IDES Audits of Illinois Trucking Companies

Issues to Consider

Illinois Department of Employment Security (IDES) audits pop up suddenly! Your trucking company may get a phone call or letter out of the blue from an IDES auditor!

IDES audits can arise due to an unemployment claim by an owner-operator who is a “1099 Independent Contractor”, a purely random selection, or due to other triggers. Companies who issue many 1099s are more likely to have an IDES audit (this is a recent audit development).

If your trucking company is faced with an IDES audit and you use independent contractor owner-operators, consider the following issues:

 

1. BUSINESS NAME AND ADDRESS ON TRUCK: All of the owner-operators who are independent contractors should have their business name and business address on their trucks. This is required by law. The IDES auditor will usually ask for proof of this. Therefore, the trucking company should take photos of all of the owner-operators’ trucks, showing the business name and business address of the owner-operator. The placement of the owner-operator’s business name and business address on the truck is not important for IDES purposes. The size and color of the business name and business address on the truck is also not important for IDES purposes. The IDES regulations are silent on this. It is simply the legal requirement that the owner-operators have their business name and business address—somewhere—anywhere—on their trucks.

2. INDEPENDENT CONTRACTOR AGREEMENT: The trucking company should carefully review each word in its independent contractor agreement for owner-operators. Where an independent contractor agreement can get a trucking company in trouble is if it indicates that the trucking company covers some of the operating and licensing expenses, beyond that required by state or federal law. Remember under Section 212.1 of the Illinois Unemployment Insurance Act (which is the strict six-part legal test the IDES auditor uses in evaluating whether a truck owner-operator is an independent contractor or an employee), independent contractor owner-operators are required to shoulder all operating and licensing costs (except for those costs that the trucking company may be required to pay by law). 

3. NON-COMPETES ARE PROHIBITED: If the independent contractor agreement for owner-operators contains a non-compete/non-solicitation provision, all bets are off. This will be a disaster! In other words, per Section 212.1, independent contractor owner-operators must be free of any restrictive covenants such as a non-compete or a non-solicitation agreement. Sometimes these non-compete provisions are dangerously buried in the language of an independent contractor agreement. In the trucking setting in Illinois, non-competes are FATAL to an independent contractor relationship between the trucking companies and owner-operators!

4. SPECIAL QUESTIONNAIRE: There is a special (very tricky) questionnaire that IDES auditors use to decide whether independent contractor owner-operators are really employees.  The standard IDES Worker Relationship Questionnaire is not used for independent contractor owner-operators. The special Questionnaire is based on Section 212.1.

The Illinois trucking company being audited by the IDES should complete the special multi-page Questionnaire prior to the IDES auditor actually asking the company to complete such a questionnaire. By filling out the Questionnaire ahead of time, the Illinois trucking company will be well aware of the questions the auditor is likely to focus upon. It is a great preparation exercise to understand the thought process and legal concerns of the IDES auditor in a trucking setting.

Readers can contact my legal assistant, Tammy Nelson, at 630-377-1554 or via email at tanelson@wesselssherman.com, for a free copy of the 212.1 Questionnaire.

5. INDEPENDENT CONTRACTOR OWNER-OPERATORS CAN ONLY LEASE TRUCKS FROM UNRELATED THIRD PARTIES: Under Section 212.1, any independent contractor owner-operators who lease their trucks from the Authority holder trucking company for whom they provide services will be reclassified to employee status upon audit.

 A strange legal provision in Section 212.1 provides that independent contractor owner-operators can only lease their trucks from unrelated third parties—not the Authority holder for whom they are driving. This is another deal breaker for independent contractor status!

If an IDES auditor discovers that the independent contractor owner-operators lease their trucks (or finance their trucks) through the Authority holder for whom they are providing services, the IDES auditor will reclassify these drivers to employee status for IDES purposes. This is a special, unique law in Illinois. It baffles many of my trucking clients who are upset by what seems to be an irrational anti-business obstacle to independent contractor status.

In view of all of the above (and the resulting liability), it is very wise for an Illinois trucking company to seek immediate legal counsel before they begin any conversations with an IDES auditor. There are many traps for the unwary.

