Friday, January 30, 2015

IDES Audits for Independent Contractor Truck Drivers

March 2012

By Nancy E. Joerg, Esq.

HIDDEN DANGERS IN ILLINOIS UNEMPLOYMENT INSURANCE LAW
DEFINING INDEPENDENT CONTRACTOR STATUS FOR TRUCK DRIVERS 


Section 212.1 of the Illinois Unemployment Insurance Act defines when truck owner-operators are independent contractors and not employees for Illinois Department of Employment Security (IDES) purposes. All requirements of Section 212.1 must be met! If the Carrier is not in compliance with Section 212.1, the painful result (ignorance of the law is no excuse!) is that the frustrated Carrier will owe the IDES for back unemployment insurance contributions plus interest (a whopping 24% per year). Be prepared!!! The following is a rough summary of only some of the key points of Section 212.1:

OWNERSHIP: Do the drivers hold title to their vehicles or lease them from third-party (stranger) leasing companies and not the Carrier? The independent contractor must be the owner of the truck or must be leasing the truck from an unrelated third-party leasing company. Many carriers express surprise and anger that such a restriction exists under Section 212.1. Why can't drivers lease-purchase a truck from whomever they wish? The bottom line is that the so-called independent contractors will likely be reclassified upon IDES audit to employee status if they lease-purchase their trucks from the Carriers for whom they haul, or amazingly, even if they lease-purchase the trucks from a family member of a shareholder or owner of, or partner in, the company for whom they haul. Further, the Carrier cannot specify the person or entity from which the driver is to lease or purchase the equipment.

SCHEDULING: Who sets the schedule for the drivers? Section 212.1 indicates that the shipper or receiver can set those times, but the Carrier cannot.

LICENSING AND OPERATING EXPENSES: Do the drivers pay all costs directly associated with licensing and operating the equipment (e.g., paying for fuel, or wear and tear), without being separately reimbursed? If the Carrier pays for or reimburses any costs directly associated with operating and licensing the drivers' equipment, except when federal or state law or regulation requires the Carrier to pay, then Section 212.1 has been violated.

IDENTIFICATION ON TRUCK: Do the drivers have their name and address as owner on their trucks? Section 212.1 requires that the drivers maintain a separate business identity by displaying their name and address on their equipment or otherwise. We don't know yet how the IDES will interpret "or otherwise." We strongly recommend that the drivers put their business name and business address as owner on their trucks.

NON-COMPETE AGREEMENTS ARE FORBIDDEN: Does the lease contract contain a covenant not to compete? The answer must be "No." Following the termination of the lease contract, the driver must be able to perform the same or similar services for others, on whatever basis and whenever the driver chooses, without incurring any liability to the Carrier to which the driver was contracted.

HOW TO OBTAIN FREE INFORMATION ABOUT SECTION 212.1: Readers who wish a free copy of Section 212.1 and its regulations should contact Legal Assistant Tammy Nelson at the St. Charles, Illinois office of Wessels Sherman Joerg Liszka Laverty Seneczko P.C. at 630-377-1554.

Questions? Please contact Senior Attorney and Shareholder Nancy Joerg at 630-377-1554, or najoerg@wesselssherman.com.

IDES Audits of Independent Contractor Truck Owner/Operators under Section 212.1

By Nancy E. Joerg, Esq.

EVALUATING THE PROPER CLASSIFICATION OF INDEPENDENT CONTRACTOR/OWNER-OPERATORS

Trucking companies frequently call me to ask me how they can lower the risk of their independent contractor/owner-operators being reclassified to employee status upon audit by the IDES. The most effective way to make sure that you are ready for an IDES audit is to carefully, word by word, go over the special questionnaire that IDES auditors use when evaluating the proper classification of independent contractor/owner-operators.
 
If the IDES auditor concludes that the owner-operators/independent contractor truck drivers are really employees, then the IDES auditor will assess back unemployment insurance taxes on the trucking company. Because the IDES charges an interest rate of 24% per year, these assessments can be very expensive and significant.
 
WHAT IS THE SPECIAL IDES 212.1 QUESTIONNAIRE?
 
Section 212.1 of the Illinois Unemployment Insurance Act was passed on August 8, 1995 to define (for IDES purposes) when a truck driver is an independent contractor and when he or she is an employee.

The 212.1 Questionnaire is the special questionnaire that IDES auditors use to decide whether independent contractor/owner operators are really employees.
In this article, I will go over each question and explain the answer that will bolster independent contractor status (and also discuss the answers that will defeat independent contractor status).
It is not the intent to suggest the reader provide the "correct" answers if they are not actually true and accurate. This article provides the proper answers for independent contractor status as useful guidelines to help enhance the reader's understanding of what facts are needed to prove independent contractor status to the IDES.

CAUTION!
 
It is important for readers to realize that if they are ever selected for an IDES audit, they should not say even one word to the IDES auditor before they review the 212.1 Questionnaire. The IDES now strictly judges an independent contractor/owner-operator on the answers provided on the 212.1 Questionnaire.

It does not matter if the driver in question seems entrepreneurial – is very free-spirited, independent, and controls his own destiny. That is not the definition of an independent contractor/owner-operator. The deciding factors are the definition as revealed in Section 212.1 of the Illinois Unemployment Insurance Act and the answers in the 212.1 Questionnaire.

Let's get started on the IDES Questionnaire:
 
QUESTION :
 
a) ICC or OTHER AUTHORITY
 
1) Were the services performed by a driver who was registered or licensed as a motor carrier of property by the Illinois Commerce Commission, the Interstate Commerce Commission, the United States Department of Transportation or any successor agencies?
 
Answer: Yes, to prove independent contractor status.

Explanation: It is a plus for independent contractor status under Section 212.1 if the driver has his or her own operating authority. If the driver does not have his or her own operating authority, then you can still pass this part of Section 212.1 by answering below that the owner-operator is leased to the authority of the Carrier.

QUESTION:
 
2) A) Was the driver performing the services under an owner-operator lease contract?
 
Answer: Yes, to prove independent contractor status.

Explanation: A written independent contractor agreement is a requirement.

