Independent Contractor vs. Employee in Minnesota (2026)

Minnesota’s Classification Framework

Minnesota does not rely on a single test. Instead, Minn. Stat. § 181.722, subd. 3 provides that, for purposes of that section, “the nature of an employment relationship is determined using the same tests and in the same manner as employee status is determined under the applicable workers’ compensation and unemployment insurance program laws and rules.”

That borrowing sends the question to whichever program’s rules govern. Workers’ compensation classification runs through Minn. R. ch. 5224, which sets safe-harbor criteria for some thirty named occupations and directs the general control criteria of Minn. R. 5224.0330 and the additional factors of Minn. R. 5224.0340 to occupations those parts do not define, and to defined occupations whose safe-harbor criteria are not all substantially met. Minn. R. 5224.0320. Unemployment insurance runs through the five-factor rule in Minn. R. 3315.0555. Two industries are carved out of both: building construction, under Minn. Stat. § 181.723, and trucking and messenger/courier work, under Minn. Stat. § 176.043 for workers’ compensation and Minn. Stat. § 268.035, subd. 25b for unemployment insurance. The IRS applies its own federal framework, which section 181.722 does not adopt.

One currency note before the tests themselves. The section you will find under this number today is the product of the 2024 omnibus labor act, which retitled it from “Misrepresentation of Employment Relationship Prohibited” to “Misclassification of Employees,” replaced a civil remedy available only to construction workers with commissioner enforcement reaching any “person” in any industry, and added the damages-and-penalty schedule, individual liability, and successor liability. 2024 Minn. Laws ch. 127, art. 10, § 7. The effective date is July 1, 2024, and it lives in the session law rather than the codified section. Conduct before that date is governed by the prior text, which supplied a civil remedy rather than the current damages-and-penalty schedule. 2024 Minn. Laws ch. 127, art. 10, § 7.

The Common-Law Right-to-Control Test

For unemployment insurance purposes, outside construction and the trucking and messenger/courier industries, Minnesota determines employee status under the common law of employer-employee (Minn. Stat. § 268.035, subd. 15), weighing the five factors set out in Minn. R. 3315.0555, subp. 1 and stated by the Minnesota Supreme Court in Guhlke v. Roberts Truck Lines, 268 Minn. 141, 128 N.W.2d 324 (1964):

1. Right to control how work is performed: the question is whether you hold the right to control the means and manner of the work, not whether you actually exercise it. As the Minnesota Supreme Court put it, “the fundamental test of employment is the right, not just the exercise, of the employer to control the details of the work. This distinction becomes important when skilled workers appear to go about their job without supervision.” Hunter v. Crawford Door Sales, 501 N.W.2d 623, 624 (Minn. 1993).
2. Mode of payment: payment by the hour, week, or month indicates employment, while payment on a job basis indicates contractor status, though payment by the job may include a lump sum computed from the hours the job requires at a fixed hourly rate. Commission pay is not itself a contractor marker, and a commission draw that need not be repaid or a guaranteed minimum salary indicates employment. Minn. R. 5224.0340, subps. 4, 5.
3. Who furnishes material or tools: a worker who supplies his or her own indicates a lack of control, unless the items are ones workers in that trade customarily furnish. Minn. R. 5224.0330, subp. 12.
4. Control of the work premises: control is indicated where work that could be done elsewhere is done on the employing unit’s premises, and the total circumstances must be considered rather than any single criterion. Minn. R. 5224.0330, subps. 1, 5; Minn. R. 3315.0555, subp. 1.
5. Right to discharge: employment is indicated where the worker can be terminated with little notice, without cause, or for failing to follow your specified rules or methods. Independent contractor status is indicated where the worker cannot be discharged without liability so long as the end result measures up to contract specifications, and a termination clause by itself does not settle the factor. Minn. R. 5224.0340, subp. 2.

The most important of the five, considered in light of the nature of the work involved, is the right to control the means and manner of performance. Guhlke v. Roberts Truck Lines, 268 Minn. 141, 143, 128 N.W.2d 324, 326 (1964). For unemployment insurance the rule names two: “[t]he two most important factors are items A and B,” meaning the right to control the means and manner of performance and the right to discharge the worker without incurring liability for damages. Minn. R. 3315.0555, subp. 1. The termination terms therefore deserve the same attention as the control terms, though the rule adds that contracts providing for termination on notice or for specified acts of nonperformance or default “are not solely determinative of the right to discharge.” Minn. R. 5224.0340, subp. 2.

