This and any related posts are designed to be an employment law resource for Minnesota business owners. Before delving into the law surrounding the employment relationship, however, the business owner must determine whether the individuals it has retained to perform services are employees or independent contractors. Business owners who use independent contractors may think they do not have employees and, therefore, that employment laws do not apply to them. An individual’s status as an independent contractor, however, is not determined by agreement or by what he or she is called. Rather, the individual’s status is determined by what he or she actually does. If an individual performing services for a business is being treated as an independent contractor, but is performing the work of an employee, and an agency such as the Internal Revenue Service or the Minnesota Department of Revenue discovers this error, the results can be expensive to the business.
Before designating an individual as an employee or an independent contractor, the business owner should consider the following factors:
- Instructions. A worker who is required to comply with another person’s instructions about when, where, and how he or she is to work is ordinarily an employee.
- Training. Training a worker by, e.g., requiring an experienced employee to work with him or her, corresponding with the worker, or requiring the worker to attend meetings, weighs in favor of employee status because the employer for whom the services are performed wants the services performed in a particular method or manner.
- Integration. A worker is subject to direction and control if his or her services are integrated into the company’s business operations. Thus, this factor weighs in favor of an employment relationship.
- Services Rendered Personally. If the worker must perform the agreed upon services personally, this factor weighs in favor of employee status because presumably the employer is interested in the method used to accomplish the work as well as the results.
- Hiring, Supervising and Paying Assistants. If the business owner hires, supervises and pays workers’ assistants, this factor generally shows control over the workers on the job. If, however, one worker hires, supervises, and pays assistants pursuant to a contract under which the worker agrees to provide materials and labor and under which the worker is responsible only for the attainment of a result, independent contractor status is indicated.
- Continuing Relationship. A continuing relationship between the employer and the worker weighs in favor of an employment relationship.
- Set Hours of Work. This is a factor indicating control and, therefore, an employment relationship.
- Full Time Required. If the worker must devote substantially full time to the business, an employment relationship is indicated because the employer has control over the amount of time the worker spends working and therefore can restrict the worker from doing other gainful work. An independent contractor would be free to work when and for whom he or she chooses.
- Doing Work on the Employer’s Premises. Work performed on the employer’s premises suggests control over the worker, especially if the work could be done elsewhere. Work done off the premises indicates some freedom from control. This fact alone, however, does not mean that the worker is not an employee. The importance of this factor depends on the nature of the service involved and the extent to which an employer generally would require employees to perform such services on the employer’s premises.
- Order or Sequence of Work. Requiring a worker to perform services in an order or sequence set by the employer shows that the worker is not free to follow the worker’s own pattern but must follow established routines and schedules of the employer. Thus, this factor weighs in favor of an employment relationship.
- Oral or Written Reports. Requiring oral or written reports indicates a degree of control by the employer and, thus, an employment relationship.
- Payment by Hour, Week, Month. Payment by the hour, week, or month generally points to an employer-employee relationship. Payment by fee generally indicates an independent contractor relationship.
- Payment of Business and/or Traveling Expenses. If the employer pays the worker’s business and/or traveling expenses, this factor weighs heavily in favor of an employer- employee relationship.
- Benefits. The provision of benefits such as insurance, a pension plan, PTO vacation pay, and sick pay indicate an employer-employee relationship.
- Furnishing of Tools and Materials. If the employer furnishes significant tools, materials, and other equipment, this tends to show the existence of an employment relationship.
- Significant Investment. If the worker invests in facilities that are used by the worker in performing services and the facilities are of the kind that are not typically maintained by employees, that factor tends to indicate independent contractor status. Lack of investment in facilities indicates dependence on the employer and, therefore, the existence of an employment relationship.
- Realization of Profit or Loss. The worker’s ability to realize a profit or suffer a loss is indicative of independent contractor status. In other words, if the worker is subject to real risk of economic loss due to significant investments or bona fide liabilities for expenses, this factor indicates that the worker is an independent contractor. The risk that the worker may not be paid for his or her services is not a sufficient economic risk to support independent contractor status.
- Working for More Than One Company at a Time. If a worker performs services for a variety of unrelated persons or companies at the same time, he or she is most likely an independent contractor. It is possible, however, that an individual who performs services for more than one person or company may be an employee of each of those persons or companies.
- Making Services Available to the General Public. If a worker’s services are available to the general public on a regular and consistent basis, this factor weighs in favor of independent contractor status.
- Right to Discharge. If the employer has the right to discharge the worker in question, this factor indicates that the worker is an employee. A person is an independent contractor if he or she cannot be fired if he or she produces results that meet contract specifications.
- Right to Terminate.If the worker has the right to end his or her relationship with the employer for whom the services are performed at any time without incurring liability, this factor indicates an employer-employee relationship.The above factors are common-law rules that the Internal Revenue Service looks at in determining whether an individual is an employee or an independent contractor.1 None of the factors discussed above, standing alone, will determine independent contractor or employee status. Each situation is considered on a case-by-case basis,2 and the IRS, the Minnesota Department of Revenue, and the Minnesota Department of Employment and Economic Development each assign different weights to each factor. The most significant factor with all agencies, however, is the business owner’s right to control the individual’s method or manner of performance. If the business owner has the right to control the method or manner of performance, then the individual is most likely an employee. If the business owner has the right to control the results of the work, but does not have the right to control the manner and means of accomplishing the result, the individual is most likely an independent contractor. In addition, there are statutory employees3 for FICA tax purposes (e.g., commission drivers, full-time life insurance sales persons, home-workers and traveling sales persons) and statutory non-employees4 for FICA, unemployment and income tax purposes (e.g., qualified real estate agents and direct sellers). Business owners are urged to consult their legal counsel before classifying an individual as an independent contractor instead of an employee.Finally, there are special rules regarding the classification of construction workers. In particular, employers should note that a new state law, effective January 1, 2009, requires individuals (not corporations, LLCs, or partnerships) who work as independent contractors in the building construction industry to obtain from the Department of Labor and Industry an Independent Contractor Exemption Certificate (ICEC). As of January 1, 2009, for purposes of the state’s workers’ compensation, unemployment insurance, wage and hour, and occupational safety and health laws, individuals doing building construction work without an ICEC will be employees of the contractor for whom they are working.5
CREDITS: This post is an excerpt from An Employer’s Guide to Employment Law Issues in Minnesota, originally produced through a collaborative effort between the Minnesota Department of Employment and Economic Development and Lindquist & Vennum, P.L.L.P.
This post is part of a series of posts on hiring an employee in Minnesota.
- For more information about employee or independent contractor status, consult Internal Revenue Service Publication 15-A “Employer’s Supplemental Tax Guide” (Rev. January 2008).
- Neve v. Austin Daily Herald, 552 N.W.2d 45 (Minn. Ct. App. 1996).
- 26 USC § 3121(d)(3)(A) – (D) (2007).
- 26 USC § 3508 (2007).
- Minn. Stat. § 181.723 (2008).