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The New Independent Contractor Requirements. How does Minnesota law define an Independent Contractor?. Minn. Stat. §268.035, Subd. 9:.

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Presentation Transcript
slide2

How does Minnesota law define an Independent Contractor?

Minn. Stat. §268.035, Subd. 9:

“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”

slide3

Minn. Stat. §268.035, Subd. 9 (con’t):

(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 service6;

(1) maintains a separate business with the independent contractor's own office, equipment, materials, and other facilities2;

(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 year3;

(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 basis7;

(7) may realize a profit or suffer a loss under contracts to perform work or service8;

(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 work4;

(8) has continuing or recurring business liabilities or obligations9; and

(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;

(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;

(1) maintains a separate business with the independent contractor's own office, equipment, materials, and other facilities;

(9) the success or failure of the independent contractor's business depends on the relationship of business receipts to expenditures10.

(4) incurs the main expenses related to the service or work that the independent contractor performs under contract5;

(7) may realize a profit or suffer a loss under contracts to perform work or service;

(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;

(9) the success or failure of the independent contractor's business depends on the relationship of business receipts to expenditures.

(8) has continuing or recurring business liabilities or obligations; and

(4) incurs the main expenses related to the service or work that the independent contractor performs under contract;

slide4

and then Minnesota passed

Minn. Stat. §181.723. . .

slide6

Minn. Stat. §181.723, Subd. 6, further requires that to operate as an independent contractor, an individual must also have an independent contractor exemption certificate11.

slide8

What is an individual for purposes of Minn. Stat. §181.723?

According to Minn. Stat. §181.723, subd 1(d): “‘Individual’ means a human being.”21

ACCORDINGLY, ONLY AN INDIVIDUAL NEEDS TO OBTAIN AN EXEMPTION CERTIFICATE

slide9

Why is this certification required?

The Office of the Legislative Auditor has estimated that at least 14 percent of Minnesota employers that are subject to employment insurance tax misclassified at least one worker as an independent contractor in 2005.

The Minnesota Department of Labor and Industry has concluded that “[w]orkers misclassified as independent contractors do not receive the benefits and protections which should be available to them.”15

slide10

Accordingly, the Minnesota legislature determined that Minn. Stat. §181.723 was necessary because “[w]orkers misclassified as independent contractors do not receive the benefits and protections which should be available to them” and further to allow individuals who desire to work as independent contractors to apply for permission to work as an independent contractor through the issuance of an exemption certificate.16

slide11

an exemption certificate may not be sufficient to classify the individual as an independent contractor13.

However,

slide12

An individual performing services will be classified as an employee under the following two conditions:

1. Performance of services not listed on the exemption certificate;

OR

2. Failure to meet all nine conditions as provided in Minn. Stat. §181.723, Subd. 6(b)(1)-(9)14.

slide14

Let’s assume the “want-to-be” Independent Contractor. . .

1. Is paid hourly

2. Does not have his own office

OR

3. Does not have his own tools

OR

4. Has no financial risk in a project based upon the work being provided

OR

5. Does not have control over the work being provided

OR

6. Has no liability if the project is not completed

OR

slide15

Then the “want-to-be” Independent Contractor. . .

may actually be an employee!

If even one of those assumptions is true!

slide16

How do I protect myself?

1. Confirm that the Independent Contractor maintains an exemption Certificate for the services to be provided

AND

2. Enter into a signed contract with the Independent Contractor specifically outlining the terms of the agreement with the Independent Contractor

OR

3. Enter into a signed contract with an entity incorporated under Minnesota law

slide17

What provisions should be included in a contract?

Identification of the Contractor and Independent Contractor

Include:

(1) Name of the parties

(2) Entity status of the parties

(3) Parties’ addresses

(4) Independent Contractor’s EIN

slide18

What provisions should be included in a contract?

Description of Services to be provided by the Independent Contractor

Include:

(1) Specific description of the services

(2) Method and basis of payment

(3) Acknowledgement that Independent Contractor is using his own tools to complete the project

(4) Acknowledgement that the Independent Contractor maintains an exemption certificate for the services to be provided

slide19

What provisions should be included in a contract?

