Just recently, a client of mine asked me to review his paperwork for the Illinois Department of Employment Security (IDES) audit he was going through. The client was a computer consulting company.
This computer consulting company (let's call it Top Notch Consulting) used independent contractor computer consultants to send to third-party companies. The IDES audit was triggered by one of Top Notch's independent contractor consultants filing for unemployment insurance benefits with the IDES.
As part of the IDES audit process, the IDES auditor asked Top Notch to fill out the form "Report to Determine Liability" also known as the "UI-1 Form." This form looks like a harmless generic form, and I find that most clients fill it out hurriedly or have their secretary or accountant fill it out. They don't bother having their attorney check it over because it appears to be such a routine form, asking for the most basic information about the company.
Don't be fooled! The "Report to Determine Liability" (UI-1 Form) can be the death knell of defending independent contractor status before the IDES!
Let me explain what I mean by this dire warning. At the start of the "Report to Determine Liability" (UI-1 Form), the IDES asks the company to put down its official name. On the next line following that basic information, the UI-1 Form asks the company to put down the "nature of its business."
Readers may well know that course of business and place of business are two very important issues for defense of independent contractor status before the IDES. Section 212(A), (B) and (C) of the Illinois Unemployment Insurance Act is a strict three-part test that the IDES uses to determine when independent contractors are actually employees for IDES purposes. Part "B" of the three-part test of Section 212 reads as follows:
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 (i.e., Top Notch Consulting) for which such service is performed.You can pass part "B" by proving that the company is in a different course of business than the independent contractor in question or works in a different place of business than the independent contractor in question.
My client, Top Notch Consulting, was ready to put down for the nature of their business that they are a computer consulting company. This would have been a mistake because Top Notch would be saying it was in the same course of business as the independent contractor. In an IDES audit, this is an extremely important legal point because we want to be able to argue that Top Notch Consulting didn't do computer consulting themselves (but rather, Top Notch was a mere referral agency for companies that needed computer consultants).
Always check before you write down the nature of the company's business when you are dealing with an IDES audit. Be sure that you are presenting the nature of the company's business as a different category than the nature of the independent contractor's business. Section 212(B) tells you that in order to pass that part of the three-part test, the company and the independent contractor must have either a different kind of business or a different place of business.
Where both the consulting company and the independent contractor consultants work with the same third-party client, the IDES and Illinois case law agree that the independent contractor and the consulting company share the same place of business – the offices of the third-party client. Because this is such an unfavorable interpretation of place of business, it becomes all the more important for the company under audit to carefully describe its own kind of business as different as possible from the work of the independent contractor.
The moral of this story is that all companies audited by the IDES should immediately retain competent legal counsel to represent them during the audit. This legal counsel should understand all aspects of Section 212(A), (B) and (C) of the Illinois Unemployment Insurance Act, and understand how auditors, Hearing Officers, and the Courts have interpreted Section 212(A), (B) and (C).
Do not fill out any forms without the review of competent and experienced legal counsel. Treat no forms as "routine." Assume that each form can and will be used against you as the IDES audit proceeds.
Questions? Please contact WS Shareholder and Senior Attorney Nancy E. Joerg at 630-377-1554 or najoerg@wesselssherman.com.
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