Three qualifications keep the control factor from reaching further than it should. Instructions required by state or federal law or regulation and general instructions you pass along from your own client or customer do not show control, mere suggestions as to detail do not normally show control, and neither does enforcing standards a regulatory or licensing agency requires. Minn. R. 5224.0330, subps. 3, 14. And working at your location does not decide the question: in St. Croix Sensory Inc. v. Department of Employment & Economic Development, 785 N.W.2d 796, 802-04 (Minn. Ct. App. 2010), the workers normally performed their tests on the company’s premises with the company’s equipment, the court agreed that the premises and tools factors “tend to indicate an employee-employer relationship,” and it still concluded, “[b]ased on the totality of the circumstances and our review of the five traditional factors,” that the assessors were independent contractors.

One caution on borrowing an answer. The Supreme Court noted in Guhlke that “[d]ecisions pertaining to the right to control persons engaged in entirely different types of work activity are of limited value in considering this problem.” A competitor’s contractor arrangement, or the one that works in another industry, is not a safe template for yours.

The five-factor test remains the operative one. The newest published Minnesota appellate restatement of the five traditional factors is Builders Commonwealth, Inc. v. Department of Employment & Economic Development, 814 N.W.2d 49, 57 (Minn. Ct. App. 2012); the Eighth Circuit restated control as the most important factor in Placzek v. Mayo Clinic, 18 F.4th 1010, 1014 (8th Cir. 2021), applying Minnesota law, and the Minnesota Court of Appeals applied the same five factors in Adegeye v. BB Home Healthcare, No. A23-1538 (Minn. Ct. App. June 24, 2024), a nonprecedential decision. One research trap worth knowing if you read older sources: the eight additional factors and detailed control criteria that appear in secondary materials as Minn. R. 3315.0555, subparts 2 and 3 were repealed in 2012, retroactive to all pending cases. The unemployment insurance rule is now subpart 1 alone; the detailed criteria survive on the workers’ compensation side at Minn. R. 5224.0330 and 5224.0340.

The IRS Three-Category Framework

At the federal level, the IRS evaluates worker classification using three categories of evidence (IRS, Independent contractor (self-employed) or employee?):

Category	Key Questions	Employee Indicators	Contractor Indicators
Behavioral Control	Does the business have the right to direct or control how the work is done?	Company trains the worker, instructs when and where to work, dictates methods, and evaluates the details of how the work is performed	Worker uses their own methods
Financial Control	Who bears business expenses and risk?	Company reimburses expenses, provides tools; worker is paid a regular hourly or weekly wage	Worker invests in own equipment, carries unreimbursed expenses, makes services available to the market, is paid a flat fee, and can profit or lose money
Type of Relationship	How do the worker and the business perceive their relationship?	Employee-type benefits (insurance, pension plan, vacation or sick pay), a relationship expected to continue indefinitely, services that are a key aspect of the regular business	An engagement for a specific project or period; a written contract describing an independent contractor relationship, which shows what the parties intended but is not sufficient on its own

Sources: IRS Publication 15-A (2026); IRS, “Behavioral control”; IRS, “Financial control”; IRS, “Type of relationship”. Note that whether the worker serves multiple clients belongs to the financial control category, as services available to the relevant market, not to the relationship category where it is often placed.

Three points sharpen each row.

Behavioral control turns on the right you retained, not the direction you actually gave. The IRS states that the business “does not have to actually direct or control the way the work is done” so long as it “has the right to direct and control the work,” and that “[t]he key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.”

Financial control has its own caveats, and they cut against the conclusions business owners usually draw. The IRS says that in many occupations, “such as construction, workers spend thousands of dollars on the tools and equipment they use and are still considered to be employees,” that “[t]here are no precise dollar limits that must be met in order to have a significant investment,” that “a significant investment is not necessary for independent contractor status,” and that employees may also incur unreimbursed expenses. Hourly billing does not by itself make a professional an employee either: the IRS notes that “it is common in some professions, such as law, to pay independent contractors hourly.”

No single factor is decisive; businesses must weigh the entire relationship (IRS, Independent contractor (self-employed) or employee?). The IRS instructs that “[t]here is no ‘magic’ or set number of factors that ‘makes’ the worker an employee or an independent contractor and no one factor stands alone in making this determination,” that “[t]he keys are to look at the entire relationship and consider the extent of the right to direct and control the worker,” and, finally, to “document each of the factors used in coming up with the determination.” Where the categories point in different directions, either you or the worker may file Form SS-8 and ask the IRS to determine the status, though the IRS cautions that “it may take at least six months to receive a determination on your filing.”

Because the federal framework asks about the common-law right of control (26 C.F.R. § 31.3121(d)-1(c)(2)) while Minnesota’s construction test conditions contractor status on 14 formal and economic requirements (Minn. Stat. § 181.723, subd. 4(a)), the same worker can be a contractor for federal employment tax purposes and an employee under Minnesota law.

