OAH 4-1900-19552-1
STATE
OF
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE MINNESOTA DEPARTMENT OF LABOR AND INDUSTRY
|
In the Matter of the Proposed Rules Relating to Independent Contractor
Exemption Certificates, |
REPORT OF THE ADMINISTRATIVE
LAW JUDGE |
Administrative
Law Judge Bruce H. Johnson conducted a hearing in this rulemaking proceeding at
9:30 a.m. on May 12, 2008, in the Minnesota Room at the Department of Labor and
Industry,
The hearing and this Report are part of a
rulemaking process governed by the Minnesota Administrative Procedure Act.[1] The legislature has designed the rulemaking
process to ensure that state agencies have met all the requirements that
The members of the Department’s hearing panel were Nancy Leppink, General Counsel for the Department, Kathy Berger, Attorney with the Department, and Stephen Hernick, Assistant Director of Licensing Education and Enforcement with the Department. Eighteen members of the public signed the hearing register.
The Department and the Administrative Law Judge (ALJ) received written comments on the proposed rules prior to the hearing. After the hearing, the ALJ kept the administrative record open for an additional eleven calendar days, until May 23, 2008, to allow interested parties to submit written comments. The record remained open for an additional five business, until June 2, 2008, to allow interested persons to file a written response to any comments received during the initial comment period.[2] Numerous comments were received during the rulemaking process. The hearing record closed for all purposes on June 2, 2008.
The Department must make this Report available for review by anyone who wishes to review it for at least five working days before it takes any further action to adopt final rules or to modify or withdraw the proposed rules. If the Department makes changes in the rules other than those recommended in this report, it must submit the rules, along with the complete hearing record, to the Chief Administrative Law Judge for a review of those changes before it may adopt the rules in final form.
After adopting the final version of the rules, the Department must submit them to the Revisor of Statutes for a review of their form. If the Revisor of Statutes approves the form of the rules, the Revisor will submit certified copies to the Administrative Law Judge, who will then review them and file them with the Elections Division of the Secretary of State. When they are filed with the Secretary of State, the Administrative Law Judge will notify the Department, and the Department will notify those persons who requested to be informed of their filing.
Based on the testimony, exhibits, and written comments, the Administrative Law Judge makes the following:
1. In 2007, the Minnesota Legislature passed Minn. Stat. § 181.723 regarding independent contractors. The statute provides in relevant part:
An individual is an independent contractor and not an employee of the person for whom the individual is performing services in the course of the person's trade, business, profession, or occupation only if (1) the individual holds a current independent contractor exemption certificate issued by the commissioner; and (2) the individual is performing services for the person under the independent contractor exemption certificate as provided in subdivision 6. The requirements in clauses (1) and (2) must be met in order to qualify as an independent contractor and not as an employee of the person for whom the individual is performing services in the course of the person's trade, business, profession, or occupation.[3]
Under the new statute, an individual must both have a current independent contractor exemption certificate issued by the Department and be performing services under the exemption certificate to operate as an independent contractor. If either requirement is not met the individual is an employee of the person for whom the individual is performing services.
2. Section 181.723 is limited to public or private sector commercial or residential building construction or improvement services performed by an individual for a person that are in the course of the person’s trade, business, profession or occupation. It does not apply to homeowners who contract with individuals to perform residential building contractor services on their homes.
3. According to § 181.723, an individual is performing services under the independent contractor exemption certificate if the individual and specific work situation meet the following requirements:
(a) the
individual is performing services listed on the individual's independent
contractor exemption certificate; and
(b) at the
time the individual is performing services listed on the individual's
independent contractor exemption certificate, the individual meets all of the
following [nine] conditions:
(1) maintains
a separate business with the individual's own office, equipment, materials, and
other facilities;
(2) holds
or has applied for a federal employer identification number or has filed
business or self-employment income tax returns with the federal Internal
Revenue Service if the individual performed services in the previous year for
which the individual has the independent contractor exemption certificate;
(3) is
operating under contract to perform the specific services for the person for
specific amounts of money and under which the individual controls the means of
performing the services;
(4) is
incurring the main expenses related to the services that the individual is
performing for the person under the contract;
(5) is
responsible for the satisfactory completion of the services that the individual
has contracted to perform for the person and is liable for a failure to
complete the services;
(6)
receives compensation from the person for the services performed under the
contract on a commission or per-job or competitive bid basis and not on any
other basis;
(7) may
realize a profit or suffer a loss under the contract to perform services for
the person;
(8) has
continuing or recurring business liabilities or obligations; and
(9) the
success or failure of the individual's business depends on the relationship of
business receipts to expenditures.[4]
4. The issue of whether an individual is an employee or independent contractor arises in innumerable contexts, including the areas of workers’ compensation, unemployment insurance, tax, occupational safety and health, and wage and hour laws. Under current law, whether an individual is operating as an independent contractor is determined based on an assessment of whether the individual and work situation meet certain conditions, which are typically the nine conditions set out in section 181.723, subd. 6.
5. To obtain an independent contractor exemption certificate, an individual must submit a complete application and application fee to the Department. The statute requires that a complete application include the following information:
(1) the individual's full name;
(2) the individual's residence address and telephone number;
(3) the individual's business name, address, and telephone number;
(4) the services for which the individual is seeking an independent contractor exemption certificate;
(5) the individual's Social Security number;
(6) the individual's or the individual's business federal employer identification number, if a number has been issued to the individual or the individual's business;
(7) any information or documentation that the commissioner requires by rule that will assist the Department in determining whether to grant or deny the individual's application; and
(8) the individual's sworn statement that the individual meets all of the nine conditions set out above.[5]
6. The new statute adds the requirement that to operate as an independent contractor an individual must also have a current independent contractor exemption certificate. To grant an individual’s application for an independent contractor exemption certificate, the Department must determine whether an individual meets the nine conditions. A primary purpose of the proposed rules is therefore to identify and require the submission of the “best” information and documentation that will assist the Department in making that determination.[6]
7. The proposed rules also establish requirements and administrative processes necessary to grant, deny, correct, renew, amend, cancel and revoke exemption certificates. They also set out the contents of issued certificates, require the Department to maintain a list of exemption certificate holders, and require the identification of certificate holders by the persons who hire them.[7]
8. In the Statement of Need and Reasonableness (SONAR) and at the hearing the Department stated that it anticipates that it will receive applications from three types of applicants: 1) individuals who have been operating as independent contractors in accordance with current law; 2) individuals who have previously worked as employees or who have no work experience; and 3) individuals who have worked as neither employees nor as independent contractors in accordance with current law. In drafting the proposed rules, the Department tried to develop information and documentation requirements that were flexible enough to accommodate all three types of applicants while providing the Department sufficient information to make the statutorily required determinations.[8]
II. Compliance with Procedural Rulemaking
Requirements
9. On August 13, 2007, the Department published a Request for Comments on Possible New Rules Governing Independent Contractor Exemption Certificates in the State Register. The notice indicated that the Department had not yet prepared a draft of the possible rules.[9]
10. As required by Minn. Stat. § 14.131, the Department asked the Commissioner of Finance to evaluate the fiscal impact and benefit of the proposed rules on local units of government. The Department of Finance provided comments in a memorandum dated March 5, 2008.[10]
11. On March 7, 2008, the Department filed copies of the proposed Dual Notice of Hearing, proposed rules, and draft SONAR with the Office of Administrative Hearings. The filings complied with Minn. R. 1400.2080, subp. 5. On the same date, the Department also filed a proposed additional notice plan for its Dual Notice of Hearing and requested that the plan be approved pursuant to Minn. R. 1400.2060. By letter dated March 13, ALJ Bruce H. Johnson approved the Dual Notice and Additional Notice Plan.[11]
12. On March 7, 2008, the Department mailed a copy of the Notice of Hearing to everyone who had requested a hearing. The Notice contained the elements required by Minn. R. 1400.2080, subp. 2, and identified the date and location of the hearing.[12]
13. On March 19, 2008, the Department requested reconsideration of the Additional Notice Plan because the Notice would have caused confusion; it noted it that revised the Plan after March 13 to eliminate some recipients. The ALJ approved the revised Additional Notice Plan on March 20, 2008.[13]
14.
Thirty-nine people requested a hearing on the
proposed rule and the hearing was held at 9:30 a.m. on May 12, 2008, in the
Minnesota Room at the Department of Labor and Industry,
15. At the hearing, the Department filed copies of the following documents as required by Minn. R. 1400.2220:
A. the Request for Comments as published in the State Register on August 13, 2007 (32 SR 325);[15]
B. the proposed rules dated March 7, 2008, including the Revisor’s approval;[16]
C. the SONAR;[17]
D. the Dual Notice as mailed and published in the State Register on March 31, 2008 (32 SR 1811);[18]
E. the Certification that the Department mailed a copy of the SONAR to the Legislative Reference Library on March 28, 2008;[19]
F. the Certificate of Mailing the Notice of Hearing to the Rulemaking Mailing List and to the parties identified in the Additional Notice Plan;[20]
G. the Certificate of Accuracy of the Mailing List as of March 21, 2008;[21]
H. the Certificate of Sending the Notice of Hearing and the SONAR to various legislators on March 28, 2008, accompanied by a copy of the transmittal letter;[22] and
I. public comments received by the Department before the hearing, and requests for a hearing.[23]
16. The ALJ finds that the Department has met all of the procedural requirements under applicable law and rules.
III. Statutory Authority
17. In its SONAR, the Department asserts that its statutory authority to adopt these rules regarding independent contractor exemption certificates is provided in Minn. Stat. § 181.723 (Supp. 2007). Subdivision 13 of that section provides that the DOLI Commissioner may, in consultation with the Commissioners of the Department of Revenue and Department of Employment and Economic Development, adopt, amend, suspend, and repeal rules under the rulemaking provisions of chapter 14 that relate to the Commissioner’s responsibilities under Minn. Stat. § 181.723. The effective date of the authorization to adopt rules in subdivision 13 was May 26, 2007.[24]
18. The ALJ finds that the Department has specific statutory authority to adopt the proposed rules.
IV. Additional Notice Requirements
19.
