The growth of freelance work has exploded in recent years and shows no signs of stopping. Effective January 1, 2021, a new ordinance that could have a significant impact on independent contractors and the companies with which they work took effect in the City of Minneapolis after the Minneapolis City Council and Mayor Jacob Frey unanimously approved it.1 The Minneapolis Freelance Worker Protections Ordinance requires businesses, and even some individuals, to enter into written agreements with particular requirements with most freelance workers. Companies that breach those agreements can face stiff penalties from the City in addition to breach-of-contract and other statutory damages. Companies, particularly those that are app-based, often design their business plan around an independent contractor model and are especially likely to feel the Ordinance’s impact.
Requirements and Reach of the Ordinance
The Ordinance requires written contracts for many independent contractors, not just oral agreements or informal understandings. When businesses2 “retain” freelance workers to perform work in the City of Minneapolis, the business must have a written contract with those workers if the workers will perform a minimum of: (1) $600 worth of work within a one-year period, or (2) $200 of work within one week. A company “retains” a freelance worker not only when the worker provides services directly for that company, but also when the company facilitates work on behalf of a third party.3 For example, if a consumer uses an app to order food delivery, the digital platform company that coordinates the delivery may “retain” the food delivery drivers for purposes of the Ordinance, such that the platform company must have a written agreement with the driver.
A hiring party that does not enter into a written contract with the worker can face a $250 penalty per worker. The written contract must contain at least the following specified terms:
- The name and address of the hiring party and the worker;
- An itemization of all material services to be provided by the worker;
- The compensation for the services, including the rate or rates and method of compensation; and
- The date on which the hiring party must pay the agreed-upon compensation or the mechanism by which the date will be determined.
If the parties cannot specifically identify the compensation to be paid before the contract has been performed, the contract must state in detail how the compensation will be determined and which party will keep track of the “information necessary to determine the total compensation” (e.g., track the number of hours worked, applicable project or piece rate). A company that keeps track of that information must provide an earnings statement to the freelance worker detailing the amount paid and how it was calculated.
As with any contract, if the hiring party breaches the contract by failing to pay the freelance worker as set forth in the contract, the worker can sue to recover what is owed. In addition, the Ordinance allows the worker to report the broken contract to the Minneapolis Department of Civil Rights, which may award the worker the amount that is owed under the contract, as well as a penalty of up to the greater of: (1) twice the amount owed; or (2) $500. The Ordinance also provides several other penalties and fines for companies that fail to pay independent contractors or that retaliate against independent contractors for raising concerns about complying with the Ordinance.
The Ordinance applies to companies and applicable individuals that retain independent contractors to perform work in the City of Minneapolis, regardless of where the company itself is located. Although it may seem counterintuitive that Minneapolis can regulate the activities of businesses located outside its borders, a challenge to the territorial reach of the Ordinance is unlikely. Advocates for businesses previously challenged a Minneapolis Ordinance requiring companies to provide paid sick leave on such territoriality grounds, but the Minnesota Supreme Court held that Minneapolis had the power to regulate companies that had no physical presence in the City if the individual worker is providing services within the City.4
The Ordinance is a response to the increasing use of independent contractor relationships by companies and workers, rather than more traditional employer-employee relationships. In adopting the Ordinance, the Minneapolis City Council noted that 57 million U.S. workers performed freelance work in 2019, and 35% of workers in the U.S. get “some share of their income” from freelance work. The Council also noted that Minneapolis is the 13th largest freelance market in the country. The City particularly recognized that many artists and other creative workers are independent contractors, and that they make up “a substantial part of the City’s economy.” The Council noted that the share of creative jobs as a part of the marketplace in Minneapolis is almost twice the national average.
