Illinois Governor Signs Two New Independent Contractor Laws to Deter Misclassification

Governor Pat Quinn (Dem.) of Illinois signed two new laws today, July 23, 2013, intended to curtail misclassification of employees as independent contractors (ICs). Both laws amend the state’s Employee Classification Act which, although its title suggests the law applies industry-wide to all employees in Illinois, is limited to the construction industry.  As noted below in the “Takeaways,” Illinois law is generally less hospitable than the laws in most other states to businesses using ICs; therefore, companies would be wise to ensure that their use of ICs in Illinois does not expose them to IC misclassification liability that can be readily minimized or avoided altogether.

The Employee Classification Act was one of the first in the country to crack down on IC misclassification and the underground economy in the construction industry.  The law imposes a three-pronged test for IC status for individuals, along with a 12-part test for individuals operating as sole proprietors or partnerships.

The first new amendment to the Employee Classification Act adds the word “individual” to the definition of “Contractor,” which includes general contractors and subcontractors. It also imposes in a new section entitled “Individual liability” whereby any officer or agent of a corporation who knowingly permits a construction employer to misclassify an individual, sole proprietorship, or partnership “may be held individually liable for all violations and penalties assessed under this Act.”

The civil penalties, which have also been slightly modified by the amendment, are $1,000 per violation for a first offense and $2,000 for each repeated violation. The Act specifically provides that it is a separate violation for each individual misclassified on each separate day.  For “willful” violations, the Act includes a double damages provision as well as a clause permitting the assessment of punitive damages equal to the amount of double damages. Willful violations are also misdemeanors, and elevate to felonies if repeated in a five-year period.

The second new amendment to the Employee Misclassification Act imposes a new reporting requirement upon construction employers, which must soon report annually all payments to individuals, sole proprietorships, and partnerships “performing construction services . . . if the recipient of payment is not classified as an employee.”  Such reports shall include the individual’s name, address, and “business identification number” or “federal employer identification number” as well as the amount paid to such recipients. The names of the reporting contractor and recipients are available to the public upon request under the state’s Freedom of Information Act.”

Both of the amendments to the Employee Classification Act go into effect January 1, 2014.

Takeaways

Illinois has been in the forefront of states seeking to curtail misclassification of employees as ICs.  In addition to the Employee Classification Law covering the construction industry, the state’s wage payment and unemployment laws, which cover all industries, use a statutory “ABC” test that has been more strictly construed by the Illinois courts than similar laws in other states. Thus, all businesses, non-profit organizations, and governments in Illinois that classify workers as ICs are at risk of misclassification liability if they do not structure and document their IC relationships in accordance with Illinois law.

Laws like those in Illinois are particularly troublesome for nationwide businesses that operate with ICs in states with laws similar to Illinois. An individual performing services in one state may be properly classified as an IC while his or her counterpart performing the same services in Illinois may be deemed to be misclassified.

Companies, non-profits, and governments using ICs to supplement their workforce in Illinois or other states would be well served by assessing their exposure to IC misclassification liability in all states in which they operate – and enhancing their IC compliance by restructuring, re-documenting, and re-implementing their IC relationships. Many companies have made use of IC Diagnostics™ and other tools such as 48 Factors-Plus™ to assess and minimize misclassification liability in each state in which they use ICs, as described in my 2012 White Paper found at the top of the “Resource” page of this blog.

A majority of states have enacted legislation in the past five years which, like these two new Illinois laws, seek to curtail IC misclassification in particular industries or across-the-board. The more savvy businesses have taken steps to enhance their level of IC compliance before becoming targets under an increasing number of state laws regulating IC relationships.

Written by Richard Reibstein.

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