20. The Department took action to inform and involve the following interested and affected parties and associations in this rulemaking:
A. the people it licenses, including master plumbers, master electricians and power limited technicians, residential building contractors, remodelers and roofers, and contracting high pressure pipefitters;
B. the Associated General Contractors;
C. the Associated Building Contractors;
D. the National Electrical Contractors Association;
E.
the
F. the Plumbing, Heating and Cooling Contractors Association (PHCC);
G.
the Builders Association of
H. the Builder’s Association of the Twin Cities;
I.
the
J. the Lakes and Plains Regional Council of Carpenters and Joiners;
K.
the Laborers District Council of
L.
the
M. the subscribers of Compact, the Department’s quarterly workers’ compensation newsletter;
N. the Subscribers of the Department’s internet list serve for workers’ compensation insurers;
O. the Subscribers of the Department’s CCLD Review newsletter for the Construction Codes and Licensing Division;
P. the Subscribers of the Department’s Safety Lines OSHA newsletter;
Q. persons who are registered on the Department of Employment and Economic Development’s rule mailing list under Minn. Stat. § 13.14, subd. 1a pertaining to unemployment compensation; and
R. persons who have submitted comments during the rule development process.[26]
21. A copy of the proposed rules, the Notice of Hearing and the SONAR were all available on the Department’s website.
22. The Department has widely disseminated the proposed rules to affected parties. Therefore, the ALJ finds that the Department has satisfied the notice requirements.
V. Impact on Farming Operations
23. Minn. Stat. § 14.111 imposes an additional requirement calling for notification to be provided to the Commissioner of Agriculture when rules are proposed that affect farming operations. In addition, where proposed rules affect farming operations, Minn. Stat. § 14.14, subd. 1b, requires that at least one public hearing be conducted in an agricultural area of the state.
24. The proposed rules do not affect farming operations, and the ALJ concludes that the Department was not required to notify the Commissioner of Agriculture.
VI. Compliance with Other Statutory
Requirements
A. Cost
and Alternative Assessments
25.
(1)
a
description of the classes of persons who probably will be affected by the
proposed rule, including classes that will bear the costs of the proposed rule
and classes that will benefit from the proposed rule;
(2)
the
probable costs to the agency and to any other agency of the implementation and
enforcement of the proposed rule and any anticipated effect on state revenues;
(3)
a
determination of whether there are less costly methods or less intrusive
methods for achieving the purpose of the proposed rule;
(4)
a
description of any alternative methods for achieving the purpose of the
proposed rule that were seriously considered by the agency and the reasons why
they were rejected in favor of the proposed rule;
(5)
the
probable costs of complying with the proposed rule, including the portion of
the total costs that will be borne by identifiable categories of affected
parties, such as separate classes of governmental units, businesses, or
individuals;
(6)
the
probable costs or consequences of not adopting the proposed rule, including
those costs or consequences borne by identifiable categories of affected
parties, such as separate classes of government units, businesses, or
individuals; and
(7)
an
assessment of any differences between the proposed rule and existing federal
regulations and a specific analysis of the need for and reasonableness of each
difference.
26. With respect to the first factor, in its SONAR the Department identified the class of persons who will be affected by the proposed rules as the individuals in the construction industry who choose to apply for an independent contractor exemption certificate and the persons for whom those individuals perform services under the independent contractor exemption certificate. The ALJ disagrees. The individuals who choose to apply for an exemption certificate will benefit slightly, but they will mostly be burdened by the statutory requirement and administrative application process. The primary beneficiaries of the rules are the individuals who are currently being misclassified by their employers as independent contractors, and the employers who currently abide by the law and do not misclassify their employees. The information required for the application process will result in assurance that an individual who is granted an exemption certificate by the Department can meet the nine conditions necessary to operate as an independent contractor for purpose of workers’ compensation, unemployment compensation, occupational safety and health, child labor and labor standards laws.
27. The cost of the proposed rules will be borne primarily by the individuals who apply for the exemption certificate. It will cost those individuals to complete the application and to prepare, copy and submit the required information and documentation. (The statute, section 181.723, requires an applicant to pay a $150 application fee.) Those for whom those individuals perform services will bear the costs of checking and retaining a copy of the individuals’ identification and printing a copy of the individual’s independent contractor exemption certificate from the Department’s website.[27]
28. The cost of the administrative requirements included in the proposed rules, by which the Department can grant, deny, correct, renew, amend, cancel or revoke an exemption certificate, will also be borne by those who apply for the certificates. The costs will be the cost of mailing an administrative request to the Department and to persons for whom the individual is performing services under the certificate. The administrative rules will benefit those who apply for the certificate, those for whom they perform services, and the Department in its administration and enforcement of the new statute.[28]
29. With respect to the second requirement regarding the enforcement cost to the agency and any anticipated effect on state revenues, the Department noted that an individual who applies for an exemption certificate is required under section 181.723, subd. 14, to pay an application fee of $150. The application fee was intended to cover the cost of the application process and enforcement of the new law. The statute has provided for the probable costs of reviewing the information and documentation and has determined its effects on state revenues. The Department does not anticipate other provisions of the statute will impact costs or state revenues; nor does it anticipate that there will be implementation and enforcement costs for any other agency from the proposed rules.[29]
30. With respect to the third requirement, the Department must determine if there are less costly or less intrusive methods to achieve the purposes of the proposed rules. The primary purpose of the proposed rule is to identify and require the submission of the information and documentation that will reasonably assist the Department in determining which individuals can operate as independent contractors. As part of its evaluation of what represents the best information for that purpose, the Department considered whether an applicant would have previously prepared or maintained the required information and documentation for another purpose to reduce the applicant’s time and cost of completing the application. The rules as proposed reflect that the information and documentation submitted may support more than one statutory condition. The Department asserts it has culled the “best evidence” to arrive at the information and documentation minimally necessary to make the required determination as to who meets the nine conditions to be considered an independent contractor. As a result, the proposed rule is the least costly and least intrusive method of achieving the primary purpose of the rule. The rule, including the administrative requirements, will result in only minimal costs to the Department that will not be covered by the application fee required by the statute.[30]
31. With respect to the fourth requirement, the Department must describe any alternative methods it considered and the reasons they were rejected. As discussed above, the Department considered requiring more or different information and documentation to prove an individual qualified for an exemption certificate. The Department then determined what information was minimally necessary to meet the statutory requirements. The Department also considered issuing exemption certificate cards, but rejected that idea because cards are frequently lost or stolen and can be easily forged unless produced using expensive processes. The Department also considered including an individual’s photograph with the certificates but rejected that idea because the cost of taking and processing the photos would exceed the costs anticipated by the $150 application fee. Instead, the Department determined that it could best verify the identity of the certificate holder by having them present current photo identification to persons with whom they contracted to perform services under an exemption certificate.[31]
32.
With respect to the fifth requirement, the
Department must note the probable cost of complying with the proposed
rules. The Department asserts that the
cost of complying with the proposed rules will be different for each applicant,
depending on the documentation they have readily available. Because the nine factor test is already used
in other regulatory contexts in
33. With respect to the sixth factor, the Department asserts that not adopting these rules will make it more difficult and more costly for the Department to determine whether an applicant could operate as an independent contractor. It could also delay the processing of applications for the exemption certificates.[34]
34. With respect to the seventh factor, the Department asserts that nothing in the proposed rule conflicts with federal regulations. There are no existing federal regulations that govern independent contractor exemption certificates.[35]
B. Performance-Based Regulation
35. Minn. Stat. § 14.131 also requires that an agency include in its SONAR a description of how it “considered and implemented the legislative policy supporting performance-based regulatory systems set forth in section 14.002.” Section 14.002 states, in relevant part, that “whenever feasible, state agencies must develop rules and regulatory programs that emphasize superior achievement in meeting the agency’s regulatory objectives and maximum flexibility for the regulated party and the agency in meeting those goals.”
36. The Department explained in the SONAR that the proposed rules establish the application process for obtaining and maintaining an independent contractor exemption certificate under Minn. Stat. § 181.723. Part 5202.0130 describes the information and documentation that must be submitted as part of the application to support the statutory factors found in Minn. Stat. § 181.723, subd. 5 (a) (8). Subpart 2, items D through I, require that the applicant submit specific types of information and documentation, and require the applicant to explain how the information and documentation relates to the statutory factors. Item J requires the submission of up to five past contracts of the applicant’s choosing (if any). Item J also requires that a template contract or contracts be submitted, but the applicant has the flexibility to design the template contract or contracts. Item K requires additional documentation to support the statutory factors, but only gives examples of acceptable documentation; the applicant is free to submit whatever documentation the applicant chooses, again with an explanation of how the chosen documentation supports the statutory factors. Therefore, while the rules require that the applicant submit documentation that he or she meets the statutory criteria for an independent contractor exemption certificate, they also provide the applicant a great deal of flexibility to demonstrate and explain how that goal is met.