QUESTION:
 
2) B) Was the contract with a company registered or licensed as a motor-carrier of property by the Illinois Commerce Commission, the Interstate Commerce Commission, the United States Department of Transportation or any successor agencies?
 
Answer: Yes, to prove independent contractor status.

Explanation: "Yes" would be a plus for independent contractor status. It is a requirement of Section 212.1 that the independent contractor/owner-operator be operating under his or her own authority or under the authority of the Carrier.

QUESTION:
 
b) RIGHT TO TERMINATE AND PERFORM SERVICES ELSEWHERE
 
1) Was the driver able, with reasonable notice if required by the lease contract, to terminate that contract, prior to the termination date specified in the contract, without incurring any liability to the company other than liability for damage to the property being carried or damage or injury caused as a result of the operation of the equipment?
 
Answer: Yes, to prove independent contractor status.

Explanation: To be an independent contractor under Section 212.1, the owner-operator must be free to terminate the contract with reasonable notice.

QUESTION:
 
2) Following the termination of the lease contract, was the driver able to perform the same or similar services for others, on whatever basis and whenever he or she chose, without incurring any liability to the company to which he or she was contracted?
 
Answer: Yes, to prove independent contractor status.

Explanation: It is necessary under Section 212.1 to give the independent contractor/owner-operator total freedom as to how he/she conducts his/her business separate and apart from the services they provide the Carrier. This means that a non-compete agreement will destroy independent contractor status under Section 212.1.

QUESTION:
 
c) SCHEDULING
 
1) (Other than informing the driver of a pickup or delivery time specified by the shipper or receiver of the property to be transported) Did the company to which the driver was contracted to perform the services impose requirements on the driver to perform the services or be available to perform the services:
 
A) at a specific time or times? _____ or
B) according to a specific schedule? _____ or
C) for a specified number of hours? _____
 
Answer: The answers to c)1)A), B) and C) above would all be No, to prove independent contractor status.

Explanation: Section 212.1 of the Illinois Unemployment Insurance Act indicates that only the shipper or receiver can set the schedule for the independent contractor driver—the Carrier for whom the independent contractor hauls cannot, or the independent contractor will be found to be an employee.

In other words, the independent contractor/owner-operator must be responsible for his own hauling schedule except when the shipper or receiver makes requests that influence the schedule.

QUESTION:
 
2) If the answer to any of the above was YES, was the requirement mandated by a governmental regulatory or licensing agency with respect to services the driver performed as an operator of equipment? _____
 
Answer: Yes, to prove independent contractor status.

Explanation: The Regulations to Section 212.1 state that "For purposes of applying Section 212.1, a requirement imposed by a governmental regulatory or licensing agency with respect to services an individual performs as an operator of a truck, truck-tractor or tractor is not a requirement imposed on the individual by any person or entity to which the individual is contracted to perform the services." Therefore, requirements by the Carrier in order to fulfill a governmental regulatory or licensing requirement are not likely to be counted by the IDES as a violation of Section 212.1.

QUESTION:
 
d) LEASE OR OWNERSHIP INTEREST 1) Did the driver lease or hold title to the equipment? _____
 
Answer: Yes, to prove independent contractor status.

Explanation: The independent contractor must be the owner of the truck or must be leasing the truck from an unrelated third-party leasing company.

QUESTION:
 
2) Was the individual or entity from which the equipment was leased or which held a security or other interest in it: A) the company to which the driver was contracted to perform the services? _____
 
Answer: No, to prove independent contractor status.

Explanation: If the independent contractor were to lease-purchase a truck from the Carrier for whom he hauls, or even from a family member of a shareholder, or owner of, or partner in the company for whom he hauls, that independent contractor driver would likely be reclassified to employee status upon IDES audit. Additionally, the Carrier for whom the independent contractor driver hauls cannot specify the person or entity from which the driver is to lease or purchase the equipment.

QUESTION:
 
B) owned, controlled or operated by or in common with, to any extent, directly or indirectly:
i)the company to which the driver was contracted to perform the services: _____ or
ii)a family member of a shareholder or owner of, or partner in, the company with which the driver was contracted to perform the services? _____
 
Answer: No, to prove independent contractor status.

Explanation: Section 212.1(a)(4) specifically states that in order to be excluded from employment, the owner-operator must either lease the equipment or hold title to the equipment, "provided that the individual or entity from which the equipment is leased, or which holds any security or other interest in the equipment, is not:

(1)The person or entity to which the individual is contracted for service, or
(2) Owned, controlled, or operated by or in common with, to any extent, whether directly or indirectly, the person or entity to which the individual is contracted for services, or a family member of a shareholder, owner, or partner, of the person or entity."  
QUESTION:
 
e) COSTS
 
1) Did the driver pay all costs directly associated with licensing and operating the equipment ( e.g., paying for fuel, or wear and tear, etc.), without being separately reimbursed? _____ 
 
Answer: Yes, to prove independent contractor status.

Explanation: Your independent contractor/owner-operators should pay all operating and licensing costs except for those costs that you, as the Carrier, may be required to pay by law.

QUESTION:
 
2) If the answer to 1) was NO, did federal or State law or regulation require that those costs be paid by the company to which the driver was contracted to perform the services? _____
 
Answer: Yes, to prove independent contractor status.

Explanation: In instances where federal or state law or regulation requires the Carrier to pay, then Section 212.1 will likely not be violated.

QUESTION:
 
f) SEPARATE BUSINESS IDENTITY 3) Did the driver display his or her name and address on the equipment? _____
 
Answer: The answer to f)1) above would be yes, to prove independent contractor status.

Explanation: Section 212.1 of the Illinois Unemployment Insurance Act requires that the drivers maintain a separate business identity by displaying their name and address on their equipment or otherwise. We strongly recommend that the drivers put their business name and business address as owner on their trucks.

What is a "business name"? Well, it can be something like "J.S. Trucking," or "John Stevens Trucking," or "John Stevens" (if that is the business name under which your owner-operator drives). No special size, color, or location on the truck appears to be needed.

What is the "business address" of the owner-operator? It can be something like, "123 Elm Street, Peoria, Illinois," or it can be simply, "Peoria, Illinois."