Industry-Specific Statutory Tests

Minnesota imposes stricter requirements in two industries, and each test is conjunctive rather than a weighing: miss one item and the worker is an employee. Minn. Stat. § 181.723, subd. 4(a) (construction, for purposes of chapters 176, 177, 181, 181A, 182, 268, and 326B); Minn. Stat. § 176.043 (trucking and messenger/courier, workers’ compensation); Minn. Stat. § 268.035, subd. 25b (the same industries, unemployment insurance).

Construction (Minn. Stat. § 181.723). For purposes of chapters 176, 177, 181, 181A, 182, 268, and 326B, an individual who provides or performs building construction or improvement services in the course of another person’s trade, business, profession, or occupation is that person’s employee (subdivision 3) unless the individual is operating as a business entity that meets every one of the 14 requirements in subdivision 4(a). That conjunctive list, which replaced the prior nine-factor test, applies to services provided or performed on or after March 1, 2025. 2024 Minn. Laws ch. 127, art. 10, § 8. The trigger is the date the services are provided or performed, not the date the contract was signed, so work performed before March 1, 2025 is measured against the older test. 2024 Minn. Laws ch. 127, art. 10, § 8. The rest of the rewritten section took effect July 1, 2024. 2024 Minn. Laws ch. 127, art. 10, § 8.

Check the scope line before working through the list. The section “only applies to persons providing or performing building construction or improvement services,” and it excludes the manufacture, supply, or sale of products, materials, or merchandise; landscaping services for the maintenance or removal of existing plants, shrubs, trees, and other vegetation, whether or not those services are provided as part of a contract for the building construction or improvement services; and all other landscaping services, unless they are provided as part of such a contract. Minn. Stat. § 181.723, subd. 2.

Two consequences follow the 14 requirements. First, if you treat a construction worker as an independent contractor, you must maintain “for at least three years, and in a manner that may be readily produced to the commissioner upon demand, all the information and documentation” supporting each requirement, both at the time the individual was engaged and at the time the services were provided. Minn. Stat. § 181.723, subd. 7(f). Second, liability runs down the subcontractor chain: an individual engaged by your employee at any tier is also your employee, unless a qualifying intervening business entity sits in the contractual chain or you establish that an intervening entity treats and classifies the individual as an employee under the listed chapters. Minn. Stat. § 181.723, subd. 4(b)(3)-(4).

Trucking, Messenger, and Courier Services (Minn. Stat. § 176.043). For workers’ compensation purposes, an operator of a car, van, truck, tractor, or truck-tractor that is licensed and registered by a governmental motor vehicle agency is an employee unless all seven statutory factors are present. The unemployment insurance chapter carries its own parallel seven-factor test at Minn. Stat. § 268.035, subd. 25b, so a carrier that fails one factor faces exposure in both programs.

The seven factors are that the individual owns the equipment or holds it under a lease arrangement, which the workers’ compensation version requires to be a bona fide lease; is responsible for maintenance of the equipment; is responsible for the operating costs, including fuel, repairs, supplies, vehicle insurance, and personal expenses; is responsible for supplying the necessary personal services to operate the equipment; is compensated on factors related to the work performed, such as a percentage of a schedule of rates, and not on the basis of hours or time expended; “substantially controls the means and manner of performing the services, in conformance with regulatory requirements and specifications of the shipper”; and enters into a written contract specifying the relationship to be that of an independent contractor.

One detail inside that list matters in practice. The operating-costs factor carries its own allowance: “[t]he individual may be paid the carrier’s fuel surcharge and incidental costs, including, but not limited to, tolls, permits, and lumper fees.”

Unemployment insurance coverage also reaches past the common-law test. “Employment” includes service performed by an officer of a corporation, by a member of a limited liability company who is an employee under the common law, and by certain individuals who are employees under the federal statutory-employee provisions. Minn. Stat. § 268.035, subd. 15.

The Penalty Landscape: What Misclassification Costs

Worker misclassification triggers liability at multiple levels at once, and the statute is what routes it there. Under Minn. Stat. § 181.722, subd. 5, any court finding that a violation occurred “shall transmit a copy of its findings of fact and conclusions of law to the commissioner of labor and industry,” and the commissioner “shall report the finding to relevant local, state, and federal agencies, including the commissioner of commerce, the commissioner of employment and economic development, the commissioner of revenue, the federal Internal Revenue Service, and the United States Department of Labor.” A litigated finding of a violation therefore rarely stays a single case.

Minnesota State Penalties

Under Minn. Stat. § 181.722, as amended effective July 1, 2024:

Violation	Penalty
Failing to classify, represent, or treat a worker as an employee	Up to $10,000 per worker (subd. 4(a)(2))
Each violation of the misclassification prohibitions in subdivision 1	Up to $10,000 per violation (subd. 4(a)(3))
Delaying, obstructing, or failing to cooperate with a Department of Labor and Industry investigation	$1,000 per person, each day a separate violation (subd. 4(a)(4))
Knowingly or repeatedly misclassifying workers	Individual liability may be imposed on an owner, partner, principal, member, officer, or agent who acted on the business’s behalf (subd. 1(b))

Four things about that table are worth more than the numbers in it.