37. The ALJ finds that the Department has met the requirements set forth in section 14.131 for assessing the impact of the proposed rules, including consideration and implementation of the legislative policy supporting performance-based regulatory systems.
C.
Consultation
with the Commissioner of Finance
38.
Under
Minn. Stat. § 14.131, the agency is also required to “consult with the
commissioner of finance to help evaluate the fiscal impact and fiscal benefits
of the proposed rule on units of local government.”
39. As required, the Department consulted with the Commissioner of Finance. On March 5, 2008, Keith Bogut, Executive Budget Officer, stated by letter that the proposed rules will have no impact on local units of government.[36]
40. The ALJ finds that the Department has met the requirements set forth in Minn. Stat. § 14.131 for consulting with the Commissioner of Finance.
D. Cost
to Small Businesses and Cities under
41. Effective July 1, 2005, under Minn. Stat. § 14.127, the Department must “determine if the cost of complying with a proposed rule in the first year after the rule takes effect will exceed $25,000 for: (1) any one business that has less than 50 full-time employees; or (2) any one statutory or home rule charter city that has less than ten full-time employees.” The Department must make this determination before the close of the hearing record, and the Administrative Law Judge must review the determination and approve or disapprove it.
42. In the SONAR, the Department stated that the proposed rules are not anticipated to increase costs by more than $25,000 for any small business or small city. Small businesses that contract with independent contractors will be required to verify the certificate and identity of the certificate holder under the rule, but the cost compliance will be minimal as discussed above.[37]
43. The ALJ finds that the Department has made the determination required by Minn. Stat. § 14.127, subd. 1, and approves this determination that costs of compliance with the rule will not exceed the costs threshold established by that statute.
44.
Under
45.
The question of whether a rule has been shown to
be reasonable focuses on whether it has been shown to have a rational basis, or
whether it is arbitrary, based upon the rulemaking record.
46. Reasonable minds might be divided about the wisdom of a certain course of action. An agency is legally entitled to make choices between possible approaches so long as its choice is rational. It is not the role of the Administrative Law Judge to determine which policy alternative presents the “best” approach, since this would invade the policy-making discretion of the agency. The question is, rather, whether the choice made by the agency is one that a rational person could have made.[44]
47. In addition to need and reasonableness, the Administrative Law Judge must also assess whether the Department complied with the rule adoption procedure, whether the rule grants undue discretion, whether the Department has statutory authority to adopt the rule, whether the rule is unconstitutional or illegal, whether the rule constitutes an undue delegation of authority to another entity, or whether the proposed language is not a rule.[45]
48. Because the Department suggested changes to the proposed rules after original publication of the rule language in the State Register, it is also necessary for the Administrative Law Judge to determine if the new language is substantially different from that which was originally proposed. The standards to determine whether changes to proposed rules create a substantially different rule are found in Minn. Stat. § 14.05, subd. 2. The statute specifies that a modification does not make a proposed rule substantially different if:
the differences are within the scope of the matter announced in the notice of hearing and are in character with the issues raised in that notice;
the differences are a logical outgrowth of the contents of the notice of hearing, and the comments submitted in response to the notice; and
the notice of hearing provided fair warning that the outcome of that rulemaking proceeding could be the rule in question.[46]
49. In reaching a determination regarding whether modifications result in a rule that is substantially different, the Administrative Law Judge is to consider:
whether persons who will be affected by the rule should have understood that the rulemaking proceeding could affect their interests;
whether the subject matter of the rule or issues determined by the rule are different from the subject matter or issues contained in the notice of hearing; and
whether the effects of the rule differ from the effects of the proposed rule contained in the notice of hearing.[47]
VIII. Analysis of the Proposed Rules
50. This Report is limited to discussion of the portions of the proposed rules that received critical comment or otherwise need to be examined, and it will not discuss each comment or rule part. Persons or groups who do not find their particular comments referenced in this Report should know that each and every suggestion, including those made prior to the hearing, has been carefully read and considered. Moreover, because sections of the proposed rules were not opposed and were adequately supported by the SONAR, a detailed discussion of each section of the proposed rules is unnecessary.
51. The ALJ finds that the Department has demonstrated, by an affirmative presentation of facts, the need for and reasonableness of all rule provisions not specifically discussed in this Report. The Administrative Law Judge also finds that all provisions not specifically discussed are authorized by statute and there are no other problems that would prevent the adoption of the rules.
IX. Broad Issues Relating to the Proposed
Rules
Public Support for the Proposed Rules
52. There was some general support for the proposed rules expressed by organizations such as the North Central States Regional Council of Carpenters,[48] the Minnesota Building Trades Council,[49] and the Laborers Union, District Council of Minnesota & North Dakota.[50]
53. Attorney General Lori Swanson submitted comments on the proposed rules and stated that she supported the general approach and documentation required by the proposed rules and commented on the adverse consequences to employees as a result of employers who “seek to dodge their obligations to pay health insurance, obtain workers’ compensation insurance, observe statutory requirements regarding working conditions, and avoid many of the laws that [the Department] enforces.”[51]
Legislative Auditor Report Regarding Misclassification
54. Deborah Parker Junod, the Program Evaluation Coordinator with the Office of the Legislative Auditor (the Office), spoke at the hearing and introduced a report compiled by her office entitled, “Misclassification of Employees as Independent Contractors.”[52] She stated that, according to a study conducted by her office, one in seven or fourteen percent of employers misclassified at least one worker as an independent contractor, but that in certain construction sectors, the misclassification occurs at much higher rates than the statewide average. For example, the Office found that 38 percent of roofing contractors, 31 percent of drywall and installation contractors, and 29 percent of residential remodelers were misclassified.[53] Junod noted that the misclassification of workers has significant consequences for employees, employers and the state. Misclassification allows employers to bypass certain obligations linked to employment, such as employee access to labor law protections, unemployment insurance, and workers’ compensation coverage. The misclassification puts compliant employers at a competitive disadvantage. The Office estimated that a typical drywall installation employer who treated installers as employees had labor costs 26 percent higher than if that employer were to misclassify the employees as independent contractors. Finally, Junod stated that misclassification results in significant tax consequences for the state. The Office recommended in the report that independent contractor certification should be an important tool to address misclassification. She stated that the proposed rule is an important step toward improving compliance with the nine-step test.[54]
Statutory Authority and Intent
55. Section 181.723, subd. 5, requires an applicant to submit a completed application, including certain information. Subdivision 5 states in full:
Application. To obtain an independent contractor exemption certificate, the individual must submit, in the manner prescribed by the commissioner, a complete application and the certificate fee required under subdivision 14.
(a) A complete application must include all of the following information:
(1) the individual's full name;
(2) the individual's residence address and telephone number;
(3) the individual's business name, address, and telephone number;
(4) the services for which the individual is seeking an independent contractor exemption certificate;
(5) the individual's Social Security number;
(6) the individual's or the individual's business federal employer identification number, if a number has been issued to the individual or the individual's business;
(7) any information or documentation that the commissioner requires by rule that will assist the department in determining whether to grant or deny the individual's application; and
(8) the individual's sworn statement that the individual meets all of the following conditions:
(i) maintains a separate business with the individual's own office, equipment, materials, and other facilities;
(ii) holds or has applied for a federal employer identification number or has filed business or self-employment income tax returns with the federal Internal Revenue Service if the person has performed services in the previous year for which the individual is seeking the independent contractor exemption certificate;
(iii) operates under contracts to perform specific services for specific amounts of money and under which the individual controls the means of performing the services;
(iv) incurs the main expenses related to the service that the individual performs under contract;
(v) is responsible for the satisfactory completion of services that the individual contracts to perform and is liable for a failure to complete the service;
(vi) receives compensation for service performed under a contract on a commission or per-job or competitive bid basis and not on any other basis;
(vii) may realize a profit or suffer a loss under contracts to perform service;
(viii) has continuing or recurring business liabilities or obligations; and
(ix) the success or failure of the individual's business depends on the relationship of business receipts to expenditures.
