By: Chad A. Staul, Esq.
My neighborhood recently suffered a brief, but damaging, hail storm. The storm's passing was quickly followed by a fleet of full sized trucks with ladders strapped to the roof surveying homes for any potential damage. Viewing the vast array of contractors descending upon my neighbors' homes made me wonder three things:
1. How many of them use subcontractors or are themselves independent contractors?
2. Are they aware of Minnesota's Independent Contractor Exemption Certificate ("ICEC")?
3. Have they performed a compliance audit recently to ensure compliance?
Why did that cross my mind? Since January 1, 2009, Minnesota law requires individuals working as independent contractors in the construction industry to obtain an ICEC from the Minnesota Department of Labor & Industry (DOL). (The requirement does not apply to corporations, LLCs or partnerships). Additionally, as the economy attempts to surge back from the economic downturn through re-investment by state and federal governments, those in the construction industry need to indentify if they are in compliance or how to become compliant.
Nine Strict Criteria: Individuals working in the construction industry must meet all nine of the following criteria to be considered an independent contractor:
- Maintain a separate business with their own office, equipment, materials and other facilities.
- Hold or have applied for a federal employer identification number (FEIN), or provide proof of filing of individual taxes for services provided the previous year.
- Operate under contracts to perform specific services for specific amounts of money and under which they control the means of performing the services.
- Incur the main expenses related to the services that the individual performs under contract.
- Is responsible for the satisfactory completion of services and is liable for failure of completion.
- Receive compensation for services under a contract on a commission or per-job competitive bid basis and not any other basis.
- May realize a profit or suffer a loss under contracts to perform services.
- Have continuing or recurring business liabilities or obligations.
- The success or failure of the individual's business depends on the relationship of business receipts to expenditures.
Operating Without an ICEC: Many general contractors have used the same subcontractors for several years and many subcontractors have been in operation well before the law's effective date. Therefore many individuals are likely not to be in compliance. Individuals operating without a required ICEC are breaking the law and face penalties of up to $5,000.00 per violation. Additionally, failing to obtain an ICEC means that individuals will be classified as employees of the general contractor, not independent contractors, for purposes of state workers' compensation, unemployment insurance, wage and hour, occupational safety and health laws, and state and federal tax withholding. This raises extensive complex issues under both federal and state law amounting to additional liability exposure.
Perform an Audit: Because this law has been in effect for less than two years, and there has been extensive re-investment in construction projects, now is the perfect time to contact Wessels Sherman for a cost-effective review of your independent contractor policies, agreements, files, and any other documentation you use with your independent contractors to ensure compliance.
For your convenience, the application and instructions for obtaining an ICEC can be found at the following website: http://www.dli.mn.gov/CCLD/PDF/icec_applic.pdf
IMPORTANT: Be aware that simply having an ICEC does not make an individual an independent contractor: it only allows them to operate as one. In addition to obtaining an ICEC, individuals will still need to meet the nine strict criteria listed above.
Contact Wessels Sherman Attorney Chad Alan Staul at (952) 746-1700 or chstaul@wesselssherman.com for help to ensure compliance with this new law and to strengthen your independent contractor relationships in Minnesota.
