What’s Up With the New Employment Misclassification Law?
By now, you've probably heard about the new laws Minnesota passed last session that are shaking up the remodeling industry. Changes to Employee Sick and Safe Time, restrictions on what contractors can say and do when working on projects paid for with insurance proceeds, the elimination of “per insurance proceeds” contracts, and the biggie, the new employee misclassification law. Before these laws were enacted, we fought hard to prevent their passage. Despite our efforts to stop them, the new laws are here, and they’re bringing major changes for contractors and homeowners alike.
Since the laws passed, we’ve had many constructive conversations with clients to figure out how these new laws may affect their business and how best to introduce and manage the changes the laws require. These laws are tough, maybe even tougher than we expected. But here's the reality: the rules have changed. If you’re going to play the game, and unless you are very risk tolerant, you have to adopt the new rules and adapt your business practices to the new requirements.
Sit down with your attorney to figure out the best way to adjust your business. It’s crucial to get ahead of these changes now. Before going too far, some of you may be asking your legal counsel to find the “loophole,” the “work-around.” The big challenge? We don’t fully know how these laws will be enforced yet. I’ve talked with management at DOLI and their answers have been less than informative. I’m told they’re still trying to figure it all out, that DOLI’s internal Office of General Counsel is preparing some resources for stakeholders on the employment misclassification bill. The projected date for the resources was the end of June. We’re still waiting. If we don’t know how the law will be enforced, it’s impossible to find a loophole or work-around.
To add to the confusion, UnitedHealthcare Group sued Minnesota last week claiming the jumbo omnibus bill included a provision that prohibits for-profit HMOs from running Medicaid health plans. The suit alleges that the jumbo omnibus bill, which also included the employment misclassification law, violates the Minnesota constitution. The Constitution requires that a bill address only a single subject and that subject must be described in the bill’s title. The jumbo omnibus bill is 1,400 double-sided pages; the title page alone is 6 pages! Single subject? Sure doesn’t seem like it. It is unclear whether, if UHG is successful, a court will strike down only the HMO law and leave the rest of the laws, like the employment misclassification law, intact or will strike down the entire jumbo omnibus bill and everything it contained.
Lawsuits like the UHG suit take a long time to wind through the system, finally have their day in court, then the appeal, and finally the Minnesota Supreme Court. It’s fair to say that this case will finally be decided in the Minnesota Supreme Court, so don’t expect an answer any time soon. That said, a court might issue a temporary restraining order preventing the enforcement of any provision of the jumbo omnibus bill. I expect additional similar lawsuits to be filed by others negatively impacted, including one brought by someone in the construction industry to kill the employment misclassification bill.
Understand when you’re talking with your legal counsel, we’re all challenged by what to advise. On the one hand, the law is in effect now, or part of it is. More on that in a moment. The language of the law is clear. We’ve all been taught how to read laws and understand legislative intent. Without a history of enforcement, though, to know what to expect from DOLI and the other agencies charged with enforcement, it is difficult to give legal advice with any certainty. You’re likely to hear different advice from different lawyers, everything from “it’s over; shut the doors” to “ignore it; this, too, shall pass and you won’t be the one they catch anyway.”
So, what should you do? First, learn what this new employment misclassification law means for you. First, it prohibits representing yourself as an independent contractor (“IC”) to an upstream contractor. It also prohibits the contractor that hires the IC from representing to any governmental agency that an employee is an IC. This part of the law is in effect now. The penalties for both the IC and the contractor are significant. In addition to fines up to $10,000 per violation (a violation is determined per person per day), the owners and officers of the hiring contractor can be held personally liable for the fines. Keep in mind, the law also includes 'successor liability.' If you sell your business, the buyer could be on the hook if one of your ICs is found to be an employee.. And, DOLI can shut down any jobsites on which misclassified employees are working, and keep them closed until the employees are paid what they’re owed, including fringes, and all the fines are paid. If your jobsite is closed, replacing the IC may not be enough to convince DOLI to reopen your jobsite. Talk with your IC and your subs about the law and how they’re adapting. Understand that your sub may be a compliant IC, but if your sub’s labor is all ICs, you may both have a problem.
Second, the law replaces the former 9-factor test with a new 14-factor test. This part of the law doesn’t take effect until March 15, 2025. While some folks say the law added 5 new factors to the original 9, that is not accurate. Much of the old 9 are covered by the new 14 factors, but they are not “the same.” One example is the new factor that requires ICs to provide the materials for their work. Under the old 9-factors, it was understood that the tradition in Minnesota allowed GCs to provide materials and ICs labor only. So why put materials into the new law? Is the intent to make Minnesota like California where the IC must provide materials? We simply don’t have that answer. Another significant change is that compliance is determined at the time work is performed. One of the factors requires the IC to provide a W-9. In the past, the timing of when the W-9 is provided wasn’t an issue. Under the new law, it appears that if the W-9 isn’t provided BEFORE the IC provides labor, the IC will be a misclassified employee and the penalties may attach.
So, what’s the bottom line? What should you do? I wish I could tell you with some degree of certainty. The best advice I can offer, what we’re advising our clients, is do what is best for your business. Start with your goals, where do you want to be in 5 years. Make decisions based on what is most likely to help you achieve the goal. A close second is to understand that part of the law is effective now and the second part in a few months. You don’t get to choose which laws to comply with and which to ignore. There’s a great deal of confusion. Bottom line, though, is that for most of you, there are clearly employees and clearly IC subcontractors. Then, there are the folks that we all know are in the middle. Outside salespeople, that carpenter you keep busy enough so s/he doesn’t have to work for others except maybe the occasional side job. The project manager, the general office worker, for many of you it’s all or nearly all of the folks who contribute to making your companies great. For those individuals, this might be a great time to re-evaluate whether there’s really a benefit to maintaining their IC status, or whether the benefit of employment outweighs the risk of maintaining the IC status. Another way to look at it is whether making those individuals employees would make it harder or easier for you to achieve your business goals.
If you’ve made it this far with this article, I want to thank you for staying with it. These new laws have driven all of us nuts and trying to get a straight answer is tough. I wish I could give you that answer and I’m sure you were hoping that I’d give it to you. Unfortunately, that’s not the world we’re in. We’ll get there, someday, hopefully sooner than later. In the meantime, talk to your attorney, your business partners, and others in the industry. Together, we’ll navigate these changes and come out stronger. Think first about how to make your business stronger. Embrace change for it is the only constant. If you’re not growing and adapting, you’re falling behind. Your competition will leapfrog past you. As members of NARI-MN, we’re all in this together. By adapting and supporting each other, we’ll come out better on the other side.
 
Bill Gschwind is the founding attorney of Minnesota Construction Law Services, and a NARI-MN member since 2012. Bill is NARI-MN’s government affairs liaison and serves on the NARI National Government Affairs Committee. He can be reached at 651-484-4412 or by email at bill@mncls.com.