Compensatory damages can be the larger figure. Alongside the penalties, subdivision 4(a)(1) makes you liable to the worker for “the value of supplemental pay including minimum wage; overtime; shift differentials; vacation pay, sick pay, and other forms of paid time off; health insurance; life and disability insurance; retirement plans; savings plans and any other form of benefit; employer contributions to unemployment insurance; Social Security and Medicare; and any costs and expenses incurred by the individual” as a result of the misclassification. Which side is larger depends on the worker’s wages, tenure, and benefits foregone measured against the number of counted violations.

The per-violation penalty multiplies, because the statute defines its own counting units. Under subdivision 1(a)(2), “[e]ach failure to report or disclose an individual as an employee shall constitute a separate violation,” and under subdivision 1(a)(3), “[e]ach agreement or completed document constitutes a separate violation.” One hiring practice repeated across a crew multiplies by headcount and by document.

Individual liability reaches further than the word “knowingly” suggests. Subdivision 1a(e) defines the term: “‘Knowingly’ means knew or could have known with the exercise of reasonable diligence.” That is a reasonable-diligence standard, not actual knowledge, so an owner who never examined a classification decision is not outside it.

Dissolving the entity does not clear an order. A commissioner’s order “is in effect against any successor person,” and a business is a successor if it shares three or more of seven listed traits with the ordered business: one or more of the same owners, members, principals, officers, or managers; similar work within Minnesota; one or more of the same telephone or fax numbers; one or more of the same email addresses or websites; substantially the same individuals engaged to perform services; substantially the same vehicles, facilities, or equipment; or substantially the same advertised project experience and portfolio of work. Minn. Stat. § 181.722, subd. 1(c).

These penalties stack. A business that misclassifies 20 workers faces state penalties of up to $200,000 on the per-worker component alone, before any compensatory damages and before the separate per-violation penalties. Minn. Stat. § 181.722, subd. 4(a)(2). The $10,000 figures are ceilings the commissioner may impose rather than scheduled amounts. Minn. Stat. § 181.722, subd. 4(a). The Department of Labor and Industry can also order you to pay the worker compensatory damages measured by the items listed above, and the commissioner’s administrative order “may assess monetary damages and penalties.” Minn. Stat. § 326B.082, subd. 7(a).

Stop Work Orders

The stop-work power behind that enforcement reaches past construction. Minn. Stat. § 326B.082, subd. 10, effective March 1, 2025, lets the Department of Labor and Industry order a business to cease all operations at one workplace or across every workplace it runs. A stop work order “may only be issued to any person who the commissioner has determined, based on an inspection or investigation, has violated the applicable law,” has engaged in any of the activities under subdivision 11, paragraph (b), or section 326B.701, subdivision 5, has failed to comply with a final notice, final administrative order, final licensing order, or a final order to comply issued under section 177.27, or is a person identified in paragraph (c) (Minn. Stat. § 326B.082, subd. 10(a)), and “applicable law” is defined to include both Minn. Stat. § 181.722 and Minn. Stat. § 181.723 (Minn. Stat. § 326B.081, subd. 3). A stop work order may also be issued to any individual identified in section 181.723, subdivision 7, paragraph (d), and it is effective against any successor person as defined in section 181.723, subdivision 7, paragraph (e). Minn. Stat. § 326B.082, subd. 10(c).

Three consequences follow the order. The commissioner may assess a civil penalty of $5,000 per day for each day of operation in violation of it. Once the order becomes final, affected employees “shall be entitled to average daily earnings from the person for up to the first ten days of work lost,” and lifting the order may be conditioned on paying those wages, so the shut-down crew stays on your payroll. And you have 30 days to request an expedited hearing: if you do not, the order “will become a final order of the commissioner and will not be subject to review by any court or agency.”

Federal Tax Liability

Where you failed to withhold because you treated the worker as a contractor, 26 U.S.C. § 3509 reduces rather than increases what you owe. Its heading is “Determination of employer’s liability for certain employment taxes,” and it operates as relief, not as a penalty.

Scenario	What you owe
Unintentional misclassification, required information returns filed (or the failure excused by reasonable cause and not willful neglect)	1.5% of wages for the income tax that should have been withheld, plus 20% of the worker’s Social Security and Medicare tax (§ 3509(a))
Information returns not filed without reasonable cause	Those figures double, to 3% and 40% (§ 3509(b))
Intentional disregard of the withholding requirement	Section 3509 does not apply at all: the full income tax that should have been withheld and the worker’s full Social Security and Medicare tax (§ 3509(c))

Your own share of Social Security and Medicare tax under 26 U.S.C. § 3111 is a separate excise tax imposed on the employer. Section 3509 reaches only chapter 24 and subchapter A of chapter 21, which is the worker’s share, so your share is never reduced and does not vary by row.

