Employee vs. Independent Contractor Test in Minnesota

This article discusses the test for determining whether an agency or an independent contractor relationship exists between two parties.  There is much litigation on the subject.  The true nature of the parties’ legal relationship impacts matters ranging from vicarious legal liability to employment law to tax consequences for mislabeling.

       I.  Employee vs. Independent Contractor Test in Minnesota:

Status as an employee or independent contractor has broad legal implications.  Misclassification has serious consequences. See, e.g., 26 U.S.C. § 3509 (tax penalties for employers misclassification of independent contractors); 29 U.S.C. §§ 206, 207, 216 (Fair Labor Standards Act penalties for misclassification of employees as independent contractors); Minn. Stat. § 176.184 (penalties for failure to provide workers’ compensation insurance); Minn. Stat. Ch. 269.035 (penalties for failure to obtain unemployment insurance).

An “independent contractor” agrees to work for a person or an entity who does not actually control, and does not have the right to control, how the independent contractor performs the work.  Conversely, an “employee” is hired by an employer to perform work.  The employer actually controls, and has the right to control, how the employee performs the work.  Importantly, an independent contractor may or may not be an agent. Burman Co. v. Zahler, 286 Minn. 400, 403, 178 N.W.2d 234, 238 (1970) (citing Restatement (Second) of Agency § 2(3)).

Generally, there following factors are used to determine employee vs. independent contractor status in Minnesota:

1. the right to control the means and manner of performance;
2. the mode of payment;
3. the furnishing of materials or tools;
4. the right to control the premises where the work is done; and
5. the right of the employer to discharge.

Guhlke v. Roberts Truck Lines, 128 N.W.2d 324, 326 (Minn. 1964); see also A. Gay Jenson Farms Co. v. Cargill, Inc., 309 N.W.2d 285 (Minn. 1981).  The most important of these factors is the right of the employer to control the means and manner of employment. Id.  Critically, it is the right, not the exercise of that right, of the employer to control the details of the work which is most important. Hunter v. Crawford Door Sales, 501 N.W.2d 623, 624 (Minn. 1993); see Christopherson v. Sec. State Bank of Oklee, 256 Minn. 191, 194, 97 N.W.2d 649, 651 (1959).

Courts will usually enforce contracts that provide a person is an independent contractor relationship.  But where a general “independent contractor” provision is contradicted by the true facts of how the parties operate or other terms in the agreement, the independent contractor provision may have “no force of application” where the elements of a principal-agent relationship are settled by contrary terms in the contract. See Nesseth v. Skelly Oil Co., 223 N.W. 608, 609 (Minn. 1929); In re Thornton’s Estate, 186 Minn. 351, 355, 243 N.W. 389, 391 (1932) (“The law will look behind the name of contracts . . . and ascertain their scope and purpose”).

       II. Principal-Agent Test in Minnesota:

An independent contractor may also be the legal agent of the other party, but not an “employee.”  A principal-agent relationship, or “agency” relationship, exists when there is:

1. An agreement that one person will act for another, and
2. An understanding that the person who authorizes the other to act is in control of the undertaking.

A person who agrees to act for the other is the “agent.” The person who authorizes the act is the “principal.”  The Minnesota Supreme Court defines an agency relationship as follows:

Agency is the fiduciary relationship that results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act. Jurek v. Thompson, 308 Minn. 191, 241 N.W.2d 788 (1976); Lee v. Peoples Cooperative Sales Agency, 201 Minn. 266, 276 N.W. 214 (1937); Restatement (Second) of Agency § 1 (1958). In order to create an agency there must be an agreement, but not necessarily a contract between the parties. Restatement (Second) of Agency § 1, comment b (1958). An agreement may result in the creation of an agency relationship although the parties did not call it an agency and did not intend the legal consequences of the relation to follow. Id. The existence of the agency may be proved by circumstantial evidence which shows a course of dealing between the two parties. Rausch v. Aronson, 211 Minn. 272, 1 N.W.2d 371 (1941). When an agency relationship is to be proven by circumstantial evidence, the principal must be shown to have consented to the agency since one cannot be the agent of another except by consent of the latter. Larkin v. McCabe, 211 Minn. 11, 299 N.W. 649 (1941).

290. Gay Jenson Farms Co., 309 N.W.2d at 290.

Whether an independent contractor is also an agent has important legal ramifications.  If there is a principal-agent relationship, the agent (who may also be an independent contractor) owes a fiduciary duty to the principal.  This means the agent is “bound to act solely for the benefit of the principal in all matters connected with the agency.” Doyen v. Bauer, 300 N.W. 451, 454 (Minn. 1941) (citing Smitz v. Leopold, 53 N.W. 719, 721 (Minn. 1892)).  Hence, an agent is not permitted to put himself in an antagonistic relation to his principal. Id.  Because the agent is under the duty to act solely for the benefit of the principal, all profits made in the course of the agency belong to the principal whether they are the fruits of performance or violation of the agent’s duty.

            III.  Principal-Agent Vicarious Liability in Minnesota:

Principals may be held vicariously liable for the conduct of their agents.  Generally, “a principal is liable for the acts of an agent committed in the course and within the scope of the agency and not for a purpose personal to the agent.” Semrad v. Edina Realty, Inc., 493 N.W.2d 528, 535 (Minn. 1992).  The liability of a principal depends on the scope of the agent’s authority.  The agent’s authority may be express or implied. Hockemeyer v. Pooler, 268 Minn. 551, 565, 130 N.W.2d 367, 377 (1964); see also Restatement (Second) of Agency § 140.  Implied or “apparent” authority arises when:

The principal must have held the agent out as having authority, or must have knowingly permitted the agent to act on its behalf; furthermore, the party dealing with the agent must have actual knowledge that the agent was held out by the principal as having such authority or had been permitted by the principal to act on its behalf; and the proof of the agent’s authority must be found in the conduct of the principal, not the agent.

Foley v. Allard, 427 N.W.2d 647, 652 (Minn. 1988).  A principal is not, however, liable for the unauthorized intentional torts of an agent. Id.; Kasner v. Gage, 281 Minn. 149, 152–53, 161 N.W.2d 40, 43 (1968).

*                                  *                                  *                                  *