How the Minnesota Wage Theft Prevention Act Continues to Change the Construction Industry’s Business Model

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What does the Minnesota Wage Theft Prevention Act mean?

Over the past few years, the Minnesota Department of Labor and Industry (DOLI) has shifted the foundation of construction. With the announcement of new legislature in 2019, the Minnesota Wage Theft Prevention Act has fundamentally altered the traditional methods general contractors and independent subcontractors operated on.

The act seeks to provide more provisions and benefits for the laborer. DOLI determined that by redefining the definition of an employee versus a subcontractor, then most traditionally accepted subcontractors would now be classified as an employee, therefore, receiving employee benefits. In an industry reliant on subcontractors, the new regulations disrupted the way general contractors run their business and projects.

How does the Minnesota Wage Theft Prevention Act impact general contractors?

Contractors must be extremely careful about how they hire and treat laborers because the misclassification of a subcontractor, that should be treated as an employee according to the new Minnesota law, can cause damaging employment legal issues.

The general contractor, if found guilty, could be liable for:

  • Significant fines and possible criminal penalties
  • Significant payroll and withholding tax liabilities
  • Significant workers’ compensation insurance premiums or liability for injuries

This results in a serious cost to the contractor and the business. Yet, the act is not only shifting the business model contractors operated under, it is impacting the entire construction industry and its supply chain.

How does the Minnesota Wage Theft Prevention Act impact the construction industry?

An employee typically costs more to the contractor as compared to a subcontractor because the general contractor must provide more benefits to an employee as compared to a sub. This is the foundation of DOLI’s argument for the Minnesota Wage Theft Prevention Act. Yet contractors’ heavy use of subs over employees is not based on skimping on employer’s responsibilities, instead, it is because of the impact it has on construction projects.

As costs increase for the general contractor, then it subsequently increases the cost of the project. An employee costs more to the contractor compared to an independent subcontractor, therefore it raises the price of the project. Construction is built on a fluctuating and competitive model. Labor needs change from one project to another therefore shifting how many employees or subs a general contractor will need and hire. Yet, a contractor’s ability to maintain a competitive price for customers while providing valuable work for laborers is dismantled with Minnesota’s new rules and regulations.

How does the Minnesota Wage Theft Prevention Act impact independent contractors?

While the intention of the Minnesota Wage Theft Prevention Act was set forth to provide more provisions for the laborer, it fails to account for the independent subcontractors that want to be subcontractors, not an employee. Numerous subcontractors choose to be independent subs because it brings its own set of advantages that otherwise are not obtainable by having employee status.

The Minnesota Wage Theft Prevention Act has caused a significant alteration to the construction industry, and not just to general contractors, but to subcontractors, customers, and all others that depend on contractors.

What should I do if I receive a Minnesota Wage Theft Prevention Act Notice?

DOLI is taking this matter extremely seriously and as we’ve already witnessed, it can have devastating impacts. If you receive a notice, you need to obtain legal counsel. It is a legal employment issue, and therefore, requires lawyers that deal with employment concerns.

Contractors can no longer assume that if others in the construction industry have not shifted how they use employees and subcontractors that they will be protected. The contractors’ business model has changed, and the consequences of not adhering to the changes are significant.

How can I protect my business from the Minnesota Wage Theft Prevention Act?

You need to start now. Begin by discussing the changes with your independent subcontractors and trade partners. Learn how they and how you can implement procedures that will protect you both.

Next, seek legal counsel that can evaluate your current process to determine how you can comply with the new regulations. At MNCLS, we can help you understand the rules and identify laborers that are misclassified to avoid potential notices. Also, we can advise your employee versus subcontractor protocols and documents, such as a company employee handbook, to ensure compliance now and in the future.

Ultimately, DOLI is seeking to reduce the ambiguity between employees and subcontractors to provide more protection for the laborer. Yet in doing so, it has changed the contractor-subcontractor working relationship. The best way to protect your business is to understand the new regulations, recognize how you need to change your business practices to be compliant, and start implementing these changes.

Actionable next steps

To get started, we’ve outlined four things you can do now to prepare and protect your business.

  1. Check with your legal counsel to ensure you have a written independent contractor template for all of your independent contractors.
  2. Once your subcontractor contract template is finalized, get all your independent contractors to sign the agreement.
  3. Evaluate your subcontractors to identify if any earn 75% or more of their revenue from your business. If a subcontractor does, you need to consult with your legal partner to determine if the subcontractor needs to be classified and treated as an employee.
  4. Make certain your subcontractors are operating their business properly. If they are following correct business practices, such as providing invoices or supplying their own transportation, it in return protects your business from liability.

Minnesota Construction Law Services understands the overbearing regulations general contractors are required to follow, especially in regards to the recent Minnesota Wage Theft Prevention Act. We know the new rules you need to follow for identifying and treating employees versus independent subcontractors that will protect your business against costly repercussions. Contact us to protect your business from costly employee lawsuits/legal action