Calling someone a contractor when they are not is its own violation

By David J.S. Madgett

Minnesota attorney, license no. 390494 · Published August 7, 2026

Minnesota’s fourteen-factor construction test gets the attention, and it deserves it. But plenty of businesses read § 181.723, conclude they are not in construction, and stop.

Minn. Stat. § 181.722 applies to any “person” — individual, corporation, partnership, LLC — and contains no language limiting it to any industry. Whether someone is an employee is determined under the workers’ compensation and unemployment insurance laws and rules, which apply across all sectors.

What it prohibits

Three things, and the third is the one nobody expects:

1. Failing to classify, represent, or treat an employee as an employee “in accordance with the requirements of any applicable local, state, or federal law.”
2. Failing to report or disclose an employee to government agencies “when required to do so under any applicable local, state, or federal law.”
3. Requiring an employee to “enter into any agreement or complete any document that misclassifies, misrepresents, or treats the individual as an independent contractor.”

That third prohibition is worth sitting with. The independent contractor agreement is not merely ineffective when the classification is wrong — making the worker sign it is a separate violation. The document you drafted to protect yourself becomes evidence against you.

This is the opposite of how business owners generally think about paperwork. The instinct is that a signed agreement helps. Here, if the underlying relationship is employment, the signature makes it worse.

The penalties

Under subdivision 4:

• compensatory damages — wages, benefits, insurance, retirement contributions, and related costs;
• up to $10,000 for each individual misclassified;
• up to $10,000 for each violation of the prohibitions; and
• $1,000 per day for obstructing the commissioner’s investigation.

Note that the per-individual penalty and the per-violation penalty are listed separately. Misclassifying a person and requiring them to sign an agreement saying they are a contractor are not obviously the same event.

Who this catches

The businesses most exposed are not the ones cutting corners deliberately. They are:

• Agencies and studios paying a regular roster of “freelancers” who work only for them, on their schedule, with their equipment.
• Salons, gyms, and clinics using a booth-rental or chair-rental model that does not actually leave the worker independent.
• Delivery, cleaning, and home-service operations built on a contractor roster.
• Startups paying early team members on 1099s to avoid setting up payroll, which is extremely common and almost never correct when the person works full time under direction.

The common thread is control and exclusivity. Someone who works only for you, whose hours and methods you set, using your tools, is very difficult to characterize as running their own business regardless of what the agreement says.

The knock-on effects

Misclassification is rarely a standalone problem. If the person was an employee, then you also:

• were an uninsured employer for workers’ compensation, at up to $1,000 per employee per week;
• owed earned sick and safe time, which excludes independent contractors but not employees;
• owed Paid Leave premiums;
• never gave the required written notice; and
• may owe unpaid overtime and unemployment insurance contributions.

One classification decision sits underneath all of them.

What to do

• Test the relationship, not the paperwork. Ask who controls the work, who supplies the tools, who bears the risk of loss, and whether this person has other customers.
• Treat exclusivity as a red flag. A “contractor” whose only client is you is the single most common failure.
• Do not rely on the worker’s preference. Someone asking to be paid on a 1099 does not make it lawful, and their agreement is not a defense — it is potentially a third violation.
• Fix it prospectively and get advice on the past. The exposure is retroactive, and how to handle a period of past misclassification is a genuinely difficult question that depends on facts a general article cannot see.