56. The Builders Association of Minnesota (BAM) has submitted a written report opposing the proposed rules.[55] BAM first argues that the proposed rules go beyond the legislature’s intent. According to BAM, the Department interpreted section 181.723, subd. 5(7), which gives the Department authority to collect additional information, as a mandate requiring the individual to prove that he meets the nine conditions set forth in section 181.723, subd. 5. BAM believes the legislature intended only for the Department to require a sworn statement, and not the documentary evidence to enable the Department to establish that the applicant meets or could meet the factors. BAM argues that requiring the information and documentation specified in the proposed rules renders that statute useless.[56]
57. The Department responds that the Commissioner has long held the authority to adopt rules to establish criteria to determine whether a worker is an independent contractor.[57] Moreover, the legislature has recently passed legislation to address the misclassification of workers. Minn. Stat. § 176.042, enacted in 1996, provides that a worker in the construction industry is an employee for purposes of workers’ compensation unless all nine factors set out in the statute are met. The same nine-factor test is set out in Minn. Stat. § 268.035, subd. 9, enacted in 1998, to determine whether a construction worker is an independent contractor for purposes of unemployment insurance. In practice, these statutes operate to determine whether a worker is an employee or independent contractor after the worker is injured or is discharged. The Department points out that many workers are misclassified, and never identified by the Department. In 2005, the legislature enacted Minn. Stat. § 181.722, which allows a construction worker to bring a civil action for damages against his or her employer for misclassifying him or her. The Department contends that, despite these legislative efforts, the misclassification of workers continues.[58]
58. The Department also points out that § 181.723 grants the Commissioner broad authority to obtain and review documentation and information from an applicant to determine whether to issue an exemption certificate. For instance, subdivision 9 provides the commissioner with broad investigative and subpoena authority “in order to carry out the purposes” of the law. Subdivision 13 permits the commissioner to adopt rules “that relate to the commissioner’s responsibilities under” the law. Subdivision 5(a)(7) expressly provides that applicants must submit information or documentation that the commissioner requires by rule that “will assist the department in determining whether to grant or deny the individual’s application.” Nowhere does the statute suggest that a single affidavit is all the documentation the Department may request. Subdivision 5(c) provides that the commissioner may deny an application if the individual “does not meet all of the conditions for holding the independent contractor exemption certificate.” Subdivision 5(e) permits an individual to request a hearing at the Office of Administrative Hearings on the commissioner’s denial of an application.[59]
59. Taken together, and in light of the previous unsuccessful attempts to address the misclassification of construction workers, the above provisions establish that the legislature intended that the commissioner would do more than rubber stamp a sworn statement, with no or minimal documentation that the applicant meets the conditions for holding an exemption certificate that are set out in the nine factors. If that was all that the legislature intended, the above authority would not be necessary and there would be no need for contested case hearings. Moreover, such a system would not be significantly different from the previous ineffective laws cited above, in that unsophisticated workers could just be pressured into signing a sworn statement, thus perpetuating the misclassification under the previous laws. As noted by Kyle Makarios at the hearing, a system where exemption certificates are issued based on no or minimal documentation of the nine factors would simply exacerbate the problems under the current system in that exemption certificates would be used to legitimize the misclassification.[60]
60.
The ALJ concludes that the proposed rules do not
go beyond the legislature’s intent, or exceed the statutory authority set forth
in section 181.723.
Excessive Documentation
61. Many of the commenters objected to the proposed rules because they are excessive, onerous, unworkable or too complex. Thirty of the 39 persons who requested a hearing wrote:
The primary reason I oppose the rule is that the documentation being required is not only excessive but…also unreasonable. The sum of all the requirements amount to over 32 separate documents ranging from tax returns with 10 different schedules to bank statements, copies of executed contracts and a previous employment history.[61]
62. The Department responds that the commenters misunderstand the amount of documentation actually required by the rules. Applicants who are operating as independent contractors under current law should already have the documentation necessary to establish the nine factors. The Department divides the application process into two categories – one is the basic information to be provided directly on the application form itself. This information is relatively basic. According to the Department, an applicant who is an independent contractor with no employees, and who has been operating consistently with the nine factor test for the past two years, would provide the following information on the application:
· information already required by Minn. Stat. § 181.723, subd. 5 (a) clauses (1) to (6) and the sworn statement required by clause (8) (Item A);
· how the applicant wants to be contacted (Item B);
· checking a box that the applicant
o is not doing business under an assumed name (Item C);
o has not received a determination on his or her independent contractor status from a court or government agency. (Item D);
o
does not have a
o has no employees. (Item F);
· has not been employed by someone else in the previous two years. (Item G);
·
filling in the applicant’s
· providing a signature that allows DLI to verify that the application and supporting documents are true and correct. (Item L); and
·
signing a sworn statement that the application
is true and correct, that the applicant is a
63. The second category of the application process involves the documentation that must be provided in addition to the application itself. According to the Department, the applicant will need to compile and submit the following information:
· Tax returns filed in the previous two years, with schedule C showing income, profit or loss from a business, IRS form 4562 showing deduction for depreciation and amortization; IRS form 8829 showing expenses for business use of a home, and 1099 forms received. (Item H)
· An executed contract and a template contract the applicant intends to use as an independent contractor, which could be the same contract. (Item J)
· Additional documents from item K (including five additional subitems required in the proposed changes).
· A color photocopy of a current government issued photo ID. (Item M)[63]
64. The Department asserts that an applicant without a clear history of operating consistently with the nine factors will need more documentation than an applicant with a clear history. The rules are designed to allow the applicant maximum flexibility in documenting that they meet the nine statutory factors, whether or not they have been operating as independent contractors under existing law. The type and extent of documentation needed to establish the nine factors will vary depending on the applicant. According to the Department, no applicant will need to submit 32 separate documents.[64]
65. The ALJ concludes that the proposed rules, as modified by the Department in its Comments submitted on May 23, 2008, and June 2, 2008, do not require excessive documentation. The Department has demonstrated that what documentation is required depends on the circumstances of the individual applicant and, in that context, is reasonable and necessary to allow the Department to ascertain whether an applicant is operating as an independent contractor according to the nine statutory conditions.
Clarity of What Evidence Is Necessary to
Demonstrate Independent Contractor Status
66.
BAM submitted concerns that the proposed rules
are “not clear about which factor explained by which document or what
combination of documents will constitute enough evidence that the individual
really is an independent contractor.”
BAM states that the lack of clarity will result in a subjective and
unpredictable application process.[65]
67.
The Attorney General also expressed similar
concerns, and suggested that the Department better define what documentation
would be sufficient to show that an applicant meets or could meet the nine
factors.[66]
68.
In response to these comments and concerns from
BAM and the Attorney General, the Department has modified the proposed rules to
indicate more clearly what information and documentation will be required to
satisfy each of the nine factors.
Specifically, the Department modified Part 5202.0130, subpart K to read
as follows:
K. Additional information and documentation that
support the factors in Minnesota Statutes, section 181.723, subdivision 5,
paragraph (a), clause (8), related to the services the applicant will provide
as an independent contractor under the exemption certificate. The applicant
must explain how each document submitted supports one or more of the factors.
Examples of documentation that support one or more factors include: Applicants must submit the documentation
described in subitems (1) and (2). In addition, applicants must submit the
documentation described in at least five of subitems (3) through (13) related
to the services the applicant will perform under the exemption certificate.
(1) Tax returns, schedules, attachments and forms
described in item H;
(2) Rental
agreements or lease agreements, other than a post office box, for facility
space used by the applicant in performing the services for which the applicant
is seeking the exemption certificate. Instead of the rental or lease
agreements, the applicant may provide the tax documentation described in item
H, subitem 10;
(3) (2)
Documentation that establishes the
applicant’s ownership or control of equipment, tools, materials, or vehicles
necessary for the applicant to perform the services for which the applicant is
seeking the exemption certificate. Examples of such documentation include
contracts, rental or lease agreements, deeds and receipts, or the tax
documentation described in item H, subitems 2 or 7 showing such ownership or
control;
(3) If
submitted by the applicant in response to item H, the state or federal
tax documentation described in item H, subitems 1, 3, 4, 8, 9, and 11,
and IRS 1099 forms issued to the applicant;
(4) A commercial liability insurance policy or bond
covering the applicant or the applicant’s business, office equipment, and
materials;
(5) A workers’ compensation policy covering the
applicant;
(6) Business or building permits held or applied for that are related to the applicant’s
performance of the services for which the applicant is seeking the exemption
certificate;
(7) Bills or invoices from and payments made to
vendors, suppliers, subcontractors, or other persons;
(8) Contracts with vendors, suppliers,
subcontractors, or other persons;
(9) Bank statements and accounting statements showing
receipts, expenditures, and profit or loss for the applicant’s business;
(10) Trade or professional memberships or affiliations;
and
(11) Marketing or advertising materials;
(12) Documentation of payment to other independent
contractors as shown on IRS forms 1099 and 1096; and
(13) Documentation of compliance with laws related
to:
(a) workers’ compensation or
unemployment insurance as described in item F, and item H, subitem 5 and 6; and
(b) payment or withholding of wages as shown on IRS W-2 and W-3 forms or item H, subitem 6.[67]
69.
In proposing those changes to subpart K, the
Department attempted to balance the applicants’ need for flexibility with their
need for clear guidance about exactly what documentation will sufficiently
support and demonstrate their compliance with the nine factors. The Department modified the rule to indicate
more clearly what information and documentation will be required to support
each of the nine factors. The
Department, in modifying subpart K, recognizes that not every applicant will
have all of the documentation identified in K, and specifically states that not
all of the documentation is necessary to satisfy the nine factors.[68]
70. The Department has determined that the information and documentation identified in item K support factors (i), (iv), (viii) and (ix) of the nine-factor test. The Department has determined that the first two factors in item K are necessary to support factor (i). The modification of item K requires the applicant to submit additional documentation from at least six subitems of subitems (3) through (13). The Department has determined that documentation from the additional six subitems is the minimum number that could reasonably support factors (iv), (viii) and (ix).
71. The ALJ finds that this portion of the proposed rule, as modified, is needed and reasonable to ensure that applicants submit sufficient information to enable the Department to determine whether an applicant qualifies for independent contractor status.
72. These modifications do not make the rule substantially different from the rule as proposed. Objections to the proposed rules sought clearer guidance about what information and documentation would be sufficient to establish that the applicant could meet the factors and be granted an exemption certificate. The documentation required has not changed, but the modifications explain how the documentation supports the factors. The modifications to items H, J and K are made in response to these comments, and are a logical outgrowth of the rules as proposed.