While this gig economy continues to grow, states, cities, and local governments seek increasing workers’ protections in a variety of ways. Among other things, Minneapolis and other jurisdictions instituted new requirements related to paid sick leave and perceived wage theft. For example, in 2019 and 2020, the state of Minnesota and the City of Minneapolis each enacted their own measures addressing purported wage theft. In their deliberations on this new Ordinance, City Council members noted that the wage theft ordinance applied only to “employees,” but not to independent contractors or freelance workers.5
Similarly, some jurisdictions—most notably California—enacted policies and legislation aimed directly at gig economy companies. The California Supreme Court in 2018 adopted the strict “ABC” test, which displaced a weighing of various factors test that had been the standard for decades to determine whether independent contractors should be classified instead as employees.6 The California legislature then adopted the ABC test via Assembly Bill 5. Under that test, many workers need to be classified as employees, as they can only be considered independent contractors if: (1) the company has an Absence of control over the worker; (2) the Business is unusual for the company, or at least away from company offices; and (3) the work is Customarily done by independent contractors. Other states, including Minnesota, have likewise proposed using this test, and there is a chance that the Biden administration could adopt it at the federal level.7
Those proposals have faced significant backlash. Many independent contractors who wish to continue being their own bosses lobbied for exemptions to California’s ABC Test. That lobbying resulted in California passing AB 2257 that exempted many industries from the application of the ABC Test. In addition, several gig economy companies took the matter to the public, resulting in the passage of Proposition 22 that allows certain delivery and ride sharing companies to continue utilizing independent contractors without being subject to the ABC Test.
In June 2019, Minneapolis decided that it needed to protect independent contractors—in particular from wage theft. The City decided, however, to take a different, more moderate approach than California and other jurisdictions. Instead of reclassifying virtually all independent contractors as employees, Minneapolis sought to protect freelance workers’ wages and other rights by ensuring they have written contracts and providing added enforcement mechanisms for those contracts. In fact, the Ordinance expressly provides that it does not dictate whether independent contractors are properly classified as contractors instead of employees. After a year of consideration and input from various stakeholders, Minneapolis adopted the Ordinance, with Mayor Jacob Frey signing it on August 5, 2020.
What Does This Mean for Minneapolis Businesses?
Even though Minneapolis’s Ordinance represents a relatively moderate approach compared to other jurisdictions,8 it could create significant administrative headaches. For example, under a strict reading of the Ordinance, a sole proprietorship or other small business that hires a plumber or electrician to perform minor repairs could be required to have a written contract with those workers or face penalties. For all businesses, the Ordinance will create additional administrative tasks and potentially increase expenses. While the increased challenges in complying with the Ordinance are likely to be modest for most companies doing business in Minneapolis, they may want to assess whether continuing to use an independent contractor model is their best option, or whether alternate arrangements such as working with on-demand or temporary employees would make more sense for them.
Businesses that work with independent contractors that do work in Minneapolis will want to consider whether they need written agreements with those contractors in light of the Ordinance, since not having proper contracts could subject companies to fines. In addition, while the Ordinance provides protections for businesses that refuse to pay freelance workers who fail to complete the promised work, hiring parties will also want to consider that the Ordinance can impose enhanced penalties for failing to pay on time.
Minneapolis business leaders should also keep apprised of further developments in this area of law. While the current Ordinance represents a relatively modest step, it is part of a wider movement to give independent contractors the same protections employees have.
The Ordinance leaves open several questions for companies that do business in Minneapolis. While Minneapolis likely can apply this Ordinance to companies located outside of the City, administrative questions remain. For example, if a contract does not identify where work takes place, and a company contracts with a freelance worker that performs services in Minneapolis without the company’s knowledge or blessing, it remains unclear whether that company would be subject to the Ordinance’s requirements and penalties.
Further, while the Ordinance purports not to create a basis for the proper classification of employees and independent contractors, it does contain a definition of “freelance worker.” While that definition is broad, there are some express exclusions that in the future, could be used to try to establish a baseline for who can be properly considered independent contractors.
In addition, while the Ordinance provides hiring parties with a defense that the worker did not “complete the services contracted for,” it leaves open the questions of what must be paid if the worker completes the promised work but not to the hiring party’s satisfaction or in the time frame contemplated by the hiring party. Ordinary contract law addresses issues like these, but it is not clear whether a hiring party would violate the Ordinance if, for example, they refused to pay the contractor for performing shoddy work or missed deadlines.
Almost one quarter of all workers in the United States now consider themselves self-employed. The vast majority of these independent contractors and freelance workers prefer their work arrangements to traditional employment because of the flexibility and control they enjoy in their work. Businesses often prefer to work with independent contractors, with benefits ranging from an increased ability to quickly utilize a workforce for short-term projects, to having more flexibility in the goods and services they can offer consumers.
While the Minneapolis Ordinance represents an effort to balance the needs and wants of independent contractors, businesses, and the City, it creates additional burdens on companies, and leaves several questions open. Companies doing business in Minneapolis with questions about the Ordinance should consult with counsel and remain vigilant to protect their ability to do business freely.