Be aware that the Federal Motor Carrier Safety Administration (FMCSA) has regulations with regard to the marking and identification of commercial motor vehicles. One of the requirements is that if the contractor's name and address is displayed on the vehicle, the name of the operating carrier must be preceded by the words "Operated by" on the vehicle identification on the door. (Discuss this issue with your transportation attorney to ensure that the vehicles are marked in accordance with all requirements of transportation law.)

I recommend to my trucking company clients that they take a photograph of each independent contractor/owner-operator's truck and stick it in the independent contractor files [so that if the trucking company is audited by the IDES years down the road, then the company will have ready photographic evidence to prove that it followed this requirement of Section 212.1].

QUESTION:
 
4) If the answer to (1) was NO, did the driver offer or advertise his or her services to the public and maintain his or her own business identity? ______ If yes, please explain how:
 
Answer: Yes, to prove independent contractor status.

Explanation: The independent contractors could put a listing under their business names under "Trucking Services" in the Yellow Pages. Ads by the independent contractor owner-operators in local newspapers under his/her business name are also helpful for proving independent contractor status. (Be sure to keep copies of the advertisements so that you have proof that the independent contractor held himself/herself out to the public.)

QUESTION:
 
g) SPECIFYING FROM WHOM A TRUCK MUST BE LEASED OR PURCHASED As a condition for retaining the driver's services, did the company to which the driver was contracted specify the person or entity from which the driver was to lease or purchase the equipment? ______
 
Answer: No, to prove independent contractor status.

Explanation: If the independent contractor were to lease-purchase a truck from the Carrier for whom he hauls, or even from a family member of a shareholder, or owner of, or partner in the company for whom he hauls, that independent contractor driver would likely be reclassified to employee status upon IDES audit per Section 212.1. Additionally, per Section 212.1, the Carrier for whom the independent contractor driver hauls cannot specify the person or entity from which the driver is to lease or purchase the equipment.

WHAT IF MY ANSWERS DON'T SUPPORT INDEPENDENT CONTRACTOR STATUS?
If you find that your facts do not match the answers that would show independent contractor status for your owner-operators under Section 212.1, then you should consult at once with your employment lawyer. You should consider restructuring your relationship with your independent contractor/owner-operators. Understand that you have a serious legal problem and that it will surface ( and cost you money!) when you have an IDES audit or hearing.

Doing a self-audit with the 212.1 Questionnaire is a terrific way to identify problem areas – areas where you fall short in being able to prove that your independent contractor/owner-operators are properly classified and not your employees. Doing this relatively easy and quick self-audit before you are faced with an IDES challenge is a wonderful opportunity to get your ducks in a row. Do not waste it.

Because Section 212.1 is a relatively new Illinois law and because the IDES has only started auditing trucking companies fairly recently under Section 212.1, we do not yet have much legal precedent to guide us. We do not really know how the IDES or the Courts will interpret Section 212.1 and a taxpayer's answers to the 212.1 Questionnaire. Therefore, readers should do everything possible to ensure their trucking companies are strong as to independent contractor status and comply with current 212.1 guidelines.
 
If any readers would like assistance with an IDES audit or hearing, or have any questions about strategy for IDES audits or hearings, please feel free to call Attorney Nancy Joerg at 630-377-1554.
Additionally, if readers would like a free copy of Section 212.1, the Rules to Section 212.1, and the 212.1 Questionnaire, please contact Wessels Sherman Joerg Liszka Laverty Seneczko P.C. Legal Assistant Tammy Nelson at 630-377-1554 or by email at tanelson@wesselssherman.com.

Illinois Employee Classification Act: The Rules Have Been Finalized and Adopted

2008
By: Nancy E. Joerg, Esq.

The Illinois Employee Classification Act, which became effective January 1, 2008, brings a new independent contractor crisis with it.

WHO IS COVERED?: Under this new law, a company such as a construction company, a trucking company which hauls gravel or road building materials, a landscape company, and a wide variety of other construction related companies, can be challenged by the Illinois Department of Labor (IDOL) and "interested parties" on how the company classifies workers as either employees or independent contractors.

PENALTIES AND CRIMINAL CHARGES: If the construction related company who uses independent contractors is found in violation of the Employee Classification Act, the company could be hit with substantial financial penalties, possible shut down of its business or job sites, and, most worrying to many, misdemeanor or felony criminal charges.

The Rules for the Illinois Employee Classification Act have been finalized. (The Illinois General Assembly permanently adopted the Rules on July 31, 2008). This article will discuss three key points that have been addressed in the finalized Rules:
  • What constitutes a bona fide corporation?
  • What records must be kept?
  • What notice must be posted?

BONA FIDE CORPORATIONS

In the "Definitions" section of the Rules for the Illinois Employee Classification Act, the definition of an "individual performing services" (i.e., alleged independent contractor) does not include a bona fide corporation. This seems to strongly suggest that bona fide corporations would not be considered potential employees under the Illinois Employee Classification Act. This is big news and in fact begins to answer the most common question people have been posing to me ever since this new law came into existence – whether or not corporations would be excluded from coverage under this new law. Of course, the question remains, "What is a bona fide corporation?"
The Rules state that in determining whether a "corporation" is bona fide, the IDOL may consider, among other factors, whether:

1) the corporation is capitalized;
2) the corporation has issued corporate stock;
3) the corporation maintains a corporate bank account;
4) there is an intermingling of corporate and personal accounts or funds;
5) the corporation holds itself out as a corporation;
6) the corporation maintains corporate books and records, including corporate meeting minutes, and files corporate tax returns that are current and complete; AND
7) Articles of Incorporation have been filed and the corporation is in good standing, in the case of Illinois corporations, with the Illinois Secretary of State or, in the case of foreign corporations, as directed by the laws of that jurisdiction. [Note: This is just one factor of the test.]

In determining whether a limited liability company (LLC) is bona fide for purposes of the Act, the Department shall consider, among other factors, whether:

1) the LLC has assets;
2) the LLC maintains a company bank account;
3) there is an intermingling of company and personal accounts or funds;
4) the LLC holds itself out as an LLC;
5) the LLC makes necessary tax filings that are current and complete; AND
6) Articles of Organization have been filed and the LLC is in good standing, in the case of Illinois LLCs with the Illinois Secretary of State or, in the case of foreign LLCs, as directed by the laws of that jurisdiction.

