If you run a business in Minnesota, one the issues you need to consider is the proper classification of workers – independent contractor or employee?[1] These classifications describe two different working relationships, each with its own sets of duties and responsibilities. It is important to make the correct classification. Employers who mis-classify workers can end up with a substantial tax bill and even a lawsuit on their hands.
So how can you tell the difference? The answer—like so many legal questions—is that it depends. It depends on what analysis you are looking at. The IRS has one set of analysis. The State of Minnesota has another. As a business owner in Minnesota, it is important to consider both federal and state rules.
Federal (IRS) Test
First, let us look at the IRS test. Courts have considered many factors when determining whether a worker is an employee or an independent contractor. Generally speaking, these factors can be grouped into three categories: behavioral control, financial control, and the relationship between the worker and the employer.
Behavioral Control. Factors that indicate whether an employer has the right to control how a worker performs the work for which she was hired include: a) instructions given by the employer to the worker, and b) training the employers give to the worker.
The key consideration is whether the business has given up the right to control the details of a worker’s performance. For an employee the answer is no. For an independent contractor, the answer should be yes.
Financial Control. Factors that indicate whether an employer has the right to control the business aspects of the worker’s job include: a) the extent to which the worker has un-reimbursed expenses, b) the extent of the workers investment, c) the extent to which the worker makes service available to the relevant market, d) how the employer pays the worker, and e) the extent to which the worker can realize profit or loss.
Independent contractors are more likely to have un-reimbursed expenses, to have significant investment in the facilities she uses to perform her work for employer, to advertise her services in the relevant market, be paid a flat fee, and have an opportunity to make a profit or loss on her work.
Type of Relationship between Employer and Worker. Factors that indicate the type of relationship between the employer and worker include: a) written contracts describing the relationship the parties intended to create, b) whether the business provides the worker with employee type benefits, c) the permanency of the relationship, and d) the extent to which services performed by the worker are a key aspect of the regular business of the company.
What really matters is the nature of the underlying relationship, not what the parties choose to call it. A true independent contractor will finance her own benefits of the overall profits of her enterprise. If the employer offers work to the worker with the expectation that the relationship will continue indefinitely, rather than for a specific period of time or for a specific project, this may be evidence that the employer and worker intended to create an employee relationship. Finally, if the worker performs work that is a key aspect of the regular business conducted by the employer, this may be evidence of an employee relationship.
State of Minnesota Test
Now let us look at the State of Minnesota test.[2] Minnesota case law has developed a five (5) factor test that allows an employer and worker to make some judgments concerning the appropriate classification of independent contractors or employees. The five factors are as follows:
- the right to control the means and manner of performance
- the mode of payment
- the furnishing of tools and materials
- control over the premises where the work was done
- the right of discharge.
The degree of control an employer may exert over a worker has become the primary factor to consider in Minnesota. If the employer has the right to control worker’s job duties, it is evidence that worker is an employee rather an independent contractor. Minnesota’s Department of Labor and Industry provides questions that are helpful in analyzing the control factor in a particular situation. The questions are not meant to compel a particular conclusion and should only be used as a guide.
Furthermore, in 1986 the Minnesota Legislature authorized the Department of Labor and Industry to further define the term “independent contractor”. The result was Minnesota Rules Chapter 5224, which contains guidelines for asserting independent contractor status for 31 specific occupations. Comparing the worker at issue with these listed occupations is a way to start educating yourself.
To clarify, the purpose of this blog post is solely to flag a potential issue for business owners. It is NOT offering legal advice of any sort. Should you have any concerns regarding this issue, feel free to contact JTO Legal through the website.
[1] The terms “employer” and “worker” are used in the following information and are not to be given a literal meaning nor do they correspond to the “employer” and “employee” as defined in the Minnesota Workers’ Compensation Act. They are used as a manner of convenience to distinguish between one who pays to have a service performed and the one who is paid to perform the service.
[2] Minnesota makes a distinction between independent contractors in the construction business, in the trucking and messenger/courier service, and other occupations. Here we address only the “other occupations” test.