Business & Real Estate Law Report

Effective March 1, 2025, Minnesota workers in the construction industry who provide commercial or residential building construction or improvement services must satisfy a 14-factor test – instead of the previous 9-factor test – to be considered independent contractors and therefore exempt from various wage and hour requirements. To be considered an independent contractor, an individual operating as a business entity must ensure all of the following requirements are met at the time services are provided or performed:

1. was established and maintained separately from and independently of the person for whom the services were provided or performed;
2. owns, rents, or leases equipment, tools, vehicles, materials, supplies, office space, or other facilities that are used by the business entity to provide or perform building construction or improvement services;
3. provides or performs, or offers to provide or perform, the same or similar building construction or improvement services for multiple persons or the general public;
4. is in compliance with all of the following:

• holds a federal employer identification number if required by federal law;
• holds a Minnesota tax identification number if required by Minnesota law;
• has received and retained 1099 forms for income received for building construction or improvement services provided or performed, if required by Minnesota or federal law;
• has filed business or self-employment income tax returns, including estimated tax filings, with the federal Internal Revenue Service and the Department of Revenue, as the business entity or as a self-employed individual reporting income earned, for providing or performing building construction or improvement services, if any, in the previous 12 months; and
• has completed and provided a W-9 federal income tax form to the person for whom the services were provided or performed if required by federal law;

5. is in good standing as defined by section 5.26, if applicable;
6. has a Minnesota unemployment insurance account if required by chapter 268;
7. has obtained required workers’ compensation insurance coverage if required by chapter 176;
8. holds current business licenses, registrations, and certifications if required by chapter 326B and sections 327.31 to 327.36;
9. is operating under a written contract to provide or perform the specific services for the person that:

• is signed and dated by both an authorized representative of the business entity and of the person for whom the services are being provided or performed;
• is fully executed no later than 30 days after the date work commences;
• identifies the specific services to be provided or performed under the contract;
• provides for compensation from the person for the services provided or performed under the contract on a commission or per-job or competitive bid basis and not on any other basis; and
• the requirements of item (ii) shall not apply to change orders.

10. submits invoices and receives payments for completion of the specific services provided or performed under the written proposal, contract, or change order in the name of the business entity. Payments made in cash do not meet this requirement;
11. the terms of the written proposal, contract, or change order provide the business entity control over the means of providing or performing the specific services, and the business entity in fact controls the provision or performance of the specific services;
12. incurs the main expenses and costs related to providing or performing the specific services under the written proposal, contract, or change order;
13. is responsible for the completion of the specific services to be provided or performed under the written proposal, contract, or change order and is responsible, as provided under the written proposal, contract, or change order, for failure to complete the specific services; and
14. may realize additional profit or suffer a loss, if costs and expenses to provide or perform the specific services under the written proposal, contract, or change order are less than or greater than the compensation provided under the written proposal, contract, or change order.

See Minnesota Statute § 181.723, subd. 4. Many of these new factors are similar to the previous 9-factor test. However, some of the more significant changes to note include insurance, licensure, and contract requirements – all of which may impact some of your worker classifications.

Compliance with this law is paramount to avoiding significant penalties. A business that misclassifies employees as independent contractors may face the following penalties: (1) compensatory damages to the worker, (2) a penalty of up to $10,000 per worker that the employer failed to properly classify as an employee, (3) a penalty of up to $10,000 for each failure to properly classifying a worker as an employee under the applicable local, state, or federal law; failure to disclosure  a worker as an employee when required to do so; and requirement or request that an individual enter into an agreement that misclassifies, misrepresents, or treats the person as an independent contract; and (4) a penalty of $1,000 for each instance of obstructing the MNDOLI’s investigations into alleged worker misclassification violations. Further, individual owners, officers, or agents who knowingly or repeatedly engage in any of the prohibited activities may also be held individually liable under the new law.

In light of this new 14-factor test, it is important for Minnesota employers in the construction industry to evaluate whether they are properly classifying their independent contractors and employees under state law.