At this point in time, we do not know how these factors will be evaluated by the IDOL.


RECORD KEEPING REQUIREMENTS

There are strict record keeping requirements in the Rules to the Illinois Employee Classification Act. You must keep the documents specified in the Rules, on each independent contractor, for a period of THREE years. If you violate the record keeping requirements, you violate the Employee Classification Act!

Records that must be maintained for each independent contractor include, but are not limited to:

1) their names, addresses, phone numbers, Social Security numbers, Individual Tax Identification Numbers and Federal Employer Identification Numbers;
2) the type of work performed and the total number of days and hours worked;
3) the method, frequency and basis on which wages were paid or payments were made;
4) all invoices, billing statements or other payment records, including the dates of payments, and any miscellaneous income paid or deductions made;
5) copies of all contracts, agreements, applications and policy or employment manuals; AND
6) any federal and State tax documents.


POSTING REQUIREMENTS

The Illinois Employee Classification Act requires you to post the IDOL's Notice about the Illinois Employee Classification Act (in English, Spanish, and Polish) in a conspicuous place on each job site where the independent contractors perform services and in each of your offices. Where it is not practicable to post a notice on the job site, you must give a copy of the Notice to each independent contractor.

TIP: Give each of your independent contractors a copy of the Notice for them to keep, and have them sign and date another copy for you to keep in each independent contractor's file to prove that the independent contractor received the Notice. Do this on a yearly basis.


REVIEW YOUR INDEPENDENT CONTRACTOR RELATIONSHIPS

This is the period in Illinois history when it is particularly important for construction and construction-related companies to really sit down, take the time, and lower liability in every way possible. Your independent contractor agreement must be carefully drafted to be consistent with the Illinois Employee Classification Act and any other independent contractor laws from other Agencies. It is a time to carefully assess independent contractor relationships, contracts, and practices.


CONSULTATION: If you have any questions about the Illinois Employee Classification Act and want to evaluate your company's liability (and discuss ways to protect your company in its use of independent contractors), contact Senior Attorney and Shareholder Nancy Joerg at 630-377-1554 or najoerg@wesselssherman.com.

Tuesday, January 27, 2015

Illinois Employers: Be Aware of Dangerous and Misleading New IDES Policy Concerning IDES Audits

September 2009
By: Nancy E. Joerg, Esq.

After an Illinois Department of Employment Security (IDES) audit of your company, the IDES sends you an Audit Findings Letter. The Audit Findings Letter alerts you that you will soon be receiving the Determination & Assessment (tax bill). However, the Audit Findings Letter does not inform you that you may be receiving multiple Determinations & Assessments , possibly spread over several months!

It used to be that just one Determination & Assessment would be issued to cover the entire timeframe of the audit. Times have changed. The IDES is now issuing (with no warning or notice!) multiple Determinations & Assessments for different quarters, years, etc.

URGENT! You must timely protest each and every Determination & Assessment that you receive.
 
Some poor folks have mistakenly thought that the multiple Determinations & Assessments are merely duplicative and they therefore did not protest each Determination & Assessment. They therefore lost all rights to appeal the audit results covered by the time periods that were not protested. Because they could no longer appeal, the Determination & Assessment became final, due and owing.
Some folks have also mistakenly believed that the IDES "Statement of Account" is the Determination & Assessment.

Be sure to timely protest EACH AND EVERY Determination & Assessment. Check which quarters it applies to. And, remember, that if you are even one day late, you will lose all rights to protest and go to a Hearing and your Assessment(s) will be final.

Remember... Get competent legal representation immediately in the face of an IDES audit, especially on the subject of independent contractor status. Get help as soon as you receive your Notice of Audit - and do not wait until you are in trouble and hit with an Assessment that you must protest before you really get your defense strategy and information in the proper order.

Questions? Please contact WS Shareholder and Senior Attorney Nancy E. Joerg in our St. Charles, IL office at (630) 377-1554, or najoerg@wesselssherman.com.
 

Why are Auditors Using Questionnaires for an IDES Audit?

January 2011
By: Nancy E. Joerg, Esq.

When clients are audited by the Illinois Department of Employment Security (IDES) and the company being audited uses independent contractors, the IDES auditor will often ask the company to fill out a Questionnaire called the Worker Relationship Questionnaire. The IDES auditor will evaluate the company's responses to help decide whether the workers at issue in the audit are really independent contractors or misclassified employees under the IDES test for independent contractor status.

Many clients become very anxious in filling out the Questionnaire. The questions are somewhat confusing. It is difficult to know exactly how to respond so that it is clear to the auditor that the workers at issue are really independent contractors and not employees.

THREE SETS OF QUESTIONS: Clients wonder why the auditor is using a Questionnaire. If you study the strict three-part test [Section 212(A), (B), and (C)] that the Illinois Department of Employment Security uses to decide who is an independent contractor and who is an employee, you will realize that the Questionnaire is divided into three sections: the first set of questions asks about Section 212(B), the next set of questions asks about Section 212(C), and the last set of questions asks about Section 212(A).

REGULATIONS: There are also regulations to Section 212(A), (B), and (C) [56 Ill. Admin. Code Sec. 2732.200] which help to explain the IDES view of each part of the three-part test. Upon studying the regulations, it will become somewhat clear as to how the questions should be answered on the Questionnaire (to result in a finding by the auditor of independent contractor status for IDES purposes).

RESPONSES ARE CRUCIAL TO DEFENDING INDEPENDENT CONTRACTOR STATUS: The questions should of course be answered truthfully, but companies should be aware that the answers on the Questionnaire are crucial in defending independent contractor status and therefore should be answered thoroughly and carefully. Work with an attorney very experienced in defending companies who use independent contractors, before filling out the Questionnaire and handing it to the IDES auditor. This is not a task to be handled lightly. This is your legal defense!

Questions? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.

How Employers Should Fill Out the IDES Audit Questionnaire

December 2009
By: Nancy E. Joerg, Esq.