Allocation of liability

Include:

(1) Time frame to complete services

(2) Liquidated damages provisions

(3) Indemnity clause

(4) Termination clause

slide20

Who does Minn. Stat. §181.723 apply to?

According to the Minnesota legislature, Minn. Stat. §181.723 is to have a limited application applying to individuals working as17:

1. Mechanical contractors;

2. Building contractors;

3. Remodelers;

4. Roofers;

5. Excavators;

6. Masonry and concrete;

9. Exterior finishing;

7. Carpentry;

10. Drywall and plaster;

8. Interior finishing;

11. General installation;

slide21

How does an Independent Contractor apply for an exemption certificate?

An application will be submitted to the Minnesota Department of Labor and Industry and include the following information18:

1. Individual’s full name;

2. Individual’s residence address and telephone number;

3. Individual’s business name, address and telephone number;

4. Services sought for the exemption certificate;

5. Individual’s Social Security Number;

6. EIN or other tax number;

7. Sworn statement that the individual meets the nine conditions;

8. Submit an application fee of $150.19

slide22

How do you verify that an Independent Contractor obtained an exemption certificate?

“The information will be on the Department of Labor and Industry's Web site. The hiring person will need to verify the individual's identity and confirm that the individual has an exemption certificate for the services they are offering to provide as an independent contractor.”20

slide23

What if an individual who does not obtain an exemption certificate is hired?

“An individual covered by the law who does not have an exemption certificate is an employee of the hiring person, and not an independent contractor. The hiring person will be considered the employer of the individual, and as such, must comply with all the obligations of an employer for the purposes of workers' compensation, unemployment compensation, OSHA, labor standards and child labor laws. There are penalties for failure to comply with an employer's obligations under these laws, such as failure to obtain workers' compensation insurance, pay unemployment insurance tax or comply with the employment laws. In addition, penalties of up to $5,000 may be assessed for each violation of Minn. Stat. §181.723, subd 7.”21

slide24

When does the law become effective?

“The law becomes effective for services performed on or after Jan. 1, 2009. Independent contractor exemption certificates issued before March 1, 2009 are effective until March 1, 2011. Certificates issued after then are effective for two years. After the expiration, a new application fee of $150 must be submitted every two years.”22

footnotes
Footnotes:
  • Minn. Stat. §268.035, Subd. 9: (emphasis added).
  • Minn. Stat. §268.035, Subd. 9(1).
  • Minn. Stat. §268.035, Subd. 9(2).
  • Minn. Stat. §268.035, Subd. 9(3).
  • Minn. Stat. §268.035, Subd. 9(4).
  • Minn. Stat. §268.035, Subd. 9(5).
  • Minn. Stat. §268.035, Subd. 9(6).
  • Minn. Stat. §268.035, Subd. 9(7).
  • Minn. Stat. §268.035, Subd. 9(8).
  • Minn. Stat. §268.035, Subd. 9(9).
  • See State of Minnesota, Department of Labor and Industry, Construction Codes and Licensing Division, “Statement of Need and Reasonableness, Proposed Rules Governing Independent Contractor Exemption Certificates; Minn. Rules, Chapter 5202” http://www.doli.state.mn.us/pdf/rulemaking_5202_icecsonar_031808.pdf
  • Minn. Stat. §181.723, Subd 3.
  • See http:www.doli.state.mn.us.ic.html#Why_is_this_certificate_required
  • Minn. Stat. §181.723, Subd 6.
  • See http://www.doli.state.mn.us/ic.html#Why_is_this_certification_required
  • Id.
  • Minn. Stat. §181.723, Subd. 2.
  • See http://www.doli.state.mn.us/ic.html#How_do_I_apply_for_the_exemption_certificate
  • Minn. Stat. §181.723, Subd 5.
  • See http://www.doli.state.mn.us/ic.html#How_do_I_apply_for_the_exemption_certificate
  • Id.
  • Id.