Imagine your employment requires you to bill your employer on a per-job basis but your employer supplies all the necessary equipment to complete requested projects. Or imagine that your company manages a property and regularly use one individual for maintenance work on that property, paid by the hour, who also works on other properties not managed by your company, supplies his own equipment, and has complete freedom to choose how and when to perform the required maintenance. In either case, is the relationship an employer-employee relationship or an employer-independent contractor relationship? Does it matter? This article will explain the basics of distinguishing between employees and independent contractors in the State of Minnesota and then discuss the application of that distinction in the context of a recent court case involving Minnesota unemployment insurance.
Minnesota’s Common Law Test for Employees and Independent Contractors
Under Minnesota common law (judge-made law), courts apply a five-factor test to distinguish between independent contractors and employees:
1. The right to control the means and manner of performance;
2. The mode of payment;
3. The furnishing of material and tools;
4. The control of the premises where the work is done; and
5. The right of the employer to discharge.
Guhlke v. Roberts Truck Lines, 128 N.W.2d 324, 326 (Minn. 1964). The first factor, the right to control, is the most important factor. Pettis v. Harken, Inc., 116 N.W.2d 565, 568 (Minn. 1962). In particular, it is the right to control rather than the exercise of control that is determinative. Mount v. City of Redwood Falls,108 N.W.2d 443, 446 (Minn. 1961). Additionally, what matters is control of how the work is to be done rather than what work is to be done. Neve v. Austin Daily Herald, 552 N.W.2d 45, 48 (Minn. Ct. App. 1996). Second in importance is factor five, the right to discharge. St. Croix Sensory v. Dep’t of Emp’t & Econ. Dev., 785 N.W.2d 796, 800 (Minn. Ct. App. 2010). The five legal factors trump any label the parties may give their relationship. Jenson v. Dep’t of Econ. Sec., 617 N.W.2d 627, 630 (Minn. Ct. App. 2000). The common-law factors are also used by the Minnesota Department of Employment and Economic Development, codified in Rule 3315.0555, for determining eligibility for unemployment insurance.
Minnesota’s common-law five factor test will not always determine whether a worker is an employee or independent contractor under state law. Minnesota’s Worker’s Compensation Act, Minn. Stat. §§ 176.021–176.041, and the Minnesota Wage and Hour Laws, Minn. Stat. §§ 177.21–177.35, as interpreted by the Minnesota Department of Labor and Industry in Minn. R. 5224.0010–5224.0340, have established distinct criteria defining employment in thirty-one different occupations, including artisans, barbers, bookkeepers and accountants, bulk oil plant operators, collectors, consultants, domestic service, babysitters, industrial homeworkers, laborers, musicians, traveling salespeople, and photographer’s models, among others. Minn. Stat. § 181.723, subdivision 4 creates a different standard for the construction industry; that section enumerates nine elements that distinguish construction contractors from employees. Significantly, courts have held that the statutory scheme applies only to human beings and therefore, in the construction industry, business entities cannot be employees of other business entities. Nelson v. Levy, 796 N.W.2d 336, 324–343 (Minn. Ct. App. 2011). Minnesota Tax Laws, Minn. Stat. §§ 268.051, 290.001–290.9744, also use separate criteria: behavioral control, financial control, and relationship.
Putting aside state law, various federal statutes and regulations (and courts interpreting them) have established their own criteria for determining whether a worker is an employee or independent contractor for purposes of federal laws regarding taxation, wages and hours, labor law, discrimination, harassment, leaves of absence, and a variety of other contexts. A discussion of all these laws and regulations is beyond the scope of this article. Although the factors considered under various laws to determine employment status share many similarities, suffice it to say that the same worker may be deemed an “employee” for some purposes and an “independent contractor” for others.
The Court’s Decision in Roulo v. Key Lakes, Inc.
