Illinois Employee Classification Act, Construction Connection by Association of Subcontractors & Affiliates (ASA), August 2008

New Definition of Employees Creates Draconian Penalties for Contractors

The Illinois Employee Classification Act, effective January 1, 2008, broadly expands those who will be deemed to be employees, rather than independent contractors. The Act was passed for the purpose of protecting employees and the tax revenues of the state. Certain experts have testified that the State losses about 8.7 million dollars a year as a result of misclassification of employees in the construction industry. Violation of the Act creates liability for substantial penalties.

The Act Applies to All of the Construction Industry

The Act applies only to any one hiring any individual or unincorporated entity (i.e. sole proprietorship or partnerships) for virtually any construction activity. It does not apply to a bona fide corporation. It applies to everyone involved in the construction process, whether it is constructing, repairing, remodeling, wrecking, custom fabricating, painting, decorating or providing landscaping for any improvement to or on real estate, privately or publicly owned. It even includes moving construction-related materials on the job site or to or from the job site.

Almost All Individuals and Unincorporated Entities Are Treated as Employees

The Act requires contractors to treat all individuals and other unincorporated entities which it employs as employees rather than independent contractors. The Act creates a presumption that the individual or unincorporated entity is an employee, unless it can meet certain criteria established by the Act.

An individual can be treated as an independent contractor rather than an employee, only if he meets three tests. First the individual must be free from control or direction over the performance of the service. Second, the service performed by the individual must be outside the usual course of service performed by the contractor. Third, the individual must be engaged in an independently established trade, occupation or business.

An unincorporated entity can be treated as an independent contractor rather than an employee, only if it meets twelve tests.

1. is performing the service free from the direction or control over the means and manner of providing the service, subject only to the right of the contractor for whom the service is provided to specify the desired result;
2. is not subject to cancellation or destruction upon severance of the relationship with the contractor;
3. has a substantial investment of capital in the sole proprietorship or partnership beyond ordinary tools and equipment and a personal vehicle;
4. owns the capital goods and gains the profits and bears the losses of the sole proprietorship or partnership;
5. makes its services available to the general public or the business community on a continuing basis;
6. includes services rendered on a Federal Income Tax Schedule as an independent business or profession;
7. performs services for the contractor under the sole proprietorship's or partnership's name;
8. obtains and pays for in its name any required license or permit;
9. furnishes the tools and equipment necessary to provide the service;
10. hires its own employees without contractor approval, pays the employees without reimbursement from the contractor and reports the employees' income to the Internal Revenue Service;
11. the contractor does not represent it as an employee of the contractor to its customers; and
12. has the right to perform similar services for others on whatever basis and whenever it chooses.

Penalties Are Severe for Violating the Act

The penalties for misclassifying an employee are substantial. Violators of the Act are subject to penalties by the Illinois Department of Labor not to exceed $1,500 per day per violation and double penalties per day if the violation is willful. Each day a misclassified employee work is a separate violation. Thus if a contractor has ten misclassified employees on the job, it may be liable for up to $30,000 per day. Repeat violations within five years subject the violator to penalties not to exceed $2,500 per day, per violation. Repeat violators are barred from any state contracts for four years from the date of their last violation. Willful violators are also subject to criminal prosecution of a Class C misdemeanor.

The Act also gives an "interested party" (the misclassified employee and probably the affected unions) a private cause of action. Suit may be brought by any interested party and in behalf of other persons similarly situated. Thus the contractor's exposure is for all misclassified employees. Plaintiffs in a private action can recover lost wages and benefits they otherwise would have accrued, $500 for each violation per person and (maybe per day), and attorneys fees and costs. The interested party also gets a 10% additional recovery of all money recovered. Thus there is a bonus for the class plaintiff or union bringing suit in behalf of the class. All claims must be brought within three years of the last work performed for the contractor.

Other Violations of the Act

The Act requires the contractor to post a notice prepared by the Department of Labor summarizing the requirements of the Act in a conspicuous place on each job site in English, Spanish, and Polish. The Act also prohibits retaliation against anyone making a complaint or testifying relating to the Act.

The Act Does Not Apply to Corporations

The employment of any individual, sole proprietorship or partnership exposes the contractor to substantial liability who attempts to treat them as independent contractors. Therefore it is well-advised for contractors to avoid this risk. This can avoided by hiring bona fide corporations which are exempted from the Act. Thus make sure that your subcontractors are incorporated at the beginning of the job until the end of the job. Verify their incorporation and continued corporate status through the Secretary of States' web site. Verify that your independent contractor has issued corporate stock, maintains a corporate bank account, and corporate minutes. These steps will insure you from liability under the Act.

Prepared by Michael T. Nigro

"Mike Nigro won a very important and difficult case for our non-profit organization. Mike counseled us through many complicated decisions by clearly explaining our choices, his strategy and recommendations. Once we determined that we could not reasonably resolve the case and we had to litigate, Mike thoroughly prepared our witnesses and presented a logical and persuasive case. He also deftly cross-examined the opposing witnesses to expose the inconsistencies and improbabilities of their testimony. We thank Mike very much for his hard work and conscientious representation."

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