors were present at the time a subcontractor performed the services.
The information provided within this article is a broad overview and general discussion of only some of the major issues to consider when working with subcontractors and is not intended to be legal advice. You should seek the advice of competent and qualified counsel to review your specific situation.
© 2016 Rinke Noonan