Two qualifications belong next to that table.

The reduced amounts are your own cost and cannot be charged back. If liability is determined under section 3509, “the employee’s liability for tax shall not be affected,” “the employer shall not be entitled to recover from the employee any tax so determined,” and the section 3402(d) credit for tax the worker already paid is unavailable.

Two fact patterns lose the relief entirely: intentional disregard of the withholding requirement, and withholding income tax but not Social Security and Medicare tax on the same wages.

The Voluntary Classification Settlement Program

The IRS Voluntary Classification Settlement Program lets an eligible business reclassify a class of workers as employees going forward for 10 percent of the employment tax that would have been due on their compensation for the most recent tax year, computed at the reduced section 3509(a) rates, with no interest or penalties and no employment tax audit of the earlier years’ classification. Announcement 2012-45, 2012-51 I.R.B. 724.

The audit that closes the door is narrower than it sounds. A current IRS employment tax audit disqualifies the business, as does a current Department of Labor or state agency audit of these workers’ classification, but an IRS audit of income tax or anything else does not. A business audited on classification in the past stays eligible if it complied with the result and is not contesting the classification in court. If you operate through more than one entity, an employment tax audit of any member of an affiliated group, a term the Announcement takes from 26 U.S.C. § 1504(a), is treated as an employment tax audit of the applicant for purposes of the program. Announcement 2012-45, 2012-51 I.R.B. 724.

Two further eligibility conditions matter: you must have treated the workers consistently as nonemployees, and you must have filed all required Forms 1099 for them for the previous three years. Announcement 2012-45, 2012-51 I.R.B. 724.

Additional Exposure

Beyond penalties and back taxes, misclassification reaches four more places.

• Unemployment insurance liability: a worker reclassified as a common-law employee was performing “employment” under Minn. Stat. § 268.035, subd. 15, and wages paid to an employee in covered employment are taxable wages, up to the statutory annual limit, on which unemployment insurance tax is owed (Minn. Stat. § 268.035, subds. 12, 24, 25). Past due amounts carry interest at one percent per month (Minn. Stat. § 268.057, subd. 5), and an employer that made a false statement without a good faith belief in its correctness, or knowingly failed to disclose a material fact, in order to avoid or reduce a required payment faces a penalty of the greater of $500 or 100 percent of the unpaid amount for penalties imposed on or after October 1, 2025 (Minn. Stat. § 268.184, subd. 1). The assessment also arrives presumed correct: “[a]ny amount due from an employer, as computed by the commissioner, is presumed to be correctly determined and assessed, and the burden is upon the employer to show its incorrectness,” the commissioner may estimate and assess only where records are not made available for audit and the commissioner has reason to believe the employer has not reported all the required wages, and a non-paying employer owes collection costs including attorney fees (Minn. Stat. § 268.057, subds. 1, 3, 4).
• Workers’ compensation exposure: workers’ compensation liability is otherwise “exclusive and in the place of any other liability,” but where you fail to insure or self-insure, the injured worker “may elect to claim compensation under this chapter or to maintain an action in the courts for damages,” and in that action you may not plead “that the injury was caused by the negligence of a fellow servant, that the employee assumed the risk of employment, or that the injury was due to the contributory negligence of the employee,” unless that negligence was willful and you prove it (Minn. Stat. § 176.031). The state Special Compensation Fund pays the worker’s benefits and then collects them back from you, along with a penalty equal to 65 percent of the benefits awarded (Minn. Stat. § 176.183, subd. 2).
• Wage-and-hour claims: a misclassified worker who is in fact a covered, non-exempt employee may be owed the federal minimum wage under 29 U.S.C. § 206, overtime at one and one-half times the regular rate for hours over forty in a workweek under 29 U.S.C. § 207, and Minnesota’s wage payment requirements. The federal remedy is the unpaid wages or overtime “and in an additional equal amount as liquidated damages,” plus “a reasonable attorney’s fee to be paid by the defendant, and costs of the action,” and the same subsection lets one worker sue on behalf of others similarly situated (29 U.S.C. § 216(b)).
• Benefit claims: a worker who is in fact a common-law employee may qualify as a plan participant where the plan covers employees in that position (29 U.S.C. § 1002(7)), a participant may sue “to recover benefits due to him under the terms of his plan” (29 U.S.C. § 1132(a)(1)(B)), and in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992) the Supreme Court read ERISA’s definition of employee to incorporate traditional agency-law criteria for identifying master-servant relationships.

