Beginning in July, 2012 and before September 15, 2012, most contractors and subcontractors in the building construction industry will be required to register with the Minnesota Department of Labor and Industry in the Contractor Registration Pilot Project ("Pilot Project"). It will be a violation of the law to contract with or perform construction services for another person without first being registered with the Pilot Project, or to contract with or pay another person to perform construction services if the other person is not registered with the Pilot Project.This Pilot Project replaces the Independent Contractor Exemption Certificate program ("ICEC") and is intended to establish a simplified framework for determining whether individual building construction workers are employees or independent contractors. The overarching goal of the amended law is to assist state agencies to investigate employee misclassification in the building industry and level the playing field for businesses that appropriately classify their employees.
The Department of Labor and Industry, along with the Department of Employment and Economic Development and the Department of Revenue, will assess whether the information obtained through the Pilot Project is useful in enforcing laws related to misclassification of employees. The current law provides for a two-year trial period, after which the Pilot Project will either be extended by the Legislature or abandoned. In the meantime, it is important for contractors in Minnesota to understand their obligations under the new law, to avoid penalties and unintentional violations.
Who Needs to Register
The law requires that anyone who performs "public or private sector commercial or residential building construction or improvement services" must register with the Pilot Project. Several exceptions apply:
- Contractors not involved in building construction (such as road contractors) do not need to register.
- You do not need to register with the Pilot Project if your only role in building construction or improvement services is to manufacture, supply or sell products, materials or merchandise.
- You do not need to register with the Pilot Project if your only role in building construction or improvement is related to landscaping services, whether or not the services are provided as part of a contract for the building construction or improvement services.
- Anyone with a current license, certificate, or registration under chapter 299M or 326B does not need to register (this includes some licensed fire protection contractors, potable water piping system contractors, those holding a journeyman certificate, multipurpose potable water piping system installer certificate, certain electrical certificates, plumbing and water conditioning certificates, high pressure piping certifications, licensed boiler inspectors and elevator operators). If you are unsure whether a license or certificate you hold falls within this category, review the license to see whether it is authorized under Minnesota Statute 299M or 326B, or contact the Minnesota Department of Labor and Industry at (651) 284-5074.
- Anyone who has given a bond to the state under Section 326B.197 or 326B.46 does not need to register (if you have a bond with the state for gas, heating, ventilation, cooling, air conditioning, fuel burning, plumbing or refrigeration work, this exception may apply to you).
- No employees need to register, as long as their employer is in compliance with employment laws at the time the construction services were performed.
- Architects and professional engineers do not need to register (if you are unsure whether this exception applies to you, consult Minnesota Statute 326.02, subdivisions 2 and 3).
- School districts and technical colleges do not need to register.
- People providing construction services on a volunteer basis (like Habitat for Humanity or Builders Outreach Foundation) do not need to register.
- Anyone exempt from licensing under 326B.805 (this includes individuals who would need to be licensed as residential building contractors, residential remodelers or residential roofers but are exempt from licensure because their gross annual receipts do not exceed $15,000) does not need to register.
- If you currently hold a certificate under the ICEC program, you will not need to register with the new Pilot Project until your ICEC certificate expires.
If you perform building construction services in Minnesota and none of the eleven exceptions above apply to you, you need to register with the Pilot Project before September 15, 2012. Registration with the Pilot Project does not relieve you of any other licensing, registration, or certification requirements – you will still need to maintain all applicable licenses and certifications.
How to Register for the Pilot Project
The Online Registration Process
Registration will occur through a website, and will be free of charge. The website will process registration applications and promptly issue registration certificates electronically to successful applicants. The Department of Labor and Industry is hoping to have the website available for registration beginning July 1st, but it is possible the website may not be up and running until later in July. When it is available, there will be a link to the registration website displayed prominently on the Department of Labor and Industry homepage.
What Information is Needed for Registration
Anyone registering as an individual, owner, or part-owner will need the following information (remember that employees do not need to register, as their employers will register for them):
- Your full legal name and job title at your business
- Your business address (both the designated address and the physical address, if they are different), email address and phone number
- What percentage you own of your business (So, if you own your business equally with one other person, your percentage will be 50%. If you are registering as an individual, i.e. not a business owner, you will not need this information.)
- Your Social Security number
- Your Minnesota tax identification number, if you have one
- Your federal employer identification number, if you have one
- Your business filings with the Minnesota Secretary of State, if you have any
- A statement as to whether or not you have any employees (see the section entitled "Employee Classification of Independent Contractors," below, if you are unsure whether your workers will be considered employees or independent contractors). You will not need to enter personal information (such as names or social security numbers) The names of any other people with an ownership interest in your business, and the percentage of the interest owned by each person (If your business is a publicly traded corporation, you do not need the names of shareholders with less than ten percent ownership.)
- Documentation of compliance with workers' compensation and unemployment insurance laws (If you have employees, as defined by the statute and explained below, you may need to carry workers' compensation and unemployment insurance for these employees. You will not be able to register with the Pilot Project if you are not in compliance with applicable insurance laws.)
You will need to sign the application and certify that you have reviewed it and determined that the information you have provided is true and accurate. You will enter your name on the website electronically, but this certification will be considered a legal signature.