Notice
73.
BAM asserts that since over 25% of the labor
force in the construction industry is foreign born, the Department should have
notified the Chicano Latino Affairs Council as to the impacts of the proposed
rules on that population.[69]
74.
The Department responds that it has sent notice
to more than 30,000 persons in the building construction industry. Foreign-born workers and the persons who hire
them would have received notice of the rule adoption proceedings in the same
way that other groups would have received notice. It is likely that BAM’s membership includes
foreign-born persons, and that these individuals would be represented by the
organizations that received notice according to the Department’s Additional
Notice Plan.[70]
75.
The ALJ concludes that the primary effect of the
rules is on contractors, employers, employees and other workers performing
building construction and improvement service, and that the Department
adequately notified the affected groups of the proposed rules.
Burden on Hiring Entities
76.
A number of hiring entities submitted concerns
about the amount of documentation they will be required to maintain. For example, Wensman Homes stated in its
letter that “Our company works with approximately 75 independent
contractors. The amount of effort
necessary in order to obtain, track and monitor the documentation required by
the rules would require the time and attention of a full-time employee.”[71]
77.
These hiring entities appear to be under the
misunderstanding that their companies will be required to maintain the
application documentation. The only
documentation persons who hire independent contractors will be required to
retain is a copy of the exemption certificate for each independent
contractor. This is required by Minn.
Stat. § 181.723, subd. 7(c) – not the proposed rules. The proposed rules do not require hiring
entities to maintain or monitor the application process.[72]
Private Data
78.
Charles Schoenwetter, a lawyer who represents
builders and developers, submitted concerns regarding the private nature of
some of the documentation required. He
stated that the proposed rules require independent contractors to divulge trade
secret and confidential information regarding how they conduct their
business. He is concerned that because
this information is being provided to the state, it will be accessible to
others through routine requests via established procedures.[73]
79.
The Department acknowledges that some of the
documents required to be submitted may be proprietary and confidential, but
Minn. Stat. § 181.723, subd. 16, classifies the application data as private
data on individuals. Under
80.
The statutory classification of the application
documentation should relieve all concerns regarding the private nature of the
requested information, and the ALJ concludes that the statute reasonably
protects the private nature of the documentation and information required by
the rules.
Unfair Competition
81.
Representative John Ward expressed concerns on
behalf of his constituents that the rules will make it difficult for small
businesses to compete.[75]
82.
The Department responds that under the current
system, the companies who comply with the nine-factor test are at a competitive
disadvantage with those who do not comply with the law and mischaracterize
employees as independent contractors.
The Legislative Auditor’s report concludes that the labor costs for
compliant employers are 26% higher than for employers who do not comply.[76] The proposed rules will even the playing field
between employers who misclassify and those who do not, and thereby lead to
fairer competition.[77]
83.
The ALJ concludes the proposed rules will not
impose undue burdens on small businesses.
84.
In testimony and written comments, the Minnesota
Electrical Association (MEA) asserted that electrical contractors performing
electrical work do not fall within the scope of Minn. Stat. § 181.723, because
that statute cross-references Minn Stat. § 326.83.[78] But, MEA acknowledged at the hearing that
electrical workers would be covered if the reference to Minn. Stat. § 326.83
were repealed, as proposed in HF 3034.[79]
85.
The Department responds that the 2008
Legislature has, in fact, taken action to repeal the reference to § 326.83 as
follows:
Sec. 2.
Minnesota Statutes 2007 Supplement, section 181.723, subdivision 2, is amended
to read:
Subd. 2. Limited application. This
section only applies to individuals performing public or private sector
commercial or residential building construction or improvement services, as
defined in section 326.83. Building construction and improvement
services do not include: (1) the manufacture, supply, or sale of products,
materials, or merchandise; (2) landscaping services for the maintenance or
removal of existing plants, shrubs, trees, and other vegetation, whether or not
the services are provided as part of a contract for the building construction
or improvement services; and (3) all other landscaping services, unless the
other landscaping services are provided as part of a contract for the building
construction or improvement services.
(Act of May 19, 2008, c. 337, §
2, 2008
86.
Without
the reference to section 326.83, there is no doubt that section 181.723
includes electrical contractors or that building construction includes
electrical work. As such, electrical
contractors fall within the scope of section 181.723.
87.
MEA also
argues that the majority of the information required for the proposed rules is
already provided by individuals seeking an Electrical Contractor or Technology
Systems Contractor license and that submitting duplicate information is
burdensome.[81]
88.
The
Department acknowledges that streamlining should take place in information
required from individuals under separate laws, but it does not believe that
this type of government streamlining is a subject for this rule.
89.
Finally,
MEA voiced concerns regarding the interaction of Minn. Stat. § 181.723
and the statutes and rules governing electrical contractors. Specifically, MEA, citing Minn. R. 3800.3540,
subp. 1, states:
90.
If an “individual”
who is licensed by the Department of Labor and Industry as an Electrical
Contractor or Technology System Contractor is not issued an independent
contractor exemption certificate, then in order for that individual to continue
to do electrical work, the company who is now deemed to be his employer would
have to apply and obtain an Electrical Contractor or Technology system
contractor license. But current
Minnesota Rule 3800.3540 prohibits that individual who is already licensed as
an “individual” Electrical Contractor or Technology system contractor from
being employed by “any other contractor or employer.”
91.
The
Department responds that Minnesota Statutes, chapter 326, and the corresponding
rules in Minn. Rules, chapter 3800, govern licensure and employment of
electricians and electrical contractors. Minnesota Statutes, section 181.723, subd. 3,
provides that an individual who does not have an exemption certificate is an
employee "for purposes of chapters 176, 177, 181A, 182, and 268." Section 181.723 does not provide that the
electrical contractor would be considered an employee of a general contractor
for purposes of Minn. Stat. chapter 326.
The rule cited by MEA is designed to keep one qualifying person from
overseeing electrical work for multiple companies. Because the laws are for different purposes
and chapter 326 is not listed in Minn. Stat. section 181.723, there is not
necessarily a conflict between the statute and the rule cited. The legislature has not exempted electrical
contractors from operation of Minn. Stat. section 181.723, and the Department is
without authority to do so by rule.
92.
The ALJ concludes that although the proposed
rules require the duplicative production of certain information required under
the electrical licensing statutes and rules, the proposed rules are not unduly
burdensome, and are not in conflict with statutes and rules governing
electrical licensing. The Department has
demonstrated their need and reasonableness.
X. Rule-by-Rule Analysis
Part 5202.0100
93.
In its Response, the Department proposed to
modify part 5202.0100 as follows:
PART 5202.0100. SCOPE.
Parts 5202.0100 to 5202.0160 govern
independent contractor exemption certificates issued to individuals performing
public or private sector commercial or residential building construction or
improvement services under implement Minnesota Statutes, section
181.723.
94. The Department asserts the change is made to make sure the rules are not limited to “exemption certificates,” because some of the rules more generally relate to other provisions of § 181.723. As noted in the SONAR, the purpose of this provision is to distinguish this chapter from Minn. R. Ch. 5224.[83]
95. The ALJ concludes that this is not a substantial change from the rule as proposed, as defined in Minn. Stat. § 14.05, subd. 2, because it is in character with the proposed rule and it avoids an unintended limitation of the scope of the rules.
Part
5202.0110, Subpart 8
96. The Department proposes to modify part 5202.0110, subpart 8, as follows:
PART 5202.0110. DEFINITIONS.
Subpart 8. Main
expenses. “Main expenses”
for purposes of
(1) The expense of
purchasing, renting and maintaining tools, equipment, facility or office space
and vehicles used in providing the service;
(2) Labor expenses
related to the service;
(3) Business expenses
that are related to the service, such as advertising, insurance, taxes,
licenses and permits;
(4) The expense of materials used in providing the
service, except for building construction or improvement materials that under a
contract are provided by the building owner or another contractor.
(Renumber proposed subparts 8 and 9 as subparts 9 and 10)
97.
The Department asserts that this change is in
response to the testimony of Mike Hickey on behalf of the National Federation
of Independent Businesses in
98. The Department relies upon the Workers’ Compensation Court of Appeals, which has identified expenses that are relevant in determining whether a worker incurs the main expenses related to the service, including tools, vehicles, materials, labor costs, and business expenses such as advertising and insurance.[85] Further, this factor requires an analysis of what constitutes the main expenses related to the “services under the contract.” Subitem 4 of the proposed definition recognizes that under current industry practice, the purchase of raw building materials may or may not be part of the contract for the provision of services.
99. The ALJ concludes that the proposed rule, as modified, is not substantially different from the rule as originally proposed because was made in response to a public comment and is in character with the rule as proposed.
Part 5202.0110, Subpart 11
100. The Department proposes to modify part 5202.0110, subpart 11, as follows:
Subpart 11. Sworn Statement. “Sworn Statement” means a statement that is
signed and sworn to before a notarial officer under
101. The Department asserts that the change is made in response to comments from the Attorney General, who pointed out that a “sworn statement” is typically understood to be made before a notary public.[86] The modification clarifies that the sworn statements referred to in the rules are signed and sworn to before a notarial officer. Most often this will be a notary public, but others are also authorized to take sworn statements, as specified in chapter 358.[87]
102. The ALJ concludes that the proposed rule, as modified, is not substantially different because it was made in response to a public comment, serves to clarify the rule, and is in character with the rule as proposed.
