Thousands of construction workers sidestepped the old law.
Minnesota is scrapping a four-year-old law intended to curb shady employment practices in the construction industry.
Starting next month, the state Department of Labor and Industry will phase in a new registration system for independent construction contractors. The Department of Revenue, meanwhile, will phase out the old rules that contractors have been sidestepping since they went into effect in 2008.
Construction companies and labor unions alike welcomed the new regulations that passed the Legislature in the final hours of this year's session. Employers look forward to simpler, more streamlined regulations. Unions hope the system will crack down on companies that illegally classify their employees as outside contractors.
"There's widespread acknowledgement that there are shady things that can happen in the construction industry," said Kyle Makarios, political director of the Minnesota Carpenters Union, who lobbied for the change. "The goal is to make it a little bit riskier for people who aren't going to play by the rules."
In the construction trades, there's a world of difference between an independent contractor and an employee. Either one can hang drywall or run the plumbing or wiring on a job site, but only employees are eligible for things like overtime, unemployment benefits or workers' compensation.
In 2008, the state began requiring contractors to obtain Independent Contractor Exemption Certificates. Regulators hoped to separate legitimate small businesses from the guys looking for day labor jobs in the parking lot behind the hardware store and collect a two percent withholding tax from companies that hired independent contractors.
Instead, thousands of construction workers sidestepped the law by registering themselves as limited liability companies, which exempted them from the law, the mountain of paperwork that went with it and the withholding tax.
In a report to the Legislature this year, the Department of Revenue reported that so many contractors had registered as LLCs, it was barely worth collecting the tax revenue. Instead of the 20,000 contractors it expected to find, only 1,694 had taxes withheld through the system in 2010. The state collected less than half a million dollars through the system that year.
"There was not a lot of money coming in," noted Jim Kittel, assistant director of the department's individual income tax division. In 2009 alone, more than 7,000 new LLCs formed in the state, many of them with construction-related names.
"It was a debacle," Pam Perri, executive vice president of the Builders Association of Minnesota, which represents residential construction companies. To obtain an independent contractors certificate, construction workers had to present no less than 20 documents. Most found it easier to just register as an LLC. "It was too burdensome," she said of the old system.
The new system -- a two-year pilot program -- will allow contractors to register online through the Department of Labor, but will also require them to prove that they are, in fact, a small business. A real independent contractor, for example, wouldn't deposit a check from their last job in a personal checking account, Makarios said.
Jennifer Brooks 651-925-5049