Working With Independent Contractors in Minnesota

For many Minnesota businesses, the choice between a full-time employee and an independent contractor is one of the first ones they confront. If you are the only one working in your business, as it grows, you may come to the point where you no longer have the ability to get everything done. There are only so many hours in the day, and before the work totally overwhelms you, it's a good idea to consider bringing on some help.

Many small businesses get intimidated by the idea of bringing on a full-time employee because it requires additional overhead with taxes and benefits that need to be administered. One option to streamline this process is to consider using an independent contractor to help with your business. Once you've started working with one, you may find that you want to add even more contractors to your business and can even grow the entire business with a team of independent contractors.

Understanding Independent Contractors - What Are They?

If you're hiring someone, Minnesota has certain ways to determine whether they are going to be treated as an employee or an independent contractor. The state uses specific criteria to ensure proper classification of the people working for you:

• Control Over Work: Independent contractors control how they perform their work, including methods and schedules.
• Equipment and Materials: Contractors typically provide their own tools, equipment, and workspace.
• Opportunity for Profit or Loss: Contractors bear the risk of profit or loss based on the efficiency of their work.
• Business Independence: Contractors can often offer their services to multiple clients or the general public - they aren't necessarily exclusive to you and your business.

Legal Requirements for Independent Contractors

If you want to use independent contractors in Minnesota, there are some requirements and best practices you need to be aware of:

1. Written Contracts: Minnesota says that independent contractors operate under a written contract specifying:
       •    The services to be performed.
       •    Payment terms (e.g., per job or commission basis).
       •    A clear scope of work and deadlines.
The contract must be signed and dated by both parties and executed within 30 days of starting work.
2. Registration and Licensing: Certain industries, such as construction, require contractors to register with the Minnesota Department of Labor and Industry (DLI). Contractors must also hold any necessary licenses or certifications related to their trade.
3. Tax Compliance: Independent contractors are responsible for their own taxes. Businesses should:
       •    Require contractors to complete IRS Form W-9.
       •    Issue Form 1099-NEC for payments exceeding $600 annually.
Contractors must also file self-employment tax returns and comply with federal and state tax laws.
4. Insurance Coverage: Contractors may need workers’ compensation insurance if required by law. Businesses should verify that contractors carry liability insurance and name the business as an additional insured party.

Avoiding Misclassification Risks

You should know that just because you classify someone as an independent contractor, it doesn't mean that the state of Minnesota will agree with you. If you've misclassified someone, you can:

• Be forced to pay back wages and benefits
• Penalized by the IRS and/or the Minnesota Department of Revenue
• Liable for unemployment insurance contributions

Want to avoid these problems? There are a few general strategies you can follow:

• Make sure the contractor meets all the legal criteria for independence
• Don't exert control over how the contractor performs their work
• Avoid defaulting to your payroll system; use payments based on project milestones or when the project is completed.

Independent Contractor Agreements

One of the most important steps in working with independent contractors is to make sure you've got an agreement in place that has some key features:

• A Scope of Work ~ Define the services to be provided, project timelines, and deliverables. Specify that the contractor has control over how they achieve results.
• Payment Terms ~ Outline payment structures (e.g., per project or retainer) and clarify that the contractor is not entitled to employee benefits such as health insurance or paid leave.
• Tax Responsibilities ~ State that the contractor is responsible for paying their own taxes and that no payroll deductions will be made.
• Dispute Resolution ~ Include clauses for resolving conflicts through mediation or arbitration to avoid costly litigation.
• Termination Clauses ~ Specify conditions under which either party can terminate the agreement, such as non-performance or project completion.

What Happens If I Make a Mistake?

Minnesota will penalize your business if you fail to operate within the structures of its independent contractor laws. Some examples of penalties you may face:

• Financial penalties for unpaid taxes and benefits.
• Legal action from misclassified workers seeking compensation.
• Audits by state agencies like the Department of Employment and Economic Development (DEED) or DLI.

How to Avoid Mistakes

You can hopefully see that making mistakes with independent contractors can be expensive and time consuming, so in order to avoid mistakes, I suggest that you:

1. Conduct Due Diligence: Verify that contractors meet all legal requirements before hiring them.
2. Use Detailed Contracts: Clearly outline expectations, payment terms, and responsibilities in a written agreement.
3. Maintain Documentation: Keep records of contracts, invoices, and tax forms like W-9s and 1099s.
4. Talk to Your Attorney

Working with independent contractors in Minnesota offers flexibility but requires careful adherence to legal standards. By understanding classification criteria, complying with tax laws, using detailed contracts, and following best practices, businesses can avoid costly misclassification issues while fostering successful partnerships with contractors.

Do I Need a Business Attorney?

If you're putting together independent contractor agreements for your business and want to discuss them, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you and your business.