Let’s Do Business , Part 3: Hiring Employees

by Derek Thooft

Your business is booming and you are looking into hiring employees – that is a great accomplishment and you should be proud, knowing that small businesses provide 64% of the country’s jobs nationwide! In this final part of our three-part series blog, we address the most common questions regarding employees: classification, hourly versus salary, worker’s compensation, and unemployment.

Employee or Independent Contractor

Almost every business owner has heard that term, however, what do they mean and what kind of obligations do they bring? It is important to understand the differences so that you can classify your workers correctly.

Having employees comes with obligations that are not present with independent contractors. An employee means paying unemployment tax, federal and state payroll taxes, and obtaining worker’s compensation insurance. There are also other tasks that come with an employee, such as verifying and complying with immigration law, obtaining employee withholding information, maintaining employee files, and more.

While businesses may want to avoid this by classifying its worker as an independent contractor, each state has its own factors in which it defines each.

In Minnesota, the most important factor that determines if a person is an independent contractor or an employee is the degree of control in which the purported employer has over the manner and method of performing work. The more control the employer has over the worker, the higher chance the worker is an employee. Control can be seen as required training, requiring work be done on company premises, setting hours of work, authority over the worker’s assistants, etc.

Overall, there are 9 factors in determining if a worker is an employee, with a large emphasis on the first one.

  1. Control of Method and Manner of Performance

  2. Right to Discharge

  3. Availability to Public

  4. Compensation on Job Basis

  5. Realization of Profit or Loss

  6. Termination

  7. Substantial Investment

  8. Responsibility

  9. Services Fundamental to Business 

The rest of this blog addresses employees and not independent contractors.

Hourly or Salary Employee

There are usually two types of employees: non-exempt and exempt. An exempt employee is not entitled to overtime pay by the Fair Labor Standards Act (FLSA). Non-exempt employees must be paid overtime and are protected by the FLSA. All hourly employees are considered non-exempt, while most salary employees are exempt.

An hourly employee is someone who gets paid a certain dollar amount per hour, which then increases with overtime. A salary employee receives a set annual amount regardless of quantity of work, which is then broken down to 52 weeks and receives a fixed amount every pay period.

A common misconception is that salary employees are always exempt, and therefore are not entitled to overtime. This depends on the employee’s salary.

The Department of Labor (DOL) issued changes that went into effect on January 1st, 2020. The new salary threshold is $35,568 a year, or $684 per week. This means that any salary employee making less would have to be reclassified as non-exempt and are entitled to overtime pay.

Remember that while the pay structure is different, both are still employees and therefore are subject to the same employment law protections.

Worker’s Compensation

Worker’s compensation (work comp) is a type of business insurance that provides benefits to employees who become injured or ill due to work. Work comp covers medical bills and wages for the injured employee, and also protects your business from personal injury lawsuits. Most importantly, work comp is mandatory for every employer.

Work comp premiums are based on your business, how many employees you have, the type of work they perform, and how many hours they work. For example, a clerical employee in the same company may be classified at a lower rate compared to a laborer working with heavy equipment. As you maintain work comp, your will be assigned an experience modification number which helps determine your rates.

When an employee is injured, it is important to report it immediately to your work comp insurance. You should report it even if you do not think the employee will need medical attention. This is because injuries can resurface after its been exacerbated, or symptoms may not show right away. If there is a claim against your work comp, they will evaluate the injury and determine if the claim will be granted or denied. If denied and the case goes to a lawsuit, work comp insurance will handle the lawsuit with their attorneys. However, if you mishandle the case, such as hiding the injury or not reporting it, this may cause your company to be liable.

Important: Even though sole proprietors and partners are generally exempt from work comp coverage, insurance companies may require work comp coverage on the owners if the company’s hours reach a certain amount, for example, 21,000 hours per year.

Unemployment Insurance

Unemployment Insurance (UI) provides benefits to workers who become unemployed through no fault of their own and is available to all employees who qualify. This program is funded through taxes paid by employers. If you have employees, you must register for a state employer unemployment account. As a new employer, you will receive the New Employer Tax Rate, which is the computed average rate of all Minnesota employers in high experience rating industries, such as construction and manufacturing. Eventually, you will receive your own experience rating after you report wages for a longer period of time.


We applaud you and your business for wanting to provide a living for others. Let us help you navigate the cumbersome employer and business laws. This ensures you stay in compliance, and makes sure you are doing what is best for you and your team. As your in-house business attorney, we will be your advocate and work in the best interest of you.

Attorney Derek Thooft has successfully represented many businesses from setting up business structures, to unemployment, and civil litigation. Your business is our business, and we look forward to serving you.

For more information, call Thooft Law or by email ThooftLaw@gmail.com