Nancy E. Joerg: December 2014

Wednesday, December 31, 2014

Government Agencies are Going After Employers Who Wrongly Misclassify Employees as Independent Contractors

September 2011
By: Nancy E. Joerg, Esq.

On September 19, 2011, Secretary of Labor Hilda L. Solis hosted an historic ceremony at U.S. Department of Labor headquarters in Washington. Ms. Solis signed a memorandum of understanding with the Internal Revenue Service intended to improve the U.S. Department of Labor's energetic efforts (across the United States) to end the business practice of misclassifying employees.

In addition, labor commissioners and other agency leaders representing seven states signed memorandums of understanding with the U.S. Department of Labor's Wage and Hour Division and, in some cases, its Employee Benefits Security Administration, Occupational Safety and Health Administration, Office of Federal Contract Compliance Programs and Office of the Solicitor. The signatory states involved are Connecticut, Maryland, Massachusetts, Minnesota, Missouri, Utah and Washington. Secretary Solis also announced agreements for the Wage and Hour Division to enter into memorandums of understanding with the state labor agencies of Hawaii, Illinois and Montana, as well as with New York's attorney general. This giant cooperative effort is intended to stamp out misclassification of independent contractors across the United States.

These newly signed memorandums of understanding will enable the U.S. Department of Labor to share information and coordinate law enforcement with the IRS and participating states. The stated purpose is to level the playing field for law-abiding employers and ensure that employees receive the protections and rights to which they are entitled under federal and state law.

These new memorandums of understanding arose as part of the U.S. Department of Labor's Misclassification Initiative. The Initiative was launched by Vice President Biden's Middle Class Task Force with the goal of preventing, detecting and remedying employee misclassification across the U.S.

"We're here today to sign a series of agreements that together send a coordinated message: We're standing united to end the practice of misclassifying employees," said Secretary of Labor Solis. Solis added, "We are taking important steps toward making sure that the American dream is still available for all employees and responsible employers alike."

"This agreement takes the partnership between the IRS and Department of Labor to a new level," said IRS Commissioner Doug Shulman. "In this new phase of our relationship, we will work together more efficiently to address worker misclassification issues, and better serve the needs of small businesses and employees."

Now, when an individual files a complaint with the U.S. Department of Labor claiming that he or she was not being paid as an employee (i.e., worked as a misclassified employee), the U.S. Department of Labor will share this information with the IRS and with states that have signed agreements with the U.S. Department of Labor.

These government agencies believe that employers who misclassify their employees as independent contractors often do so to avoid paying taxes, workers' compensation insurance premiums, and other costs such as employee benefits. In the government perspective, this intentional misclassification allows these employers to unfairly undercut their competition and makes it harder for legitimate businesses to compete.

In view of this determined effort by the IRS, the U.S. Department of Labor, and state agencies to share information and coordinate law enforcement in order to "level the playing field" for what they term law abiding employers, any companies using independent contractors should be sure to have their independent contractor relationships evaluated to see if the relationship is supported by Federal and State law. Also, any independent contractor agreements, websites, independent contractor manuals, etc. should be very carefully reviewed by experienced legal counsel.

Readers should be aware that the independent contractor tests for the IRS, U.S. Department of Labor and various states all may vary considerably. Therefore, research must be done for a company using independent contractors to determine potential liability under the different independent contractor tests and definitions.

Don't delay in doing what you can to limit your liability in using independent contractors.

Questions about this topic or other management-side labor and employment law issues? Please contact WS Shareholder and Senior Attorney Nancy E Joerg at 630-377-1554, najoerg@wesselssherman.com, or visit our website.

Employers Wonder: How Can my Independent Contractor File for Unemployment Insurance Benefits?

March 2011
By: Nancy E. Joerg, Esq.

I frequently get phone calls from clients (employers) who wonder how their independent contractors can go to the local Illinois Department of Employment Security (IDES) office and apply for unemployment insurance benefits.

The most common comment I hear is "I thought that only employees could apply for unemployment insurance benefits."