For assistance with an IDES, DOL, or IRS audit; drafting an independent contractor agreement; or evaluating your use of independent contractors,  contact Nancy Joerg at Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.

Warning for Illinois Accountants: Significant Change in IDES Audit Policy!

October 2013

Starting in early 2013, the Illinois Department of Employment Security (IDES) "increased the pain" on Illinois businesses using independent contractors. The IDES audit division modified their audit policy guidelines to be much more likely to result in multi-year audits.

Now, IDES auditors will audit an Illinois company for a second year if the first year being audited results in an assessment of only $2,000 or more.

In other words, if an Illinois company is audited by the IDES and the auditor finds that (for that initial audit year) the company has made enough "mistakes" to result in money owed to the IDES in the amount of $2,000 or more, then the IDES auditor will proceed to audit that company for another year. There used to be a much more forgiving $5,000 threshold, so now there is a much greater danger of multi-year audits.

In my opinion as an attorney who has handled many IDES audits over twenty-four years, this new audit policy is misguided in many ways. It is very damaging financially to small Illinois businesses that use independent contractors (if those independent contractors are found to be employees by the IDES auditor under the brutal test for independent contractor status). Keep in mind that the interest rate that the IDES inflicts on these harsh assessments is 24% per year (2% per month).

Accountants and others advising their Illinois clients should take immediate action when they find out that one of their clients is going to be audited by the Illinois Department of Employment Security. The best advice to clients and their advisors is to first "say nothing whatsoever" to the IDES auditor until experienced legal counsel is obtained (and the Company can understand its legal position/vulnerability and then can effectively plan its defense strategy).

The independent contractor test used by the IDES--Section 212 (A), (B), and (C)--must be thoroughly understood and discussed with the client before any conversation takes place between the company/accountant and the IDES auditor. Seemingly innocuous questions by the IDES auditor such as "what does the company do" and "what does the independent contractor do" are frighteningly important in terms of an accurate legal analysis under Section 212 (A), (B), and (C).

Much harm or much good can be done right at the beginning of an IDES audit, so immediate legal advice should be sought. A strategy for defending independent contractor status should be developed right at the beginning of the audit process, to avoid a multi-year IDES audit and to reduce potential reclassification liability.

If any readers of this e-mail would like a free copy of Section 212 (A), (B), and (C) of the Illinois Unemployment Insurance Act and its Regulations to better understand the severity of the IDES test for independent contractor status, please contact Legal Assistant Tammy Nelson at 630-377-1554 or via email at tanelson@wesselssherman.com.

Questions about lowering your clients' risk in the use of independent contractors or how best to handle an IDES audit? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.

Significant Change Coming In U.S. Department of Labor Audits Involving Independent Contractors

July 2013

The 2014 budget for the U.S. Department of Labor was released on April 10, 2013, and it has troubling overtones for employers. By evaluating this very telling budget information, it becomes clear that the U.S. Department of Labor is unfortunately going to change the way it organizes its enforcement activities aimed at worker classification (i.e., whether certain workers are independent contractors or employees).

MORE INVESTIGATIONS BASED ON INDUSTRY: According to this 2014 budget information, the U.S. Department of Labor will increase the percentage of investigations that it does based upon industry rather than complaints.

 

In the past, the U.S. Department of Labor has based its independent contractor investigations largely on complaints made by disgruntled workers. Now, the U.S. Department of Labor will look at companies in industries with a high prevalence of worker misclassification.

 

CERTAIN INDUSTRIES MORE LIKELY TO HAVE WORKER MIS­CLASSIFICA­TION: The U.S. Department of Labor’s 2014 budget information notes that certain industries are more likely to have worker misclassification (some of the industries named in this regard are construction, janitorial, home health care, child care, transportation, warehousing, meat and poultry processing, personnel service, etc).

 

The bottom line here is that a company using independent contractors may not have any reported complaints from its workers, but that company may still be targeted by the U.S. Department of Labor for an audit.

COORDINATION WITH VARIOUS STATES: The U.S. Department of Labor continues to threaten that it is going to coordinate its efforts in investigating independent contractor status with various states. 