When an Illinois Department of Employment Security (IDES) auditor audits a company that uses independent contractors, the IDES auditor almost always gives the company a questionnaire to fill out. The IDES has been using the same basic multi-page questionnaire called the Worker Relationship Questionnaire for several decades.

The purpose of the Worker Relationship Questionnaire is to obtain detailed information from the company about the alleged independent contractor relationship. The Questionnaire is designed so that it can be filled out by the company or by the auditor. (This is at the auditor's discretion.) At the end of the Questionnaire, there is a space for the individual who filled out the questionnaire to sign that they indeed filled out the questionnaire and provided the responses.

If a company has several kinds of independent contractors, then the auditor will usually ask the company to fill out several Worker Relationship Questionnaires. For example, many years ago a client company of our law firm was an architectural business that used independent contractor architects, engineers, interior designers, draftsmen, et al. The company, therefore, filled out many different Worker Relationship Questionnaires - each one representing that kind of specialized independent contractor. (It is of course a matter of strategy for a company to decide how many Worker Relationship Questionnaires they will fill out and which independent contractors will be in which grouping. This is a decision for a company and its attorney to carefully evaluate.)

The Worker Relationship Questionnaire is divided into three main sections. Each section represents one part of the strict three-part test [Section 212(A), (B), and (C)] that the Illinois Department of Employment Security uses to decide who is an independent contractor and who is an employee.

Possibly the trickiest part of filling out the Worker Relationship Questionnaire is deciding how to describe the type of business the company is in, and the type of business the independent contractor is in, and whether the company and the independent contractor are in the same course or kind of business. Course or type of business is a crucial part of Section 212(A), (B), and (C).

Remember that if a company fails any one part of the three part test, then the worker at issue will be found to be an employee for IDES purposes.

Clients sometimes ask me what will happen if they refuse to fill out the Worker Relationship Questionnaire. Failure to cooperate with an auditor and provide the auditor with requested information only ends up hurting the company. This is because the legal burden of proof rests on the company during an audit. The legal responsibility to prove that a worker is an independent contractor rests upon the company and not upon the auditor.

Simply stated, there is a legal presumption that the worker is an employee-unless the company can prove the worker is an independent contractor. From a practical standpoint, this means a company must provide proof, evidence, information and documents to the auditor to convince the auditor that the worker is an independent contractor. In the absence of such proof, the auditor is free to find that the worker is an employee and therefore the auditor will assess back unemployment insurance contributions onto the company being audited. (There is also 24% per year interest added to that assessment.)

Be very careful in filling out the Worker Relationship Questionnaire. Even one wrong answer can create legal barriers to proving independent contractor status. Seek the assistance of an attorney experienced with IDES audits.

Questions? Please contact WS Shareholder and Senior Attorney Nancy E. Joerg in our St. Charles, IL office at (630) 377-1554, or najoerg@wesselssherman.com.

Powerful IDES Exemptions for Independent Contractors

March 2010
By: Nancy Joerg, Esq.

Many companies that use independent contractors do not realize that under the Illinois Unemployment Insurance Act, there are many specific tests for various kinds of independent contractors. [Even the Illinois Department of Employment Security (IDES) auditors do not always know all of the different tests for independent contractor status and exemptions from employment!]

It is essential that a company know the specific test for the type of independent contractor used so that it can gather the necessary proof to establish independent contractor status if it is ever audited by the IDES.

The following is a list of some (but not all) of the independent contractor tests under the Illinois Unemployment Insurance Act:

  1. Persons free from the employer's control and direction who are engaged in an independent trade, occupation, business or profession and who perform services which are outside the course of the employer's business or performed outside the place of business. (Section 212)
  2. Owner-operators of their own trucks but only under certain specified circumstances as provided in the Act. (Section 212.1)
  3. Direct sellers of consumer goods outside of a retail establishment if the remuneration for such service is directly related to sales, rather than hours worked, and the services are performed pursuant to a written contract that provides that the person shall not be treated as an employee for federal tax purposes. (Section 217)
  4. Real estate salesmen to the extent that such services are compensated for by commission. (Section 217)
  5. Real estate closing agents when their contract with the title insurance company specifies that they are not employees and they are paid on a per closing basis. (Section 217.1)
  6. Real estate appraisers whose written employment contract provides that they are paid on a fee per appraisal basis and that they are free to accept or reject appraisal requests from that entity or from other entities. (Section 217.2)
  7. Persons under the age of 18 who deliver newspapers or shopping news and any persons who deliver newspapers or shopping news to the ultimate consumer, if substantially all of their remuneration is on a "per piece" or output rather than an hourly basis and they work under written contracts that indicate they are not to be treated as employees for federal tax purposes. Freelance editorial and photographic work for newspapers is also exempt from employment. (Section 225)
  8. Insurance agents who are paid solely by commission. (Section 228)
  9. Golf caddies if they are full-time students under the age of 22 and are paid directly by a golf club member or by the golf club on behalf of a member. (Section 232.1)
In most situations, the services of actors, actresses, singers, musicians, models and other "talent" constitute employment, not independent contractor status. However, a talent or modeling agency that is licensed under the Private Employment Agency Act is not the employing unit with respect to the performance of services for which an individual has been referred by the agency. (Section 204)

Another tip: Some of the payments that a company makes to individuals are really just payments for referral fees or reimbursement of expenses. These payments should not be considered wages. Be sure to point this out to the auditor. The auditor could overlook this referral fee issue and consider these kinds of payments to be wages and therefore payments to employees.

If the company does not claim the exemption from employment, the auditor may not necessarily bring it up because s/he may feel it is up to the company to raise a legal defense or because s/he simply is not aware of an exemption.

The moral of the story here is to look over the kinds of independent contractors you use and be ready to prove these exemptions when and if you are audited. If you prove the exemptions, then of course you will not owe any back unemployment insurance contributions (taxes) on these workers.

Questions? Please contact WS Shareholder and Senior Attorney Nancy E. Joerg at (630) 377-1554, or najoerg@wesselssherman.com.

Five Questions Companies Commonly Ask about IDES Audits

March 2010
By: Nancy E. Joerg, Esq.
 