You must remain registered while providing construction services for another person. Registration with the Pilot Project is free. Your registration will be good for the duration of the two-year trial period but may need to be renewed later if the Pilot Project is extended by the legislature.
If the structure, legal form, or ownership of your business changes, the new business or owner will need to submit a new registration. The registration cannot be transferred to another person. You will also need to update any information submitted on your original registration (such as address or phone number) within 15 days of any change. Information changes can be provided electronically on the registration website.
Public and Private Information
The public website will include certificates of registration with the registered person's legal business name, including any assumed name, as filed with the secretary of state. The certificates will also show the person's business address (as entered on the application), the effective date of the registration and the expiration date. The statute states that any other data or documentation submitted to the commissioner for registration is private or nonpublic data.
Avoiding Statutory Violations
It is illegal under the new law to:
- Contract with or perform construction services for another person without first being registered with the Pilot Project (unless you are exempt from registration)
Contract with or pay another person to perform construction services if the other person is not registered with the Pilot Project (unless they are exempt from registration)
- This means you must check the registration status of anyone you contract with or pay to perform construction services. The registration certificates will be available online so you can verify that any subcontractors are registered before you contract with or pay them for their services. All payments to an unregistered person for construction services on a single project site shall be considered a single violation, which means you will not receive a violation for every payment you make to an unregistered person, but rather you could receive one violation per unregistered person per project
- If a person is registered at the time you enter into a contract but becomes unregistered during the project, it will not be considered a violation to contract with or pay that person, so long as they were registered when the contract was created. This means that you will be safe under the law if you check the registration status of all your subcontractors or workers when you contract with them—you do not need to re-check registration status throughout the project to ensure they are still registered.
- Hold yourself out as an independent contractor unless you meet the new law's definition of an independent contractor
- Require any individual through coercion, misrepresentation or fraudulent means to adopt independent contractor status or form a business entity (e.g. forcing someone to form an LLC or become an independent contractor is a violation of the law)
- Knowingly misrepresent or misclassify an individual as an independent contractor
Penalties and Consequences
The maximum penalty for failure to register is $2,000, but the commissioner "shall forgive the penalty if the person registers within 30 days of the date of the penalty order." This means that any penalty you receive for failing to register with the Pilot Project will be waived if you complete your registration within 30 days of receiving the penalty order.
Penalties for other violations (like contracting with or paying an unregistered person, or holding yourself out as an independent contractor without satisfying the requirements) appear to carry the same potential penalties as any other licensing violation, which means that the commissioner may issue an administrative order to any person who the commissioner determines has committed a violation of the law. The administrative order may require the person to correct the violation, may require the person to cease and desist from committing the violation and/or may assess monetary penalties. The commissioner may issue to each person a monetary penalty of up to $10,000 for each violation of applicable law committed by the person. Existing law also states that the commissioner may order that part or all of the monetary penalty will be forgiven if the person to whom the order is issued demonstrates to the commissioner by the 31st day after the order is issued that the person has corrected the violation or has developed a correction plan acceptable to the commissioner. The law also allows for failure to correct a violation (as required by an order) to be considered contempt of court. Finally, violating the law could lead to suspension or revocation of your registration or license if you have one.
Note that the commissioner has a great deal of discretion in issuing fines or other penalties, and because this law is new, it is difficult to know at this time what fines or penalties should be expected for violations.
Employee Classification of Independent Contractors
The goal of the Pilot Project is to make it easier for employers and government agencies to determine whether workers are independent contractors or employees, and to deter misclassification between these categories. In an effort to clarify the status of a particular worker, the new law articulates nine factors which must be met for a worker to qualify as an independent contractor.
The nine factors are:
- Maintains a separate business with the individual's own office, equipment, materials, and other facilities;
- (i) Holds or has applied for a federal employer identification number or (ii) has filed business or self-employment income tax returns with the IRS if the individual has performed services in the previous year;
- Is operating under contract to perform specific services in return for specific amounts of money and under which the worker controls the means of performing the services;
- Is incurring the main expenses related to the services that the worker is performing under the contract;
- Is responsible for the satisfactory completion of the services that the worker has contracted to perform and would be liable for a failure to complete the services;
- Receives compensation directly for the services performed under the contract on a commission or per-job or competitive bid basis and not on any other basis;
- May realize a profit or suffer a loss under the contract to perform services
- Has continuing or recurring business liabilities or obligations; and
- The success or failure of the individual's business depends on the relationship of business receipts to expenditures.
The "and" before the final factor indicates that all nine factors must be met in order for an individual worker to qualify as an independent contractor. Owning your own business or LLC does not automatically qualify you as an independent contractor. Owners and partial owners of businesses must satisfy the nine factors, and must also submit invoices in the name of the business entity. If you do not satisfy the nine factors and submit invoices in the name of your business entity, you will be considered an employee rather than an independent contractor, regardless of LLC (or other business entity) status. This also means your employer will need to satisfy any applicable requirements for unemployment and workers' compensation insurance, along with any other laws related to employees.
Tax Withholding Requirement Repealed
The new law also eliminates the existing two percent tax withholding requirement for contractors, effective for payments made after June 30, 2012.