Minnesota’s leave programs add a fifth, and they do not work by retroactively enrolling anyone. Whether the worker sits in covered employment for Paid Leave runs through chapter 268B’s own definition: an existing specific statutory or rule test for that occupation or sector as of May 25, 2023 applies, and where none exists the definition in Minn. R. 5200.0221 applies (Minn. Stat. § 268B.01, subd. 27). A worker reclassified as an employee was in covered employment all along, so you owe Minnesota Paid Leave premiums on that worker’s wages from January 1, 2026 forward, recomputed and assessed once the quarterly wage detail report is corrected (Minn. Stat. § 268B.14, subd. 1), with interest at one percent per month on what remains unpaid (Minn. Stat. § 268B.15, subd. 5), and a wage detail report that left the worker out may also draw an administrative service fee equal to two percent of that worker’s total wages, which the employer escapes on a reasonable showing of good faith (Minn. Stat. § 268B.12, subd. 4(b), (c)). Earned sick and safe time adds liability for the leave hours that should have been provided plus an equal amount as liquidated damages, or 48 hours for each year plus an equal amount where you kept no records sufficient to compute the hours, with a three-year limitations period (Minn. Stat. § 177.50, subds. 2, 7).

For a growing Minnesota business, a single misclassification audit can produce six-figure liability once these layers combine. Aaron Hall works with Minnesota companies to resolve these situations, and prevention costs far less than remediation.

Common Misclassification Scenarios for Growing Businesses

Misclassification problems rarely involve bad intent. They arise when businesses scale quickly, engage skilled professionals, or follow industry norms without examining the legal framework. Here are the scenarios that most often trigger scrutiny for companies in the 10-to-250 employee range.

The Fractional CFO or Controller

Many growing businesses hire part-time financial officers who work 10 to 20 hours per week, use the company’s accounting software, attend management meetings, and hold themselves out as the company’s CFO to banks and investors.

A fractional CFO who serves several businesses can still be your employee, but in Minnesota the multiple-client fact cuts against that result rather than being overcome by it. Minn. R. 5224.0070, subp. 3, makes a consultant an employee when all the listed criteria are substantially met, including that the employer holds the right of first call on the consultant’s services, that the services are recurring rather than sporadic, and that “[t]he consultant’s services are not available to the public,” while subp. 2 treats freedom to work for others at the same time and freedom from regular hours as independent contractor criteria. Where neither set is substantially met, Minn. R. 5224.0320 sends the question to the general criteria, under which set hours of work and a continuing relationship indicate employment, Minn. R. 5224.0330, subps. 7 and 8, but working for a number of firms at the same time indicates a lack of control, id., subp. 11. For unemployment insurance the list is shorter: Minn. R. 3315.0555, subp. 1, weighs five factors, the two most important being the right to control the means and manner of performance and the right to discharge the worker without incurring liability, and schedule, integration, and continuity reach the analysis only if those five leave the outcome inconclusive.

The fix: Structure the engagement around defined deliverables (monthly financial reporting, annual budget preparation) rather than ongoing availability, and do not take a right of first call on the CFO’s time. The consultant’s contract should run for a specified period or purpose, leave the consultant free to serve other clients, impose no required hours, and measure the result rather than the manner of the work.

The IT Consultant Who Became a Department

A business hires an IT consultant for a network upgrade. The project extends. The consultant starts handling day-to-day help desk tickets, attends staff meetings, and has a company email address. Six months later, the “consultant” is functionally an IT employee without benefits.

Be careful about what that email address proves. Neither a company title nor a company email address appears among the five factors Minnesota weighs for unemployment insurance under Minn. R. 3315.0555, subp. 1. Status turns on five factors, and “[t]he two most important factors” are the right to control the means and manner of performance and the right to discharge the worker without incurring liability for damages, while a factor “not specifically identified in this part” is considered only “if the outcome is inconclusive when applying the factors in items A to E.” Minn. R. 3315.0555, subp. 1. Titles and email accounts are still worth noticing, because they usually come packaged with the control facts that do decide the question, and because status is determined “from the consequences which the law attaches to their arrangements and conduct rather than the label they might place upon it.” St. Croix Sensory Inc. v. Department of Employment & Economic Development, 785 N.W.2d 796, 800 (Minn. Ct. App. 2010).

The fix: Maintain clear project scopes with defined start and end dates. If the need becomes ongoing, convert the role to employment or engage a managed-services firm.

Sales Representatives on Commission

Commission-only sales representatives are frequently treated as independent contractors because they are paid on results rather than hours. Business owners then worry that assigning a territory, setting prices, or supplying leads will undo that treatment.