Illinois companies naturally are quite concerned when they suddenly receive an official letter from the Illinois Department of Employment Security (IDES) telling them that they have been "selected for audit." This article addresses five of the most common questions I get from clients who are facing an IDES audit of their company:

Question 1: How does the IDES define an independent contractor?
 
Answer to Question 1: Illinois uses a strict three-part test [Section 212(A), (B), (C) of the Illinois Unemployment Insurance Act], with the presumption being that the independent contractor is a misclassified employee for whom the company must pay unemployment compensation taxes. The test is commonly referred to as the "A-B-C Test."

Question 2: What exactly does the A-B-C Test require to prove that a worker is really an independent contractor and not an employee?
 
Answer to Question 2: Section 212(A), (B), (C) states "Service performed by an indi­vidual for an employing unit, whether or not such individual employs others in connection with the per­formance of such services, shall be deemed to be employment unless and until it is proven in any proceeding where such issue is involved that -

A. Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact; and
 
B. Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
 
C. Such individual is engaged in an independently established trade, occu­pation, profession, or busi­ness."

Question 3: Is there a special IDES definition for independent contractors who both own and drive trucks?
 
Answer to Question 3: Yes. Section 212.1 of the Illinois Unemployment Insurance Act.

Question 4: What is the independent contractor test under Section 212.1?
 
Answer to Question 4:
 
Sec. 212.1. Truck Owner-Operator
 
(a) The term "employment" shall not include services performed by an individual as an operator of a truck, truck-tractor, or tractor, provided the person or entity to which the individual is contracted for service shows that the individual:

(1) Is either:

(i) Registered or licensed as a motor carrier of real or personal property by the Illinois Commerce Commission, the Interstate Commerce Commission, or any successor agencies, or

(ii) Operating the equipment under an owner-operator lease contract with the person or entity, when the person or entity is registered, licensed, or both, as a motor carrier of real or personal property licensed by the Illinois Commerce Commission, the Interstate Commerce Commission, or any successor agencies; and

(2) Has the right to terminate the lease contract and thereafter has the right to perform the same or similar services, on whatever basis and whenever he or she chooses, for persons or entities other than the person or entity to which the individual is contracted for services;

(3) Is not required by the person or entity to which the individual is contracted for services to perform services, or be available to perform services, at specific times or according to a schedule or for a number of hours specified by the person or entity, provided that pickup or delivery times specified by a shipper or receiver shall not be deemed specified by the person or entity;

(4) Either leases the equipment or holds title to the equipment, provided that the individual or entity from which the equipment is leased, or which holds any security or other interest in the equipment, is not:

(i) The person or entity to which the individual is contracted for service, or

(ii) Owned, controlled, or operated by or in common with, to any extent, whether directly or indirectly, the person or entity to which the individual is contracted for services or a family member of a shareholder, owner, or partner of the person or entity;

(5) Pays all costs of licensing and operating the equipment (except when federal or State law or regulation requires the carrier to pay), and the costs are not separately reimbursed by any other individual or entity; and

(6) Maintains a separate business identity, offering or advertising his or her services to the public, by displaying its name and address on the equipment or otherwise.

Question 5: How far back in time can the IDES auditor go in his investigation?
 
Answer to Question 5: If a company is audited by the IDES, an auditor can audit the company for a maximum of four years. However, the usual practice by an IDES auditor is to audit only one year if the assessment owed is less than $5,000.


Questions about how to handle an IDES audit? Please contact WS Shareholder and Senior Attorney Nancy E. Joerg at 630-377-1554 or najoerg@wesselssherman.com.

Don't Handle an IDES Audit Without Careful Planning!

September 2009
By: Nancy E. Joerg, Esq.


In view of the hundreds of Illinois Department of Employment Security (IDES) audits I have handled over the years, companies, accountants, tax attorneys and others often ask me: "What are your top tips on handling IDES audits?" So, I have put together a handy checklist of my eight top strategy tips for handling IDES audits:
  • Be prepared for the audit and if necessary get a continuance. Don't assume that the date of the audit is set in stone. I have never heard of an IDES auditor who wasn't willing to continue the start date of the audit at least once. It is more important to be prepared than to start the audit on the date as first set.
  • Decide who is going to interact with the IDES auditor. The best person to interact with the auditor is the one who best understands the facts and issues - sometimes not the Company owner. The IDES auditor will usually suggest performing the audit on your company premises. This is not a good idea for a variety of reasons. Therefore, suggest to the auditor that the audit be conducted at your accountant's or attorney's office instead of the company premises. I have never yet known of an auditor who will not agree to this suggestion.
  • If this is a trucking IDES audit, become an "expert" on Section 212.1 of the Illinois Unemployment Insurance Act. Section 212.1 is the test for independent contractor status for truck owner-operators under Illinois unemployment insurance law. Do a self audit by filling out the Section 212.1 Questionnaire used by IDES auditors to help decide whether the trucker at issue is an independent contractor under Section 212.1.
  • If this is not a trucking IDES audit but rather an IDES audit involving other kinds of independent contractors such as mechanics, welders, dispatchers, computer consultants, et al., then you want to become an expert on Section 212(A), (B), and (C) which is the IDES test for independent contractor status used for almost all non-trucking categories. Obtain a copy of the Worker Relationship Questionnaire that IDES auditors usefor all situations under Section 212(A), (B), and (C). Also be aware that certain kinds of independent contractors (for example, newspaper delivery) have unique legal exemptions and tests. Careful legal research is essential.
  • Be cooperative with the auditor. Don't stonewall him or her. It is a mistake to believe that it is best to give as little information as possible. The opposite is the truth here. The burden of proof is on you, the Company being audited, to convince the auditor that the independent contractors at issue are not your employees. By stonewalling the auditor, you are almost ensuring you will fail in this task of carrying your burden of proof.
  • If you are claiming that any of the independent contractors at issue are corporations, check the Illinois Secretary of State's website: http://www.cyberdriveillinois.com/ and print out the detail showing the corporation is in "good standing."
  • If you have paid people not for services but for a "mere referral," then you have to be prepared to explain to the auditor that these are mere referral fees and not payment for services.
Moral of the Story... Get competent legal representation immediately in the face of an IDES audit, especially on the subject of independent contractor status. The same principles apply to IRS audits or workers' compensation insurance audits on the subject of independent contractor status. Get help immediately - as soon as you receive your Notice of Audit - and do not wait until you are in trouble and hit with an Assessment that you must protest before you really get your defense strategy and information in the proper order.

