Report calls for more coordination to prevent worker misclassification

A new report from the Minnesota Office of the Legislative Auditor finds that the state lacks a “coordinated approach” to preventing employers from misclassifying workers as independent contractors.

Worker misclassification, which is prohibited by state law, allows employers to reduce labor costs and gain an unfair competitive advantage in the marketplace, according to the OLA report released Thursday.

Misclassification rates in Minnesota are unknown, the report says.

But based on data from the Minnesota Department of Employment and Economic Development, an estimated 22% of employers “subject to a random unemployment audit misclassified at least one worker in 2018.”

To address the matter, the Legislature should direct one or more agencies to calculate misclassification rates on an “ongoing basis” and require state agencies to take a more “coordinated and collaborative approach” to the issue, the OLA report says.

The report also urges the Legislature to enact “common tests for determining worker classification” and amend statutes to “ensure that agencies are required to penalize employers that repeatedly misclassify workers,” among other recommendations.

Nicole Blissenbach, commissioner of the Minnesota Department of Labor and Industry, said in a March 8 letter that the department “considers worker misclassification a significant problem in Minnesota.”

“DLI is committed to tackling this issue head-on and always strives to improve its efforts in this area,” Blissenbach writes.

Worker classification has become an issue at the Capitol this year. Newly introduced legislation [House File 4444 and Senate File 4483] would create more enforcement tools and provide stiffer penalties against employers who misclassify workers.

Specifically, the legislation includes “compensatory damages” and penalties of up to $10,000 for “each individual” the employer “failed to classify, represent or treat” as an employee, among other provisions.

Not everyone is on board with the legislation.

Adam Hanson, president of the Associated Builders and Contractors’ Minnesota and North Dakota chapter, said the legislation is “punitive in nature” and “ignores any good faith mistakes an independent contractor or company might make.”

“The law does away with the state’s current nine-factor independent contractor test and replaces it with an even more complicated 14-factor test, several of which have multifactor tests within them,” Hanson said in an email. “Failure to satisfy just one of those factors results in costly fines and liabilities.”

In addition, Hanson said, contractors are “prohibited from using ‘time and material’ or cost-plus contracts with independent contractors, both of which are frequently used in the construction industry without issue. The bill appears to limit general contractors’ ability to even protect themselves from liability if they request registration documentation from independent contractors.”

Richard Kolodziejski, government affairs director for the North Central States Regional Council of Carpenters, said in an email that the OLA report “further highlights what we already knew: Misclassification of employees is a growing problem in Minnesota. Our current laws do very little to deter this practice.

“The recommendations this report brings forward further supports the need for the legislation moving at the Capitol resulting from the Attorney General’s Task Force,” Kolodziejski added. “I applaud this Legislature for being proactive in their work to resolve this widespread problem and level the playing field for all honest contractors who are not cheating the system and properly treat their workers as employees.

“Minnesota should set a better example and do all it can to prevent this illegal shift of responsibility of payroll taxes and workers compensation insurance on an individual employee.”

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