REGIONAL- The distinction between an employee and an independent contractor can be confusing to some employers, while for others it’s one that can be manipulated to the employer’s benefit and the worker’s detriment.
Calling an employee a contractor or vice versa is called misclassification, and it’s a prevalent issue in Minnesota businesses that the Legislature is trying to address.
Their work flows from a 66-page report developed by the Office of the Legislative Auditor on the subject. While noting that misclassification occurred in many industries and up to 22 percent of employers in an unemployment insurance audit, the report singles out two groups, construction and gig workers, for stand-alone chapters. While the construction industry employs eight percent of the state’s workers, 16 percent of them were found to be misclassified. The gig economy, Uber and Door Dash drivers and such, where drivers are considered by their employers as independent contractors, is a nontraditional, more recent development that deserved more scrutiny.
What’s the difference?
The answer to that question is not as clear cut as one would think, as state law outlines many different “tests” to determine worker classification. Indeed, state law prescribes specific worker classification tests for at least 30 different industries or occupations. The state uses different classification tests to determine a worker’s eligibility for unemployment benefits and worker’s compensation. The Department of Employment and Economic Development (DEED), Department of Labor and Industry (DLI), and the Department of Revenue (DOR) use different standards to determine a worker’s classification. There are even different standards within a single agency – the Department of Labor and Industry uses one standard to determine eligibility for worker’s compensation, but a different standard to determine whether an employer violated the state’s prohibition against misclassifying employees. One agency could classify a worker as an employee and another agency could classify the same worker as an independent contractor, creating confusion for both workers and employers.
The most common factor is the level of control an employer has over an individual’s work. The more they prescribe and direct an individual’s activities, the more likely that person should be classified as an employee. Setting worker schedules, requirements that a worker personally performs the work, designating the place of work, requiring workers to comply with an employer’s instructions, whether the employer provides tools and materials, and reimbursement of worker expenses are some of the approximately 20 factors considered when determining whether a worker is an employee or an independent contractor for purpose of worker’s compensation.
Problems caused
Worker misclassification has numerous impacts for workers, employers, and government.
Workers misclassified as independent contractors rather than employees are prevented from receiving many employment-related rights and protections. For example, because independent contractors are generally not subject to minimum wage and workplace safety requirements, a misclassified worker may not receive wages to which they are legally entitled, and they may work in an environment without required safety precautions.
Independent contractors must pay both the employee and employer shares of Social Security taxes, and typically aren’t considered eligible for employee benefits such as health insurance or paid time off.
Employers who misclassify employees as independent contractors avoid legally required obligations such as contributions to the unemployment insurance program, reducing labor costs. An unfair competitive advantage is created favoring employers who willfully misclassify employees over those who follow the law.
Misclassification carries the risk that an employer could be sued by an employee and be required to pay monetary fines or compensate workers for damages.
Government suffers through lower program and tax revenues or increased reliance on state coverage of worker’s compensation benefits. Workers who don’t receive all the compensation or benefits they are owed often turn to government social assistance programs.
The bill
Rep. Emma Greenman, DFL-Minneapolis, is the chief author of the House bill, which has 20 co-authors. HF 4444 would ensure a business does not classify, represent, treat, report, disclose, document, or enter into an agreement with an employee, or require employees to agree to be misclassified or treated as something other than an employee — like an independent contractor. The Department of Labor and Industry could penalize a business up to $10,000 per violation. Employers could be held personally liable for violations, and the bill includes a multi-factor test that could hold a new owner of a business liable for past violations of the former owner. Employers have the right to demonstrate extreme financial hardship when required to reimburse the state for litigation expenses and have those costs reduced.
The bulk of the bill zeroes in on the construction industry, creating a new definition of independent contractor specific to the industry. A new multi-part test with 14 requirements will be established to determine independent contractor status.
The bill also defines an employer-employee relationship in the following way: “An individual who provides or performs building construction or improvement services for a person that are in the course of the person’s trade, business, profession, or occupation is an employee of that person and that person is an employer of the individual. It reinforces that an employee may not be required to represent themselves as an independent contractor, and that they must be treated in their work and compensation as an employee.
The bill also creates the Intergovernmental Misclassification Enforcement and Education Partnership, composed of the commissioners of labor and industry, revenue, employment and economic development, and commerce, and the attorney general. The partnership is required to meet quarterly on issues related to investigation and outreach on employee misclassification. The partnership’s duties will include efforts related to education, outreach, detection, investigation, deterrence, and enforcement of employee misclassification.
Unsurprisingly, the bill has met with pushback from construction industry organizations. A letter from the Associated Builders and Contractors of Minnesota (ABCM) called the bill “overly punitive.” They objected to the fact that the bill makes no distinction between willful misclassification and honest mistakes, holding all violations to the same expanded civil penalties. They noted that the OLA report acknowledged that genuine mistakes are made and asked that penalties be limited to willful violations.
ABCM also drew attention to a section which gives the Commissioner of Labor and Industry expanded authority to issue stop work orders.
“A single isolated violation at one jobsite could subject a contractor to the closure of all its jobsites, which could have broad negative consequences,” they said.
Prohibitions against an employer requesting that an individual register as a construction contractor and from entering into an agreement that treats an individual as an independent contractor run counter to standard practices contractors use to protect themselves and ensure that individuals are properly registered, ABCM said. Discouraging these actions could expose employers to penalties for being proactive, they contended.
A letter representing the views of 11 different business groups from the Minnesota Chamber of Commerce to hospitality, realtors, grocers, and contractors also weighed in with objections.
“Our members do not want more complex regulation in an area where clear and consistent guidance from regulators is often lacking,” the group wrote. “Well-rounded laws should make it easier for good actors to legally participate in our economy and harder for bad actors to engage in violative behavior.”
The group expressed the need for the bill address the issue of lack of interagency collaboration, asserting that the newly established partnership fails to focus on the core concern of consistent and uniform application of independent contractor regulations. They also expressed concern about the expanded violations and civil penalties, and reiterated most of ABCM’s concerns.
HF 4444 has already made its way through four House committees and is awaiting consideration by the Ways and Means Committee. The Senate version, SF 4483, has also been through four committees and has been referred to a fifth, the Finance Committee.