If any readers would like assistance with an IDES audit or hearing, or have any questions about strategy for IDES audits or hearings, please feel free to call Nancy Joerg at 630-377-1554 or contact her via email at najoerg@wesselssherman.com.


Monday, January 26, 2015

IDES and IRS Audits: Why Does the Company Need to Prove Independent Contractor Status?

July 2009 
By Nancy E. Joerg, Esq.

When companies are audited by the Illinois Department of Employment Security (IDES) [or any state unemployment insurance agency] or the IRS, companies start out logically assuming that they are "innocent until proven guilty" on the independent contractor issue. WRONG!

The legal requirement for a company using independent contractors is that the company is presumed by the IDES or IRS to be the legal employer of the independent contractors. Therefore, when a company pays the worker to perform services, those workers are presumed to be the employees of the company upon audit. This means that every company that uses independent contractors should be seriously preparing, way before there is an audit or any other legal challenge, to prove that these independent contractors and not employees of the company.

How does a company prove that the independent contractors are not its employees? The "big picture" is to prove that the independent contractors are self-employed.

Effective proof consists of documents showing that the worker holds himself/herself out under his/her own business name, checks from the company made out to the independent contractor's business name with the independent contractor endorsing those checks with his/her business name, IRS Forms 1099 made out to the business name of the independent contractor, etc.

In addition, the IRS and the IDES (or any state unemployment insurance agency) have their own detailed checklist of rules and regulations to prove that the workers are independent contractors. The company must prove that the independent contractors meet the requirements of those rules and regulations.

There are many "practical steps" that a company can take to lower its risk in using independent contractors. Nancy Joerg can cost-effectively review your independent contractor agreement, your website, your independent contractor files, and any other documentation that you use with your independent contractors. Call Nancy at (630) 377-1554, or email najoerg@wesselssherman.com, to schedule a phone conference or a meeting.

Friday, January 23, 2015

How Does a Company Properly Terminate Independent Contractors?

February 2011
By: Nancy E. Joerg, Esq.

Many of our law firm's clients use independent contractors. When the independent contractor relationship is no longer satisfactory, or the reason for the relationship no longer exists, clients often wonder how they can properly terminate the relationship.

WHEN THERE IS A WRITTEN AGREEMENT: One of the first things I ask the client is whether there is a written agreement between the independent contractor and the company. If there is, I ask the client to send it to me for my legal review. I carefully evaluate it for any provisions relating to "termination."

Many independent contractor agreements have termination provisions which describe under what conditions the agreement can be terminated by either the Company or the independent contractor. These independent contractor termination provisions should be strictly followed to avoid breach of contract lawsuits.

Additionally, independent contractor agreements frequently have notice provisions under which a certain number of days or weeks notice must be given by the terminating party to legally terminate the agreement. These provisions should be strictly followed.

WHEN THERE IS NO WRITTEN AGREEMENT: If there is no written agreement between the parties, then the question must be asked: What are the terms of the oral contract between the parties? Did the parties ever discuss how the relationship could or should be terminated if necessary?

If there is no written agreement and no specific oral provision relating to the termination of the oral contract, then the parties are best served by simply discussing the situation and deciding what is the best way to end the relationship. If the independent contractor has spent money on materials and supplies to fulfill the project and the company suddenly terminates the relationship, the independent contractor could reasonably bring a lawsuit for a breach of an oral contract. It is always best for companies to work out mutually agreeable terms to the termination of the relationship in order to avoid a potential lawsuit.

Practical Tips: When drafting a termination provision for an independent contractor agreement, make sure that it is not too complicated. Below is a sample termination provision that is simple yet effective:

This Agreement may be terminated:

A. Without cause, by thirty (30) days' prior written notice by either party; or
B. With cause, immediately upon material breach of any term of this Agreement by either of the parties.

Regarding notice provisions, the independent contractor agreement should not state that the parties can walk away at any time because this indicates an employment relationship. An employment at will relationship means that both the company and the employee have the right to terminate the employment relationship at any time, with or without cause or notice. If your independent contractor agreement contains a provision that allows the parties to terminate the relationship at any time, revise the agreement to include a notice provision with at least some kind of a notice period required for termination of the contract.

Questions? Please contact Senior Attorney and Shareholder Nancy Joerg at 630-377-1554, or najoerg@wesselssherman.com.

Handling IDES Audits: Section 212(A), (B) and (C)

by Nancy E. Joerg, Esq.

"It is amazing, and distressing, to me when I see what some of my clients have handed over to the IDES prior to my getting involved with the case."

Over the many years during which I have represented Illinois companies in the face of Illinois Department of Employment Security (IDES) audit challenges, I have been struck by how much more effective my legal representation is if I am called in on the case right at the beginning – when the company first received its Notice of Audit from the IDES.

Frequently, accountants, enrolled agents, corporate counsel, human resource people, and others will not call me until they have "flunked" the IDES audit, and are in a position of having to protest the Determination and Assessment (tax bill) that is thrown onto the company as a result of losing at the IDES audit.

Preferable to Win at Audit Level. Of course, sometimes we are successful in winning at the IDES Hearing level, but it is preferable to win at the initial IDES audit level. First of all, the legal fees will be substantially less if the battle with the IDES is won during "the first round" (i.e., the audit stage). Secondly, there is much better control of all information that is given to the IDES if someone knowledgeable about the Illinois Unemployment Insurance Act (and all of its provisions and regulations) is steering the company defense right from the start of the IDES investigation.
It is amazing, and distressing, to me when I see what some of my clients have handed over to the IDES prior to my getting involved with the case. Particularly when the issue of independent contractor status arises, client companies (unknowingly!) give much harmful and irrelevant information to the IDES, and this becomes a permanent part of the company's IDES file, even when they proceed to protest the Determination and Assessment and go to an IDES Hearing.