Minnesota’s rules cut the other way on much of that list. Territorial restrictions, company-set prices and terms, furnished leads, off-premises work, and a requirement that the salesperson refrain from selling for competitors are, taken together, “not sufficient to establish an employment relationship” for an outside commission salesperson. Minn. R. 5224.0150. Those parts govern outside commission salespeople and manufacturer’s representatives, and Minn. R. 5224.0160 covers the traveling salesperson, defined as one “associated with a manufacturer or distributor whose products the salesperson sells directly to wholesalers or retailers,” an occupation the rule treats as either an employee or an independent contractor depending on which set of conditions is substantially met. A commission sales role outside that definition runs through Minn. R. 5224.0320 to the general criteria. What does point toward employment is a requirement to appear at or report to the firm’s offices regularly, work fixed hours, follow and report on leads, take part in sales meetings or training courses, and canvass territory at regular intervals, together with the firm being dependent principally on traveling salespeople for the disposition of its merchandise, and the rule treats that as employment only when all of those conditions are substantially met. Minn. R. 5224.0160, subp. 3. A mandated CRM can be the modern form of the reporting factor, where the required entries report on the method of performing the services rather than on results or contract compliance. Minn. R. 5224.0330, subp. 4. Commission pay is one of the five traditional factors but not one of the two most important. Minn. R. 3315.0555, subp. 1. For unemployment insurance, a salesperson other than a corporate officer whose wages from insurance or real estate sales come solely by way of commission is in noncovered employment by statute, whatever the level of control. Minn. Stat. § 268.035, subd. 20.

The fix: Leave the sales agent free to solicit when, where, and how he or she pleases, to choose working hours and the schedule of calls, and to bear travel and other expenses. Those are the criteria the rule actually names for independent contractor status. Minn. R. 5224.0160, subp. 2.

Delivery Drivers and Field Service Workers

In the trucking and messenger/courier industries, an operator of a car, van, truck, tractor, or truck-tractor licensed and registered by a governmental motor vehicle agency who neither owns the equipment nor holds it under a bona fide lease arrangement is an employee by statute for workers’ compensation purposes, not merely a likely one (Minn. Stat. § 176.043). The unemployment insurance chapter reaches the same operator in parallel terms, requiring that the individual own the equipment or hold it under a lease arrangement (Minn. Stat. § 268.035, subd. 25b). Both Minn. Stat. § 176.043 and Minn. Stat. § 268.035, subd. 25b make a vehicle operator in the trucking and messenger/courier industries an employee unless every one of seven factors is present, and the first requires that the driver own the equipment or hold it under a bona fide lease. A signed independent contractor agreement is one of those seven factors, never a substitute for the rest. Minn. Stat. § 176.043. Minnesota courts decide status from what the parties actually do rather than what they called it. See Hunter v. Crawford Door Sales, 501 N.W.2d 623, 625 (Minn. 1993); St. Croix Sensory, 785 N.W.2d at 800.

Field service workers who do not drive for a carrier fall outside those two statutes and are judged under the general control tests in Minn. R. 3315.0555 and Minn. R. 5224.0330 to 5224.0340, where company vehicles, company-set hours, and assigned customers each point toward employment without automatically deciding the question.

The fix: If the worker uses your equipment and follows your routes, classify that person as an employee. If you need contractor-status drivers in those industries, all seven statutory factors must be present: the driver owns the equipment or holds it under a bona fide lease, is responsible for maintenance, carries the operating costs, supplies the personal services to operate the equipment, is compensated on factors related to the work performed rather than hours or time expended, substantially controls the means and manner of performing the services in conformance with regulatory requirements and the shipper’s specifications, and enters into a written contract specifying an independent contractor relationship. Minn. Stat. § 176.043.

How to Structure Compliant Contractor Relationships

If your business legitimately engages independent contractors, these practices reduce misclassification risk. Each element reinforces the independence of the relationship under both Minnesota and federal law.

Focus First on Control, Not Business Form

The strongest indicator of independent contractor status is your right to control the means and manner of performance, not the worker’s business form. Minn. R. 5224.0330, subp. 1 calls control “[t]he most important factor in determining whether a person is an independent contractor,” and Minn. R. 3315.0555, subp. 1 states that “[t]he two most important factors” are the right to control the means and manner of performance and the right to discharge the worker without incurring liability for damages.

Requiring a contractor to operate through an entity is sound contracting practice, and for building construction work it is a mandatory element under Minn. Stat. § 181.723, subd. 4. But it is one of 14 cumulative requirements there, and it is not itself the test. In construction it also has a hard limit running the other way: conditioning payment on an employee forming a business entity is a separate violation, and “[e]ach instance of conditioning payment to an individual who is an employee on one of these conditions shall constitute a separate violation of this provision.” Minn. Stat. § 181.723, subd. 7(c)(1).