Even when independent contractors sign a valid independent contractor agreement, they are not actually prohibited from going to the Local IDES Office and applying for unemployment insurance. Any individual can walk into the Local IDES Office and apply for benefits; of course, not all these individuals will be ultimately successful in obtaining unemployment insurance benefits.

IDES WILL ASK FOR ALL SOURCES OF INCOME: If an independent contractor applies for unemployment insurance benefits (either going in person to the Local IDES Office or applying online), they will be asked for all sources of income that they earned over the past year. Usually, the last "30 day employer" is the company who is "charged" for the unemployment insurance benefits that this individual might obtain.

IDES WILL CROSS CHECK SOCIAL SECURITY NUMBER WITH SOURCE OF INCOME: In the course of writing down/reporting all the sources of income for that individual for the past year, the name of a company where the individual worked as an independent contractor may arise. The IDES will cross check the individual's Social Security Number with that source of income. If the IDES finds out that the IDES did not report wages to the Social Security Number of that individual, that discrepancy will normally trigger an IDES audit of that company-even if the individual was classified by the company as an independent contractor.

Independent contractor/employee discrepancies are the biggest source of leads for IDES audits: When an independent contractor applies for unemployment insurance benefits, the IDES will not assume that the individual is indeed an independent contractor. Rather, the IDES will apply its legal tests to the fact pattern and see whether the IDES agrees that the individual is an independent contractor. The two most common IDES independent contractor legal tests are:

Section 212.1: If the individual applying for unemployment insurance benefits is a truck driver/owner-operator, then the IDES may apply the legal test known as Section 212.1 (truck owner-operator) of the Illinois Unemployment Insurance Act.
Section 212(A), (B), and (C): If the individual applying for unemployment insurance benefits is a "regular independent contractor" (not a truck owner-operator), then the test most likely to be applied is Section 212(A), (B), and (C) of the Illinois Unemployment Insurance Act.

IDES WILL STILL LOOK AT THE ELIGIBILITY OF THE EMPLOYEE: If the Local IDES Office determines that the individual trying to obtain unemployment insurance benefits is really an employee and not an independent contractor, then the IDES will still evaluate the fact pattern to see if this newly classified "employee" is eligible for unemployment insurance benefits. For example, an individual can be found to be ineligible for unemployment insurance benefits because the individual committed misconduct. If an individual is guilty of misconduct, the individual will be denied unemployment insurance benefits even though the IDES found the individual to be an employee (and not an independent contractor).

Even when individuals are found to be ineligible by the IDES for unemployment insurance benefits, if a company has classified them as independent contractors (but the IDES has deemed them to be employees), this will usually lead to an IDES audit of the company.

IF AN INDEPENDENT CONTRACTOR FILES FOR UNEMPLOYMENT, ASSUME YOU WILL BE AUDITED BY IDES AND BE PREPARED: If one of your independent contractors files for unemployment insurance benefits, assume you will eventually be audited by the IDES. Prepare yourself as thoroughly as possible for that coming event. One good way to prepare for an IDES audit is to fill out a Worker Relationship Questionnaire (the multi-page document that IDES auditors use to determine whether an individual is an independent contractor or an employee).

If readers would like a free copy of the questionnaires that IDES auditors use, please contact Wessels Sherman Legal Assistant Tammy Nelson at 630-377-1554 or via email at tanelson@wesselssherman.com.

Keep Track of 30 Working Days for Illinois Unemployment Insurance Purposes

March 2010
By: Nancy E. Joerg, Esq.

Many clients ask me: "How many days does an employee need to work for me before my company becomes the chargeable employer for Illinois Unemployment Insurance purposes?"

There is a simple unemployment insurance rule that Illinois employers should be aware of: a company will usually not be "charged" for an ex-employee's unemployment insurance benefits if that ex-employee did not work for the company for at least 30 working days.

This is an extremely simple rule that employers should keep in mind because, if used properly, it is a wonderful way for a company to help keep its unemployment insurance rate down.