Part 5202.0120, Subpart
3
103. The Department proposes the following modifications to Part 5202.0120, subp. 3:
PART 5202.0120. WHO SHALL BE ISSUED AN INDEPENDENT CONTRACTOR EXEMPTION CERTIFICATE.
Subp. 3. Landscaping
services excluded. Individuals
who are performing landscaping services are not performing public sector
commercial or residential building construction or improvement services. For purposes of this section, landscaping services
means to adorn or improve that land around a building by contouring the land
and placing and setting plants, shrubs, and trees. Minnesota Statutes,
section 181.723, subd. 2 (3), landscaping services means placing soil, sod and
mulch; planting seeds, plants, shrubs, trees and other vegetation; and
installing erosion control measures, retaining walls, boundary walls, fences,
brick and stone pavers, and aesthetic surface treatments.
104.
The Department asserts that it modified subpart
3 to reference the statutory amendment in HF 3034, signed by the governor on
May 19, 2008.[88] The description of landscaping services is
further modified to list the services proposed by the Laborers District Council
of
105. The ALJ concludes that the modification is not a substantial change. The Department invited comment on, and provided a copy of, pending HF 3034 at the hearing.[89] Moreover, the change is made in response to public comment and is in character with the rule as proposed.
Part 5202.0130, Subpart
1(B)
106. The Department proposes to modify Part 5202.0130, subp. 1B as follows:
PART 5202.0130. APPLICATION; REQUIRED INFORMATION AND DOCUMENTATION; APPROVAL OR DENIAL.
Subpart 1. Complete application; submission of documents.
A. . . . .
B.
The applicant must submit complete and legible copies of the information
and documentation required in subpart 2 and must retain the original
information and documentation for at least two years after submitting the
application. The Commissioner may store by imaging or other electronic
format any information and documentation
submitted as part of the application if the image or electronic format
produces an accurate and readable image. The commissioner must retain the
copies of the submitted information and documentation until the information and
documentation is stored by imaging or other electronic format and until 60
days after there is a final order approving or denying the application under
Minnesota Statutes, section 181.723, subdivision 5. After
the order is final and the information and documentation is
electronically stored, the commissioner may destroy the copies. Thereafter,
the commissioner may destroy the copies.
C. …[90]
107. The Department asserts that Subpart 1, item B is modified to clarify that the Commissioner may store by imaging or other electronic format any information and documentation submitted as part of an application. In addition the requirement that the Commissioner retain copies of the submitted information and documentation “until 60 days after there is a final order approving or denying the application under Minnesota Statutes, section 181.723, subdivision 5” is deleted and replaced with a provision that permits the Commissioner to destroy the copies after they have been stored by imaging or other electronic format. There is no need to retain paper copies for a period of 60 days after an order approving or denying has become final because the applicant is instructed to submit copies and retain the original information and documentation for at least two years after submitting the application. The rules and statute permit the Commissioner to request the original document as needed. The Department has limited storage space and there is no need to retain copies of original documents retained by the applicant where the image is accurate.
108. The ALJ concludes that this is not a substantial change because it is in character with the proposed rule and it removes an unnecessary requirement from the rule.
Part 5202.0130, subp. 2(D)
109. The Department proposes to modify Part 5202.0130, subp. 2(D) as follows:
Subp. 2. Required information and documentation.
D. A
copy of any audit, letter, report, order, decision, determination, certificate,
opinion, or ruling issued by any state or federal court or agency, to the
applicant or about which the applicant has knowledge, that is related to the applicant's business or the applicant's status
of the applicant or the applicant’s
business as an independent contractor, sole proprietor, employer or an employee. The applicant must explain how the audit, letter,
report, order, decision, determination, certification, opinion, or ruling
supports one or more of the factors in Minnesota Statutes, section 181.723,
subdivision 5, paragraph (a), clause (8), or why the applicant should be
granted the exemption certificate despite the document's findings.[91]
110.
The
Department asserts that this subpart is refined to more clearly indicate the
types of documentation that will be helpful to the Department in determining
whether to issue an exemption certificate. Requiring submission of any opinion “related
to the applicant’s business” was overly broad because it could include
documents that are not relevant to the independent contractor status. The new language narrows item D to more clearly
ensure that the required documentation is related to the issue of whether the
applicant is an independent contractor. For
example, a determination by the IRS that the applicant is or is not an employer
would be relevant.[92]
111.
The ALJ
concludes that this is not a substantial change because it is made in response
to public comment that the original rules did not contain a sufficiently clear
description of the documentation required, and is in character with the rules
as proposed.
Part 5202.0130, Subpart 2(E)
112. The Department proposes to modify Part 5202.0130, subp. 2(E) as follows:
Subp. 2. Required information and documentation.
E. A
copy of any credential held or training completed by the applicant that is
related to, or required for, the performance of services for which the
applicant is seeking an exemption certificate. Examples of these credentials
include a business, professional, or personal license issued by a government
entity; a certificate of completion of an apprenticeship or other training program;
and a degree issued by an accredited educational institution. The applicant
must also explain how the credential or training supports one or more of the
factors in Minnesota Statutes, section 181.723, subdivision 5, paragraph
(a), clause (8). If the credential is a license issued by a
113. Subpart 2(E) requires the applicant to provide credentials or training he or she has received. BAM testified in opposition to the requirement, stating that a training credential is not pertinent to determining if an individual is an independent contractor. It argues the requirement is unnecessary and duplicative if the individual is already a license holder. It is more reasonable, BAM suggests, for the Department to request any existing license type and number because the Department would already have that information.[93]
114.
The Department agrees with BAM that actual
copies of Minnesota-issued licenses are not needed, and it therefore has
amended Part 5202.0130, subpart 2(E) to permit an applicant to submit the
license number of any license issued by a
115. The ALJ concludes that the change does not result in a rule that is substantially different from the rule as proposed because it is made in response to a comment on the proposed rules and is in character with the rules as proposed.
Part 5202.0130,
Subpart 2(F)
116. Subpart 2(F) requires the applicant to provide information about his or her intention to hire employees while acting as independent contractors under the exemption certificate. BAM has submitted comments in opposition to this requirement, stating that an applicant’s “intent” to hire someone is vague and unworkable and as such the requirement is unclear.[96]
117. The Department agrees with BAM that it may not be necessary to ask whether the applicant “intends” to hire employees. Therefore, the Department proposes that Part 5202.0130, subpart 2(F) be amended to eliminate the requirement regarding the applicant’s intentions, as follows:
Information about whether the applicant employs or intends to employ
individuals while acting as independent contractors under the exemption
certificate. If the applicant employs or intends to employ individuals, the
applicant must also submit documentation of the applicant’s unemployment
insurance tax account number under Minnesota
Statutes, section 268.045, and workers’ compensation coverage for the
employees under Minnesota Statutes,
chapter 176. If the applicant believes that unemployment or workers’
compensation insurance is not required, the applicant must explain the legal
basis for why unemployment or workers’ compensation coverage is not required.
118. The ALJ concludes that the proposed revision is not substantially different from the rule as originally proposed because it is made in response to a public comment and is in character with the rules as proposed.
Part 5202.0130,
Subpart 2(G)
119. Subpart 2(G) requires an applicant to provide information about the applicant’s employment history in the two years before the date of the application. BAM recommends that the requirement be eliminated because it is not necessary to consider someone’s work history to determine whether that person is now an independent contractor.[97]
120. The Department responds that the information about previous employment will provide valuable context to assist the Department in determining who qualifies for an exemption certificate. Nonetheless, the Department proposes that Part 5202.0130, subp. 2(G) be modified to eliminate the requirement that documentation indicative of employment be submitted, as follows:[98]
G. Information about whether, at any time
during the two years before the date of the application, the applicant has been
employed; has been paid wages; has had wages garnished or withheld; or has
received workers’ compensation or unemployment insurance benefits. If any
of these has occurred the applicant has been employed at any time during
the two years before the date of the application, the applicant must
explain why these indications of the employment do does
not preclude issuance of an exemption certificate.
121. The Department acknowledges that if the Department receives the applicant’s employment information, it is unnecessary for the Commissioner to also obtain information about indications of employment such as garnished or withheld wages, workers’ compensation benefits and unemployment benefits.
122. The ALJ concludes that the proposed change does not constitute a substantial change because it was made in response to comments and is in character with the rules as proposed.
Part 5202.0130, Subpart 2(H)
123. Subpart 2(H) requires the applicant to provide copies of tax returns, schedules and attachments, if any such document related to the services the applicant will provide have been filed in the previous two years. BAM recommends that this item be stricken because providing excessive and proprietary tax documentation is unnecessary. BAM argues that the Department should only request IRS 1099 or 1096 forms.[99] Other commenters also suggest that 1099 forms and proof of liability insurance should be a sufficient means of proving someone is an independent contractor.[100]
124. Anderson Management & Maintenance submitted written comments, stating that an independent contractor just starting out would have an employment history and none of the tax history other than W-2 forms, and that these appear to be unacceptable under subpart H.[101]
125. The Department responds that the proposed rule is narrowly crafted to require only tax information needed to evaluate whether the applicant can meet the nine statutory factors. If the applicant has been self-employed as an independent contractor in the past two years, tax documents such as returns, schedules and attachments, are likely to show business or self-employment taxes paid, business receipts, depreciation, expenses, obligations, and profit and loss factors. The 1099 form and 1096 forms only show payments made to other independent contractors and payments received by the applicant; the forms do not support the statutory factors because they are frequently issued to employees who are misclassified as independent contractors. The Department therefore proposes no changes to the proposed rule.[102]
126. In response to the concern submitted by Anderson Management & Maintenance, the Department asserts that it anticipates that applications will be submitted by workers just starting their own business. If an applicant has not operated as an independent contractor before and therefore has not filed any business or self-employment tax forms in the past two years, the application will not necessarily be denied. Under both items G and H the applicant could explain that he or she is just starting out. However, the applicant will have to submit documentation set out in K that demonstrates that the applicant could meet the nine statutory factors going forward.
