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Illinois Legislature Clamps Down On Employee Misclassification in Construction Industry (But Danger Lurks For All Employers)

Two workers are sitting in your office. Which one is the independent contractor? No, not the start of a joke but the inability to answer that question could cost you a great deal of money. The Illinois Employee Classification Act (Act), 820 ILCS 185/1 et seq., became effective January 1, 2008. The Act is intended to prevent the misclassification of employees as independent contractors in the construction industry – an effort likely to garner national attention as states and the federal government are putting increasing scrutiny on the proper classification of workers. The new law is designed to prevent contractors from avoiding overtime pay, unemployment compensation, payroll taxes and other costs that can otherwise be avoided by classifying workers as independent contractors as opposed to employees.

The Act creates another tricky day for all Illinois employers. Its language takes aim at Illinois employers in the “construction” industry. The definition of “construction” is expansive, however, and includes everything from general contractors to home decorators; from “landscaping” to “maintenance,” and to everyone (i.e., trucking companies) who moves “construction related materials on the job site to or from the job site.” Though likely not the intent of the drafters, the definition of “construction” is so broad that it may well include everyone who performs work related to a building or real property.

The Act provides that any individual performing services for a “contractor” is presumed to be an employee, not an independent contractor, unless proven otherwise. It is a violation of the Act for a contractor to not designate an individual as an employee unless the contractor can satisfy either the Act’s three-part test or its more expansive twelve-part test. The three-part test requires the employer to establish that the individual is: (1) free from control or direction; (2) performs services outside the usual course and services performed by the employer; and (3) is engaged in an independently established trade, occupation, profession or business. The twelve-part test is similar to, but more stringent than, the test typically used by courts (and the IRS) to establish independent contractor status. For example, one part requires the individual to have a “substantial investment in capital” in the individual’s business; another requires the individual to treat the business separately for tax purposes; and a third requires separate permitting, where required, for the work done. Just goin’ mobile or working at home with a company-owned computer will not be enough. Suffice it to say that the factors are not only difficult to meet but can be virtually impossible to establish.

Definitely not a bargain, but the Act provides, as a significant deterrent to misclassification, expansive penalties for non compliance: $1,500 for each violation found in an initial audit by the Department of Labor; $2,500 for each violation found in any subsequent audit. Each day that a violation continues constitutes a separate and distinct violation. Violate the Act “willfully” and the employer can be liable for, among other things, punitive damages and even a Class C misdemeanor (a criminal penalty). Of equal concern, however, is the Act’s private right of action. This means that any employee, former employee or, more likely, a competitor or labor union, can report a contractor for a suspected violation. To ensure (and encourage) legal representation, the Act provides that attorneys fees and costs are recoverable.

This can be a squeeze box even when subcontracting to outside vendors or otherwise legitimate subcontractors. Because the Act applies only to individuals as independent contracts, employers may wish to require their independent subcontractors to incorporate or form limited liability companies before entering into an agreement for construction-related services – in addition to making sure that they meet the other requirements of the Act before assuming they are not truly employees. Alternatively, a contractor may want to contract with a temporary job service which provides day or contract labor where the individual remains an employee of the service company – with the agency responsible for paying all applicable taxes and other withholdings and meeting other legal requirements. Even so, there are joint liability requirements that should be considered and discussed. Finally, contractors who wish to continue using individual, independent contractors can, and should, utilize an independent contractor agreement drafted specifically to comply with the provisions of the Act – although, even the existence of such an agreement cannot circumvent the Act if the individual does not actually meet the tests. For those with existing contracts, contractors are encouraged to have those agreements (and the proper classification of workers) reviewed by outside counsel to ensure compliance with the Act.

However, the issue of proper classification of workers is not limited to Illinois employers in the construction industry or Illinois employers at all. These issues are relevant to employers everywhere. Misclassified workers in any state, and in any industry, can result in significant liability for employers. If you have improperly classified a worker as an independent contractor you may face liability for failing to withhold (and pay) federal and state employment taxes and state unemployment taxes. You could also face liability for failure to pay appropriate wages or overtime. And, under most state provisions, if such a worker is injured on the job he or she could sue you directly for damages instead of being subject to the exclusive remedy provisions of the worker’s compensation system.

Ryan McCabe Poor is a partner at Ice Miller LLP. Ryan provides labor and employment law advice and counsel, including representation in litigation in state and federal court and before administrative bodies, collective bargaining negotiations, arbitrations, and labor relations services, assistance with employment contracts and separation agreements, and the development of policies, procedures, and training programs.

Eric Singer is senior counsel in the DuPage County, IL, office of Ice Miller. Eric concentrates his practice in construction law, with an emphasis on representation of design professionals, contractors, owners and lenders in litigation and resolution of design, construction and real estate disputes, negotiation of construction and design agreements.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.