Plaintiff Roulo offered IT services to Key Lakes Companies, which maintains and upgrades shipping vessels. Roulo v. Key Lakes, Inc., A17-067, 2017 WL 3863997, at *1 (Minn. Ct. App. Sept. 5, 2017). After Roulo stopped providing services for Key Lakes Companies, an unemployment law judge (ULJ) determined that Roulo was an independent contractor and therefore not eligible for unemployment benefits. He appealed that decision.
The Minnesota Court of Appeals determined whether Roulo was an independent contractor or employee. The court first addressed the most important factors: the right to control and the right to discharge. The court upheld the ULJ’s finding that Key Lakes Companies did not have a right to control Roulo’s operations. The court found that Key Lakes Companies relied on Roulo’s expertise and did not direct how Roulo performed his services; Roulo himself described the projects as a collaborative effort. Not only did Key Lakes Companies not direct Roulo’s work, Key Lakes Companies did not formally evaluate Roulo’s services. Roulo’s freedom to deny work, even if unexercised because Roulo was afraid of replacement by another IT provider, and right to work for other businesses while maintaining services for Key Lakes Companies, were also evidence of a lack of right to control. The Court of Appeals also upheld the ULJ’s finding that Key Lakes Companies had the right to discharge Roulo.
Next, the court addressed the remaining factors and upheld all the ULJ’s findings regarding those factors. The use of a purchase-order system, indicating payment on a per-job basis, the 1099 tax-form, and Roulo’s rejection of offered benefits through employment status all demonstrated the mode of payment was typical of an independent contractor relationship. On the other hand, the court found that the furnishing of materials and tools indicated an employee relationship because Key Lakes Companies furnished Roulo with the necessary equipment to complete his projects. Even though Roulo had latitude to select the kind of equipment he needed, Key Lakes Companies reserved the right to approve all of the equipment. Finally, Roulo completed half of his work at home and was mostly free to choose where he performed his services and therefore the court found that the control of the premises factor indicated an independent contractor relationship.
The Minnesota Court of Appeals ultimately upheld the ULJ’s finding of an independent contractor relationship. The court explained that because the right of control factor is so important, and in this case that factor indicated an independent contractor relationship, the court was compelled to agree with the ULJ’s decision.
Whether a party offering services is an employee or independent contractor can have significant legal repercussions; therefore, it is important that parties negotiating for services be clear about the nature of their relationship. Remember that how the parties explicitly label their relationship, however, does not automatically control whether the worker will be considered an “employee” or “independent contractor” in the eyes of the law. Rather, the employee vs. independent contractor determination will be made based on all the particular facts and circumstances under a variety of legal factors arising in the context of the dispute. The standard for determining whether a worker is an employee or independent contractor may differ depending on the context (e.g., federal and state income tax withholdings, federal payroll tax withholdings and contributions, eligibility for state unemployment compensation, eligibility for state workers’ compensation, wage and hour laws, anti-discrimination statutes, and coverage under the wide array of federal and state labor and employment law statutes and regulations).
In Roulo v. Key Lakes, Inc., the Minnesota Court of Appeals applied the five-factor common law test and concluded that an IT worker was properly classified as an independent contractor, rather than employee, based largely on the fact that the hiring party did not control his work. As a result, the worker was denied unemployment compensation.
As you can see, employment questions including the determination of employee vs. independent contractor classifications, are very complicated. If you need help classifying a worker as an employee or independent contractor, drafting an employment agreement, or drafting an independent contractor agreement, please contact one of the Minnesota employment law attorneys at Trepanier MacGillis Battina P.A.
About the Author:
Minnesota employment lawyer Bryan R. Battina represents both employers and employees in a variety of employment law matters, including negotiation of employment agreements, drafting independent contractor agreements, litigating employment agreement claims, and litigating disputes over independent contractor misclassification. Bryan may be reached at 612.455.0505 or email@example.com. Trepanier MacGillis Battina P.A. is a Minnesota employment law firm located in Minneapolis, Minnesota.