On September 15th, 2012, the Department of Labor and Industry (“DOLI”) began enforcement of changes to Minnesota Statute § 181.723, the independent contractor law. The changes eliminated the Independent Contractor Exemption Certificate, created a new registration requirement for residential contractors, and minimized the safe-harbor enjoyed by general contractors when their subs were either corporations or LLCs.
The registration requirement affects many of the subs on your jobs every day, subs you’ve worked with for years. Tile setters, painters, carpet installers, and drywall installers are among the trades that do not require licenses, but must now register with DOLI. If you hire roofers, siders, or gutter installers you now must confirm that your subs have registered.
Under the old law, if the subcontractor was an LLC or corporation registered with the Secretary of State, the Independent Contractor statute did not apply. In the new version, LLCs and corporations are required to register. The individual performing the work is only considered to be an independent contractor if he meets a number of criteria; chief among them is that the individual, or the contractor he works for, is registered with the Department of Labor and Industry and meets the familiar nine factor test. Independent contractors must be registered before they perform any work or the worker will be considered an employee of the prime contractor.
There are two exceptions to the registration requirement. First, licensed contractors do not have to register. If your sub holds a building contractors license, a roofer’s license, or one of several other licenses issued by DOLI, registration is not required.
The penalty for non-compliance strikes hardest at the person hiring the unregistered contractor. For the sub, the penalty for failing to register is a $2,000 fine, but DOLI must forgive the penalty if the sub registers within 30 days of being assessed the fine. For the contractor, however, hiring an unregistered subcontractor will also result in a $2,000 fine per unregistered sub. In addition to these fines, if the subcontractor is unregistered, the individual performing the services will be considered an employee of the prime contractor. This will obligate the prime contractor to provide workers’ compensation coverage and make all necessary tax withholdings from the compensation of the person doing the work. If the insurance is not provided and the withholdings are not submitted as required, penalties and interest will be assessed.
Get in compliance with this law; get your subcontractor agreement updated and have your subcontractors sign it. Require subs to provide you with a copy of their license or their registration. If you deny them work, they’ll have the documentation to you the same day. Moreover, we recommend you verify their registrations at least annually.
As always, if you have any questions about this or any other law or regulation affecting your business, give us a call. We’re here to help before problems arise. If you wait until the problem finds you, it is far more expensive to fix.