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.