The New Independent Contractor Exemption Certificate: The Judge Rules

By Pam Perri Weaver
Executive Vice President
Builders Association of Minnesota
In 2007, the legislature passed a law to create an Independent Contractor Exemption Certificate. This law will require certification for all independent contractors who are sole proprietors. Starting September, 2008 all independent contractors will have to begin applying to the State of Minnesota for an exemption certificate. It is called an exemption certificate because it exempts an independent contractor from being classified as employee. The certificate verifies that they are an independent contractor.
Why should builder’s care? Because you may be audited by the Minnesota Department of Revenue. If a builder can’t produce certificates for each independent contractor they use, then the Department of Revenue will treat them as an employee. Meaning you, the builder, will have to pay related taxes (such as workers compensation and unemployment). It will be the builder’s responsibility to keep the exemption certificate on file for all independent contractors who are sole proprietors after January 1, 2009. You must keep the certificate for three years.
I want to stress the issue that ONLY a sole proprietor is required to have an exemption certificate. According to the Minnesota Department of Labor and Industry, “Minnesota Statutes 181.723 is clear that the commissioner may grant independent contractor exemption certificate only to individuals. An individual is defined by MN statute 181.723, subd. 1 (f) as a human being. Making clear that the statute only allows for exemption certificates to be issued to individuals and not to business entities such as corporations and partnerships.”
Often on the road from legislation to regulation things can and do go astray. The regulators who turn laws into rules must interpret what the legislators intended. BAM was very concerned that the requirements to obtain an Independent Contractor Exemption Certificate were so burdensome and intrusive that it would actually increase under the table cash transactions in the construction industry. This was the exact problem they were trying to solve. So, we, along with many of our members requested the proposed rules go to an Administrative Law Judge hearing. Also referred to as an ALJ.
Think of an ALJ as an impartial 3rd party that the public can make its case too when bureaucrats have stepped out of bounds. An ALJ hearing tries to answer if the proposed rule is needed and is reasonable. Armed with over 200 member responses and feedback on our arguments, BAM was able to prepare a case that the rules were overly burdensome and by making the law more difficult to follow, there would be less compliance. You don’t want to penalize the people who are following the law; you want to find a way to get to the individuals who are breaking the law. Finding the right balance should be the public policy objective.
The good news is that because of BAM’s challenge, the Department of Labor and Industry submitted a number of changes to the ALJ to reduce the complexity of the rules. For example,
• The initial proposed rules required up to 32 separate documents. We were able to reduce this to less than eight.
• They removed much of the language that would require arbitrary decisions on behalf of the department to delay the certificate issuance.
• The department changed the rules to allow for a choice of documentation and ranked which documents would be of more importance in determining who should be issued an exemption certificate.
Of course, your subcontractors can easily avoid all of the hassle of filing for an Independent Contractor Exemption Certificate by becoming an LLC. Also, there are two important exclusions: landscaping services and individuals delivering materials to a construction site have been excluded from having to register as an independent contractor.
The Judge’s ruling came out on July 4, 2008. Before the ruling came forward, the department made a number of alterations to the rules based on our comments.
You can read the final ruling at: http://www.oah.state.mn.us/aljBase/190019552.rr.htm We didn’t get everything we asked for, but BAM’s members made a difference to reduce unreasonable rules. Thank you to those who took the time to contribute comments, answer surveys, propose solutions, and send in letters. You gave us the resources to lobby for these important changes on your industry’s behalf.