Below are some examples to provide guidance on how the Illinois Department of Employment Security (IDES) calculates the 30 working days:

The individual works a shift which begins at 10:00 p.m. on Monday and ends at 7:00 a.m. on Tuesday. While this individual performs services for this employer on two calendar days, for the purpose of determining whether the 30 day requirement has been met, the individual's shift counts as only one day of service (Monday).
The individual begins his shift at Noon but becomes ill fifteen minutes later. Since the individual performed services for the employer for fifteen minutes, one day is counted toward meeting the 30-day requirement.
The individual is scheduled to work on a certain day but fails to report for work because he is ill. Even if the employer provides paid sick leave to the individual for that day, it will not be counted toward the 30-day requirement.
Upon the permanent layoff of an individual, the employer pays that individual for any unused, accrued vacation time that the individual is due and grants him severance pay in the amount of one day's pay for each year of continuous service. These payments are not included for the purpose of determining whether this employer has met the 30-day requirement.
The individual works a four-day work week. That is, instead of working eight hours per day, five days per week, he works ten hours per day, four days per week. Even if the individual's ten-hour shift extends over two calendar days, each shift still counts as only one day, and this individual will have worked only four days in a normal work week.

Overtime work (or working additional shifts) is not included in determining whether the 30-day requirement has been met unless there is at least 6 hours between the beginning of the overtime work (or the additional shift) and the end of the prior shift and the overtime work (or additional shift) does not occur on a day which will otherwise be included in meeting the 30-day requirement. Examples:

The individual's normal shift ends at 3:00 a.m., and he is asked to work the next shift which begins at 4:00 a.m. Even if he works both shifts, since there is not at least 6 hours between the shifts, only one day will be counted toward meeting the 30-day requirement.
The individual's shift ends at 3:00 a.m. on Saturday, and he is asked to return to work for an additional overtime shift from 9:00 a.m. until 2:00 p.m. He must then return to work at 7:00 p.m. to work his regular shift. This overtime work does not count as an additional day toward meeting the 30-day requirement because his regular shift begins that same day and would already be included in meeting the 30-day requirement.
The individual's normal shift begins at 3:00 p.m. and ends at 11:00 p.m. However, he is required to work four hours of overtime every day so that he does not complete his shift until 3:00 a.m. This shift still counts as only one day toward the 30-day requirement.

NOTE: An employer may also become the chargeable employer after less than 30 days if it was the single employer that paid wages to the individual permitting the individual to requalify for benefits after a previous disqualification under Section 601 (voluntary leaving), 602 (misconduct), or 603 (refusal of work). To requalify, the individual must earn an amount equal to or in excess of his current Weekly Benefit Amount in each of four calendar weeks.

Effective Independent Contractor Agreements Under the Illinois Employee Classification Act

January 2008
By Nancy E. Joerg, Esq.

Illinois construction companies; construction-related businesses such as landscaping, painting, welding, etc., and trucking companies that pick up and deliver to construction sites, haul road building materials, etc. are all very nervous about the harsh new law, the Illinois Employee Classification Act (ECA) which went into effect January 1, 2008.

Now is the time in which Illinois construction companies and construction-related companies should be reviewing their independent contractor relationships, agreements and practices. Independent contractor agreements must be carefully drafted to be consistent with this very tough new law and any other independent contractor laws from other Agencies.

Section 10 of the ECA defines when a worker in a construction or construction-related field, or a truck driver who has a connection to construction, is an independent contractor and when he or she is an employee. If a construction worker or truck driver is found to be misclassified as an independent contractor under this new law, severe penalties can be levied against the employer that has misclassified the worker. Therefore, it is important to do everything possible to comply with the ECA's strict, rigid, and punitive provisions.

Employers: if there is anything in your independent contractor agreement that conflicts with any of the factors of Section 10 of the Illinois Employee Classification Act, consider changing your independent contractor agreement and, if necessary, the way you interact with your independent contractors on an ongoing basis.

For example, Section 10 states that the alleged independent contractor must obtain and pay for all licenses and permits. The words of your independent contractor agreement should be consistent with that factor. Additionally, the way you actually operate with the independent contractor should be consistent with that factor.

This is the period in Illinois history when it is particularly important for construction and construction-related companies to carefully evaluate all independent contractor relationships, contracts, and practices.