Several concrete terms do move the control factor, and each is something you write or decline to write:

• Leave the contractor free to serve other clients, and confirm that the contractor does. Working for a number of firms at the same time indicates a lack of control (Minn. R. 5224.0330, subp. 11), while a full-time requirement or a restriction on working for anyone else is evidence of control (id., subp. 10).
• Allow the contractor to hire a substitute without your knowledge or consent (subp. 6), which points the opposite direction from a standard personal-performance clause.
• Price the work on a job basis with expenses built in. Paying the worker’s approved business or travel expenses indicates control; a job-basis price with the contractor responsible for incidental expenses indicates the absence of it (subp. 13).

Use Written Agreements That Reflect Reality

A written independent contractor agreement should address:

• Scope of work: defined deliverables and project timelines, not open-ended availability
• Payment terms: per-project or milestone-based, with invoicing by the contractor’s business entity
• Control provisions: state that the contractor controls the manner, means, and methods of performance
• Termination: tied to project completion or breach, not at-will
• Multi-client acknowledgment: the contractor is free to serve other clients, including competitors

The agreement must reflect reality. In Hunter, a garage door installer hired as a “subcontractor” provided his own hand tools, worked alone, and was paid by the job with no tax withholding, and the Minnesota Supreme Court still reversed the independent contractor determination, because the record showed the company “not only had the right to, but did in fact, exercise a substantial amount of control over the manner in which Hunter did his job,” and the contract of hire was “contingent upon successful completion of on-the-job training.” The “nature of the relationship is to be ascertained, not from the label given to it by the parties themselves, but from the consequences which the law attached to their arrangements and to their conduct.” Hunter v. Crawford Door Sales, 501 N.W.2d 623, 624-25 (Minn. 1993).

Since July 1, 2024 the stakes on that paperwork run the other way as well. Requiring or requesting a worker who is in fact your employee to sign an agreement or complete a document that treats the worker as an independent contractor is itself a prohibited act, and each such agreement or document is a separate violation. Minn. Stat. § 181.722, subd. 1(a)(3).

As part of the Legal Operating System™ approach to business infrastructure, your contractor agreements should be reviewed alongside your employee handbooks and employment contracts so the documents do not contradict each other.

Document Behavioral Independence

Beyond the written agreement, maintain evidence that the contractor actually operates independently:

• The contractor sets their own hours and work location
• The contractor uses their own tools, equipment, and software
• The contractor submits invoices rather than receiving regular paychecks
• The contractor carries their own liability insurance
• The contractor markets their services to the public and serves multiple clients

In construction the documentation is not optional: you must keep for at least three years, producible to the commissioner on demand, all the information supporting each of the 14 requirements as of both engagement and performance. Minn. Stat. § 181.723, subd. 7(f).

Conduct Periodic Classification Audits

Worker relationships evolve. A contractor engaged for a three-month project who is still working 18 months later, attending team meetings, using a company email, and answering to a supervisor has accumulated several facts Minnesota treats as evidence of employment: a continuing relationship, training that includes required attendance at meetings, and employer-furnished tools and materials are each control criteria under Minn. R. 5224.0330, subps. 7, 9, and 12. Those facts weigh toward employee status without deciding it, because the two most important factors remain the right to control the means and manner of performance and the right to discharge without liability. Minn. R. 3315.0555, subp. 1. Schedule annual reviews of every contractor relationship to test whether the working conditions still support the classification you have.

Know When to Convert

Converting a contractor to an employee is a recognition that the business need has changed. The Voluntary Classification Settlement Program described above is the route for doing it with the federal back-tax exposure settled, and a business currently under an IRS employment tax audit, or under a Department of Labor or state agency audit concerning the classification of these workers, is not eligible. Announcement 2012-45, 2012-51 I.R.B. 724. When the working relationship no longer supports contractor status, proactive conversion costs less than defending a misclassification claim.

Where Minnesota Businesses Should Focus

Minnesota’s rewritten Minn. Stat. § 181.722, combined with the Department of Labor and Industry’s authority to investigate, issue orders, and impose penalties, means worker classification is not an issue you can defer.

If your business uses independent contractors, three actions reduce your risk immediately:

1. Audit your current contractor relationships against the five common-law factors and, if applicable, the construction or trucking statutory tests (Guhlke v. Roberts Truck Lines, 268 Minn. 141, 128 N.W.2d 324 (1964); Minn. Stat. § 181.723; Minn. Stat. § 176.043)
2. Review your contractor agreements so they reflect the actual working relationship rather than the one you intend
3. Consult with an attorney about any borderline relationship before the Department of Labor and Industry or the IRS evaluates it for you

Aaron Hall is a Minneapolis business attorney who advises companies on employment law compliance, including worker classification, non-compete and restrictive covenant issues, and workforce structuring. For a consultation on your contractor relationships, contact Hall PC.