127. The ALJ concludes that the proposed rule, Part 5202.0130, subp. 2(H), is not overly burdensome and the Department has established its need and reasonableness.
Part 5202.0130, Subpart 2(J)
128. Subpart 2(J) requires the applicant to provide copies of up to five executed contracts for services the applicant contracted to provide before the date of the application, if any, and template contracts the applicant intends to use in contracting to provide services under the exemption certificate. BAM opposed the requirement, stating that oral contracts would be difficult to submit and that contracts are proprietary business assets. BAM also expressed concerns that the proposed rules do not clearly identify which documents related to which factors.[103]
129. The Department responds that the proposed rule is necessary because it pertains the statutory factors regarding contracts entered into by the independent contractor (factors iii and iv). Decisions issued by the Workers’ Compensation Court of Appeals illustrate the importance of contractual provisions in analyzing whether the nine factors have been met. In response to BAM’s concerns of confusion, the Department proposes to amend subpart J to reflect the statutory factors that are related to contracts, as follows:[104]
J. Copies of up to five executed contracts for services the applicant
contracted to provide before the date of the application, if any, and template
contracts that the applicant intends to use in contracting to provide services
as an independent contractor under the exemption certificate. The template contracts must satisfy
factors (iii), (iv), (v), (vi) and (vii) in Minnesota Statutes, section 181.723,
subdivision 5, paragraph (a), clause (8) for the services the applicant will
provide as an independent contractor under the exemption certificate.
130. The ALJ concludes that the proposed change clarifies the rule and does not constitute a substantial change because it was made in response to comments and is in character with the rules as proposed.
Part 5202.0130, subp.
2(K)
131. Subpart 2(K) requires the applicant to submit any additional information and documentation that supports the nine statutory factors. BAM recommends the entire item be deleted, or a point value be assigned to each of the factors, because otherwise the process is too subjective and uncertain.[105]
132. The Department responds that the threshold for proper documentation is that the applicant must submit some documentation to indicate that he or she can meet each of the nine factors. The documentation submitted will vary from applicant to applicant because there is more than one way to establish each factor. The rules provide the applicants flexibility in how to document they meet the statutory factors. Nonetheless, the Department has amended the proposed rules to add further clarity regarding what documentation will be sufficient to satisfy each of the nine factors.[106]
133. See Findings 65-70.
134. The ALJ concludes that the proposed rule, Part 5202.0130, subp. 2(K), is not too subjective or uncertain and the Department has established its need and reasonableness.
Part 5202.0130, Subpart 2(M)
135. The Department proposes to amend Part 5202.0130, subp. 2(M) as follows:
M. A color copy photocopy of a current photo identification
document issued to the applicant by the United States or a state or territory
of the United States, along with documentation required by any federal
electronic verification program, such as the Systemic Alien Verification for
Entitlements Program adopted under United
States Code, title 8, section 1642, that assists the department in
verifying the applicant’s authorization to work in the United States.
136. The Department amended subpart M in response to comments from Mr. Hickey, who questioned whether a person needs to obtain a copy of the identification document from the official source.[107] The second change is to cite the federal authority for the SAVE program referenced in the rule. This is a technical change to make the rule more informative.[108]
137. The ALJ concludes that the changes do not make the rule substantially different from the rule as proposed. The change in the first portion of the rule is in response to a comment, and the second change does not alter the substance of the rule, but merely provides an informational statutory citation.
Part 5202.0130, subp.
2(N)
138.
Subpart 2(N) requires the applicant to provide
an additional sworn statement that the applicant is a
139.
The Department responds that these requirements
are valid because if an applicant is not allowed to legally work in the
140. The ALJ concludes that the Department has demonstrated the need and reasonableness of this provision.
Part 5202.0130,
Subpart 3
141. Part 5202.0130, subpart 3 clarifies the Commissioner’s duty to approve an application if the documentation and information submitted establish that the applicant meets the nine statutory factors. BAM asserts that the Department does not have authority to establish and prove that the individual meets the nine factors. BAM recommends that the language of the rule be revised to require the Commissioner to issue a certificate if the information and documentation submitted “meets the intent of the statute,” and to deny an application if the submissions “do not meet the intent of the statute.”[111]
142. The Department responds that the recommended changes would provide the applicant and the Department with little or no guidance and would lead to confusion over the legislature’s “intentions.” As discussed above, the legislature intended to minimize misclassification by requiring the Department to evaluate whether applicants meet the nine-factor test before there is an injury, an unemployment claim, or labor standards or OSHA violation.[112]
143. The ALJ concludes the Department has demonstrated the need and reasonableness of this provision.
144. The Department has proposed the following technical modification to Part 5202.0130, subpart 3, to make clear that both conditions must be met before an exemption certificate will be issued:
PART 5202.0130. APLICATION; REQUIRED INFORMATION AND DOCUMENTATION; APPROVAL OR DENIAL.
Subp. 3. Approval or denial. Applications must be approved or denied according to items A and B, and Minnesota Statutes, section 181.723, subdivision 5, paragraph (c).
A. The commissioner
must issue an exemption certificate if both items (1) and (2) are met:
(1) the
application is complete according to subpart 1,; and
(2) if the commissioner determines that all of
the information and documentation submitted establishes that the applicant
meets or could meet the factors in Minnesota Statutes, section 181.723,
subdivision 5, paragraph (a), clause (8), for the services for which the
applicant has requested an exemption certificate.
145. The ALJ concludes this is not a substantial change because the rule as originally proposed used the conjunction “and” between the two operative phrases, and the modification does not change the meaning.
146. The ALJ recommends that the Department include language delineating its process for handling incomplete applications. According to this subpart, the Commissioner needs to approve an application if it is complete and if the applicant meets the statutory factors. According to section 181.723, subd. 5(c), the Commissioner has 30 days from receipt of the complete application to approve or deny the application. The ALJ is unclear what happens if an applicant submits an incomplete application, i.e., whether the Department will notify the applicant that the application is incomplete and include specifically what information is missing, or whether the Commissioner will simply deny the application. If the latter is true, and the Commissioner denies the application because it is incomplete, should the applicant resubmit the application with the missing information or pursue the appeal process according to section 181.723, subd. 5(e)? The ALJ recommends that the Department include information regarding the Department’s process for handling incomplete applications. The information is not required by statute or other law and therefore this is a recommendation only. Failure to comply with this recommendation does not constitute a defect for purposes of chapter 14.
Part 5202.0140, Subpart 1
147. Part 5202.0140, subpart 1, provides in relevant part, “Within 15 calendar days of the change, each certificate holder or application for an exemption certificate must notify the commissioner in writing.” The ALJ recommends that the Department omit the word “calendar.” In other areas of the proposed rules, the Department refers to “working days” and “days.”[113] The references to “days” in other parts of the rules presumably mean “calendar days.” Therefore, the reference here to “calendar days” is inconsistent with the previous references and the ALJ recommends the use of “days” throughout the rules. This is not required by any statute or law and therefore is a recommendation only. Failure to comply with this recommendation does not constitute a defect for purposes of chapter 14.
Part 5202.0140, Subpart 3
148. The Department proposes to modify Part 5202.0140, subp. 3 as follows:
5202.0140. APPLICATION
FOR A CORRECTED, RENEWAL, OR AMENDED CERTIFICATE; TIME FRAMES FOR SUBMISSION OF
INITIAL AND RENEWAL APPLICATIONS.
Subpart 3. New application and fee
required Legal name change.
If the change is to the certificate holder’s legal name, or business name, or business
organization, the certificate holder must submit a new complete
application and fee according to part 5202.0130 additional information
and documentation if the Commissioner determines it is needed to verify the
change and to determine whether the name change affects the validity of the
exemption certificate.
149. The Department explains that the reference to business organization is deleted because if the independent contractor changes his or her business organization from a sole proprietorship to another business entity, the business entity would no longer be an individual eligible for an exemption certificate. A new application would not be submitted in this circumstance. A change in the certificate holder’s legal name does not necessarily require a new application. The rule is therefore modified to reflect that the Commissioner may request additional information or documentation if needed to determine whether the certificate remains valid despite the name change.
150. The ALJ concludes that the change is not substantial because it eliminates an unintended consequence of the proposed rule and reduces the cost and burdensomeness of this subpart.
