Misclassification of employees as independent contractors is a common issue for business owners in Minnesota and elsewhere. Business owners receive many benefits from classifying working with independent contractors as opposed to hiring an employee. There are no federal taxes to withhold, and no Social Security or Medicare taxes to pay. The employer also doesn’t have to pay employee benefits, healthcare insurance and other expenses.
There are also benefits to hiring an employee. Employees provide a consistent workforce and establish a more substantial relationship and the employer can have more say over how the person does the work. Yet another reason why business owners choose to retain the services of employees rather than contractors is that there’s plenty of government scrutiny over whether independent contractors deserve that classification, and the penalties for misclassification can be costly.
The Minnesota Employee vs. Independent Contractor Legal Test
Minnesota courts use different tests to determine whether an individual is an employee or an independent contractor. The type of test depends upon the industry in which your business operates. Construction, trucking and messenger services have their own specific tests, while other industries use a more general test. Depending on your industry, here are the five key factors used to determine the type of relationship you have with a worker:
- Control: If the worker controls the means and manner in which services are performed, this is seen as a contractor relationship. If the employer retains sole control, it’s most likely an employee relationship.
- Discharge: If a worker can be fired for any reason, they’re generally an employee. Contractors would have a contract with the employer to perform a job, and any firing before completion would most likely be in breach of contract and the contractor could have the right to sue for breach of contract.
- Investment in services: Who dictates the value of the services provided? Workers paid by the job are generally contractors, and those paid in a regular and routine manner are usually employees.
- Investment in equipment: If the employer furnishes tools or equipment, including vehicles and materials or supplies, the relationship with the worker is likely an employee relationship.
- Premises: Where is the work performed? If the worker has control over the premises where services are performed, it’s likely a contractor relationship. If all services are performed at locations specified by the business owner, it’s likely an employee relationship.
There are hefty penalties involved in a finding of misclassification. In some rare cases, business owners have been held criminally liable. Businesses that have engaged in the following practices face penalties and fines:
- Classifying a worker improperly as an independent contractor
- Failing to withhold state and federal payroll taxes
- Failing to pay Social Security and Medicare taxes
- Failing to pay unemployment compensation taxes
Employment law is complicated, and it is important to work with an experienced employment attorney. Contact John Holden at Holden Law Firm for answers to any questions you might have regarding employee classification or other employment law matters. John Holden provides knowledgeable, experienced legal counsel for employees and small businesses in the Twin Cities.
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