Audit Questionnaires. Again referencing the independent contractor issue, the IDES uses a six-page detailed Worker Relationship Questionnaire to decide if a particular worker is an independent contractor or an employee for purposes of Section 212(A), (B), and (C) of the Illinois Unemployment Insurance Act (or, the IDES might use the new Questionnaire for Section 212.1, truck owner-operators). I cannot emphasize enough how incredibly important it is for an attorney, extremely well versed on these Questionnaires, to help the company plan its best responses to each and every question. Many of the questions on the Questionnaires are "trick questions," and simply "being honest" is never enough, because there are many ways to express the honest reality of the independent contractor relationship. For example, certain terms and words should never be used, whereas other terms and words should always be used, wherever possible, depending upon the true facts and circumstances of the case.

Also, at the audit level, many persuasive documents can be given to the IDES auditor. Even though these documents may not be strictly the "whole legal test" for independent contractor status, if they are presented to the auditor in the proper fashion, with the right persuasive arguments, sometimes the auditor will decide not to reclassify those workers, even though they may technically "fall short" of Section 212(A), (B) and (C).

Moral of the Story… Get competent legal representation immediately in the face of an IDES audit, especially on the subject of independent contractor status. The same principles apply to IRS audits or workers' compensation insurance audits on the subject of independent contractor status. Get help immediately – as soon as you receive your Notice of Audit – and do not wait until you are in trouble and hit with an Assessment that you must protest before you really get your defense strategy and information in the proper order.

Questions? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.  

Great News for Companies Who Use Independent Contractor Massage Therapists!

May 2011
By: Nancy E. Joerg, Esq. 

A recent and well-reasoned U.S. Tax Court decision found that massage therapists who rent space at a spa are independent contractors for Federal employment tax purposes. Although this ruling is directly important for IRS purposes, it also provides some great tips for other kinds of legal challenges to the independent contractor status of massage therapists.

GOOD FACTS FOR INDEPENDENT CONTRACTOR STATUS: In Cheryl A. Mayfield Therapy Center v. IRS, T.C. Memo 2010-239, the U.S. Tax Court found that the massage therapists were independent contractors primarily because they rented space from the spa. In all kinds of independent contractor cases, when an independent contractor has a fixed rental to use space on the premises of the company for whom it provides services, this is a major boost toward strengthening independent contractor status. Think about it-employees don't rent space from their employers!

The U.S. Tax Court also noted, with approval, that the independent contractor massage therapists set their own schedules and were free to accept or reject any work offered by the spa's receptionists.

The independent contractor massage therapists were free to charge less for their services even though the spa posted suggested prices.

The U.S. Tax Court observed with approval that the independent contractor massage therapists bought their own tools and supplies and were responsible for obtaining the proper licensing.

Other factors that were in favor of independent contractor status were that the spa did not give the independent contractor massage therapists any employee benefits such as sick leave or vacation and did not pay any business or travel expenses.

BAD FACTS FOR INDEPENDENT CONTRACTOR STATUS: Facts which tended to go against independent contractor status were also present in this case. The spa collected customer payments, prepared weekly payout sheets for the massage therapists, and paid the massage therapists on a weekly basis.
 
In this case, as in most, there were many factors that went for and against independent contractor status, but the U.S. Tax Court ruled that the proper classification was independent contractor status and not employee status.

GREAT TIP: CHARGE THE INDEPENDENT CONTRACTOR A FIXED RENTAL: This U.S. Tax Court decision offers insightful guidance on a how a spa can structure an independent contractor relationship with an independent contractor massage therapist who will perform his or her services at the spa. The fact that the independent contractor massage therapists paid a fixed fee rental to the spa was a very strong factor here pointing to independent contractor status. When independent contractors perform their services on the premises of the company for whom they provide services, it is always a "great tip" for the company to the charge the independent contractor a fixed fee rental.

Questions? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.

Wednesday, January 7, 2015

Evaluating Your Independent Contractor Agreement Under the Illinios Employee Classification Act

Evaluating your Independent Contractor Agreement Under the Illinois Employee Classification Act (Formerly HB 1795 - Now Public Act 95-0026)

DOING A SELF-AUDIT: The first step in doing a "self-audit" of your independent contractor agreement is to study Section 10 of this new law. Section 10 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 they are an employee under this new law. 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 company who has misclassified this worker. Therefore, it is important to do everything possible to comply with the strict, rigid, and punitive provisions of this new law.

YOUR AGREEMENT SHOULD NOT CONFLICT WITH SECTION 10: The next step in doing a self-audit of your independent contractor agreement is to carefully read over your independent contractor agreement word for word and line by line and make sure nothing conflicts with Section 10.
TWO TESTS: Section 10 contains two tests - one is a three-part test and the other is a twelve-part test.

If an independent contractor meets all three parts of the three-part test, that independent contractor is properly classified as an independent contractor for purposes of the Illinois Employee Classification Act.

If an alleged independent contractor cannot meet all three parts of the three-part test of Section 10, there is still a hope-if the alleged independent contractor can pass the twelve-part test of Section 10, then the alleged independent contractor would be found to be properly classified under the Illinois Employee Classification Act.

IF ANYTHING CONFLICTS WITH THE FACTORS, CHANGE YOUR AGREEMENT AND THE WAY YOU INTERACT WITH THE INDEPENDENT CONTRACTORS TO ENSURE CONSISTENCY WITH SECTION 10: If there is anything in your independent contractor agreement which conflicts with any of the factors of Section 10, 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 says 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.

In order to properly conduct this self-audit, it is always a good idea to work with an attorney who is deeply involved with this new law and is very experienced in the independent contractor issue in general.

FREE INFORMATION: Readers can contact Legal Assistant Tammy Nelson at 630-377-1554 or tanelson@wesselssherman.com for a free copy of the Illinois Employee Classification Act. Keep your eye on the Wessels Sherman Joerg Liszka Laverty Seneczko P.C. website (http://www.wesselssherman.com/) where we will have frequent updates and articles about the Illinois Employee Classification Act.



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.