Part 5202.0150,
Subpart 4
151. Part 5202.0150, subpart 4, requires that the person for whom a certificate holder is performing services must review photo identification of the certificate holder and must obtain a copy of the current exemption certificate from the Department’s website. BAM recommends the Department omit this requirement, and suggeststhat a better way to ensure against fraud is by the penalty and investigative authority granted in the statute.[114]
152. The Department responds that enforcement after the fact is a difficult and inefficient way to address the misclassification and fraud issues. It is more efficient to require the hiring entities to review photo identification and obtain current certificates from the Department’s website.[115]
153. Anderson Management & Maintenance submitted similar concerns that licensed contractors should not be required to “police the eligibility of independent contractors with or without exemption certificates. If an independent contractor has a history of quality, reliable work performance, (s)he will be hired and 1099’s prepared for such work as required by current law.”[116]
154. The statute, Minn. Stat. § 181.723, subd. 7(c), requires the hiring entity to obtain a copy of the independent contractor exemption certificate, and retain it for five years. The proposed rule simply requires the hiring person to obtain the copy from the Department, where it will be posted on the Department’s web page. It is to the hiring person’s benefit to verify the validity of the certificate and the identity of the certificate holder since by operation of Minn. Stat. § 181.723, all other workers are employees of the hiring person.[117]
155. The ALJ concludes the Department has demonstrated the need and reasonableness of Part 5202.0150, subp. 4.
Part 5202.0140, subp. 5 and Part 5202.0160, subp. 1
156. The Department proposes two technical changes for these subparts. The changes delete the words “Standard” from the phrase, “Central Standard Time,” used in both subparts. The change is consistent with the reference to “central time” in Minn. Stat. § 181.723, subp. 11.[118]
157. The ALJ concludes the changes are not substantial because they correct references to time that may have led to confusion.
Based on the Findings of Fact, the Administrative Law Judge makes the following:
1. The Department gave proper notice in this matter. The Department has fulfilled the procedural requirements of Minn. Stat. § 14.14 and all other procedural requirements of law or rule.
2. The Department has demonstrated its statutory authority to adopt the proposed rules, and has fulfilled all other substantive requirements of law or rule within the meaning of Minn. Stat. §§ 14.05, subd. 1; 14.15, subd. 3; and 14.50 (i) and (ii).
3. The Department has demonstrated the need for and reasonableness of the proposed rules by an affirmative presentation of facts in the record within the meaning of Minn. Stat. §§ 14.14, subd. 4; and 14.50 (iii).
4. The additions and amendments to the proposed rules suggested by the Department after publication of the proposed rules in the State Register are not substantially different from the proposed rules as published in the State Register within the meaning of Minn. Stat. § 14.05, subd. 2, and 14.15, subd. 3.
5. Any Findings that might properly be termed Conclusions and any Conclusions that might properly be termed Findings are hereby adopted as such.
6. A Finding or Conclusion of need and reasonableness with regard to any particular rule subsection does not preclude and should not discourage the Department from further modification of the proposed rules based upon this Report and an examination of the public comments, provided that the rule finally adopted is based upon facts appearing in this rule hearing record.
Based on the Conclusions, the Administrative Law Judge makes the following:
IT IS RECOMMENDED that
the proposed rules, as modified, be adopted.
Dated: June 26, 2008.
|
s/Bruce H. Johnson |
|
BRUCE H. JOHNSON |
|
Administrative Law Judge |
Recorded: Reported by Kirby Kennedy & Associates
Transcript (one volume)
[1]
[2] See
[3]
[4]
[5]
[6] SONAR at p. 3.
[7] SONAR at p. 3.
[8] See Dept. Response, Att. 5, p. 6.
[9] 32 SR 325, 325-26 (Ex. A); M
[10] Ex. K-2.
[11] Approval Letter, Mar. 13, 2008, Ex. H-1.
[12] Ex. K-3.
[13] Approval Letter, Mar. 20, 2008.
[14] Ex. I-1.
[15] Ex. A.
[16] Ex. C.
[17] Ex. D.
[18] Ex. F-1; Ex. F-2.
[19] Ex. E.
[20] Ex. G; Ex. H.
[21] Ex. G.
[22] Ex. K-1.
[23] Ex. I.
[24] SONAR at p. 3-4.
[25] Ex. G; Ex. H.
[26] SONAR at p. 9-10.
[27] SONAR at p. 5.
[28] SONAR at p. 4-5.
[29] SONAR at p. 5.
[30] SONAR at p. 5-6.
[31] SONAR at p. 6-7.
[32] See SONAR at p. 7, citing Minn. Stat. § 176.042.
[33] SONAR at p. 7-8.
[34] SONAR at p. 8.
[35] SONAR at p. 8.
[36] Ex. K-2.
[37] SONAR at p. 10-11.
[38]
Minn. Stat. § 14.14, subd. 2;
[39]
Mammenga v. Dept. of Human Services,
442 N.W.2d 786 (
[40]
In re Hanson, 275 N.W.2d 790 (
[41] Greenhill v. Bailey, 519 F.2d 5, 19 (8th Cir. 1975).
[42]
Mammenga, 442 N.W.2d at 789-90; Broen Mem’l Home v.
[43] Manufactured Hous. Inst. v. Pettersen, 347 N.W.2d at 244.
[44] Federal Sec. Adm’r v. Quaker Oats Co.,
318
[45]
[46]
[47]
[48] Comment, Apr. 29, 2008.
[49] Comment, Apr. 29, 2008.
[50] Comment, May 16, 2008; and Rebuttal Comment, June 2, 2008.
[51] Comment, Apr. 29, 2008.
[52] Tr. p. 31; Ex. N.
[53] Tr. p. 32; Ex. P.
[54] Tr. p. 33-34.
[55] Ex. O; Ex. P; Comment May 23, 2008.
[56] BAM Comment, May 23, 2008.
[57] See Department Response, May 23, 2008,
Att. 1, p. 1, citing Minn. Stat. § 176.83, subd. 11, and
[58] Dept. Response, Att. 1, p. 1-2, citing Ex. N.
[59] Dept. Response, Att. 1, p. 2.
[60] Dept. Response, Att. 1, p. 2; Tr. p. 55-56.
[61] See e.g., Comments from DeWitz Home Builders, Inc., Apr. 23, 2008, Midway Homes, Inc., Apr. 23, 2008, Midwest Land Services, Inc., Apr. 28, 2008.
[62] Dept. Response, Att. 2, p. 1-2.
[63] Dept. Response, Att. 2, p. 2.
[64] Dept. Response, Att. 2, p. 2.
[65] Ex. O, p. 4.
[66] Letter, Apr. 29, 2008, p. 4-5.
[67] Dept. Response, Att. 1, p. 4; Att. 5, p. 3; Dept. Rebuttal Comment, June 2, 2008. The Department suggested revisions to subpart K in its Comment filed on May 23, 2008. It further revised subpart K on June 2, 2008, (and corrected the revision on June 12, 2008).
[68] Dept. Response, Att. 1, p. 4; Att. 5, p. 3; Att. 3, p. 2.
[69] Ex. O, p. 5.
[70] Dept. Response, Att. 1, p. 5.
[71] Wensman Homes, Apr. 24, 2008; see also Comments from Babcock Builders, Inc., Apr. 23, 2008, and W. Gohman Construction Co., Apr. 28, 2008.
[72] Dept. Response, Att. 2, p. 3.
[73] Apr. 24, 2008.
[74] Dept. Response, Att. 2, p. 4-5.
[75] Letter, Apr. 29, 2008.
[76] See Ex. N, p. 8.
[77] Dept. Response, Att. 2, p. 5-6.
[78] Tr. 56-60; Ex. Q.
[79] Tr. p. 61; Ex. L.
[80] Dept. Response, Att. 4, p. 1.
[81] Tr. 56-60; Ex. Q.
[82] Dept. Response, Att. 4, p. 2.
[83] Dept. Response, Att. 5, p. 1.
[84] Tr. p. 72.
[85]
Dept. Response, Att. 5, p. 1, citing Thomas
v.
[86] See Letter from Attorney General, Apr. 29, 2008.
[87] Dept. Response, Att. 5.
[88]
2008 Laws of
[89] See Ex. L.
[90] Dept. Response, Att. 5, p. 3.
[91] See Dept. Rebuttal Comment, June 2, 2008 (as corrected June 12, 2008).
[92] Dept. Rebuttal Comment, June 2, 2008.
[93] Ex. O, p. 6.
[94] Dept. Response, Att. 1, p. 6; Dept. Response, Att. 5.
[95] Dept. Response, Att. 5.
[96] Ex. O, p. 6-7.
[97] Ex. O, p. 7.
[98] Dept. Response, Att. 1, p. 7; Dept. Response, Att. 5; Dept. Rebuttal Comment, June 2, 2008.
[99] Ex. O, p. 7-8.
[100] See Comment from HomeBrook Builders, Apr. 25, 2008.
[101]
[102] Dept. Response, Att. 1, p. 8.
[103] Ex. O, p. 8.
[104] Dept. Response, Att. 1, p. 8-9; Dept. Response, Att. 5.
[105] Ex. O, p. 9.
[106] Dept. Response, Att. 1, p. 9-10; Dept. Response, Att. 5.
[107] Tr. p. 70.
[108] Dept. Response, Att. 5, p. 7; Dept. Response, Att. 5A, 5B and 5C.
[109] Ex. O, p. 10.
[110] Dept. Response, Att. 1, p. 10.
[111] Ex. O, p. 10-11.
[112] Dept. Response, Att. 1, p. 11.
[113] See e.g., Part 5202.0130, subp. 1(C).
[114] Ex. O, p. 11.
[115] Dept. Response, Att. 1, p. 11-12.
[116]
[117] Dept. Response, Att. 2, p. 3.
[118] See Dept. Response, Att. 5, p. 8-9.