 

The Obama administration has been vocal about the fact that it wants to increase its investigation and enforcement of those businesses that use independent contractors and also increase its coordination with other federal and state agencies.

 

COMPANIES SHOULD HAVE INDEPENDENT CONTRACTOR RELATION­SHIPS CAREFULLY REVIEWED BY A KNOWLEDGEABLE PROFESSIONAL: Any company that uses independent contractors should realize that the climate throughout the United States is much more aggressive in terms of state and federal investigation. Therefore, those companies should be sure to have their websites, independent contractor agreements and documentation, and overall independent contractor relationships carefully reviewed by a knowledgeable professional.

 

For consultations on limiting your liability in the use of independent contractors, contact Attorney Nancy E. Joerg, who enjoys a nationwide reputation in assisting companies who use Independent Contractors of all types.  Nancy Joerg can be reached at Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.

Yes, the Illinois Employee Classification Act Complaints are Starting to Roll in!

By Nancy E. Joerg, Esq.


Clients are asking me if we have started receiving complaints from the Illinois Department of Labor relating to the harsh new Illinois law, the Employee Classification Act. Yes, we are starting to see these complaints coming in from the Illinois Department of Labor.

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.
If the construction related trucking company who uses independent contractors is found in violation of the Illinois Employee Classification Act, the trucking 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.

Below is the kind of wording we are seeing in these initial complaints:

Re: IDOL File No. 2008-###/Request for Records

Please be advised that the Illinois Department of Labor (IDOL) has received a complaint, alleging that you have violated Illinois' Employee Classification Act, 820 ILCS 185, by misclassifying one or more individuals performing construction services on your behalf in connection with re-roofing a house at 123 ABC Street, St. Charles, IL.

In connection with its investigation of this complaint, and pursuant to its authority under Section 25 of the Act, IDOL hereby requests that within fifteen (15) days you make available or provide copies to IDOL of all records in your power, possession or control relating to your business relationship with the individual(s) performing services, including but not limited to:

• Their names, addresses, phone numbers and Social Security numbers;
• Any/all written agreements or contracts you have with them;
• Any/all records of days/hours worked;
• Any/all payroll or payment records; and
• Any federal and state documents related to the individuals performing services.

Failure to comply with this request for records may result in the issuance of a subpoena to compel production of the requested information. Furthermore, failure to comply with a valid IDOL order may result in the imposition of civil and/or criminal penalties, as prescribed in the Act.

Also note that if there is any additional information you wish IDOL to consider in its investigation of this matter, please submit information in writing to IDOL within 15 days of this letter.

We urge all trucking companies who use independent contractors to seek legal counsel regarding their usage of independent contractors—not just with regard to the Illinois Employee Classification Act, but also in terms of the IRS, the Illinois Department of Employment Security (IDES), workers' compensation, etc. Don't wait until you are hit with a complaint or an audit. Get legal advice early on in the game.

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.

What is "Construction" Under the Illinois Employee Classification Act?

By Nancy E. Joerg, Esq.

The Employee Classification Act (formerly House Bill 1795) is a frightening and radical Illinois law which went into effect January 1, 2008. It applies to construction and construction-related companies (including trucking companies) who use independent contractors in construction and construction related jobs. It is very punitive towards companies who are found to have misclassified its independent contractors!!

Many nervous clients understandably ask, "Exactly what is construction and am I considered a construction or construction-related company?" As used in this far-reaching Act, "construction" means:

1. any constructing;
2. any altering;
3. any reconstructing;
4. any repairing;
5. any rehabilitating;
6. any refinishing;
7. any refurbishing;
8. any remodeling;
9. any remediating;
10. any renovating;
11. any custom fabricating;
12. any maintenance;
13. any landscaping;
14. any improving;
15. any wrecking;
16. any painting;
17. any decorating,
18. any demolishing;
19. adding to or subtracting from any building, structure, highway, roadway, street, bridge, alley, sewer, ditch, sewage disposal plant, water works, parking facility, railroad, excavation or other structure, project, development, real property or improvement or to do any part thereof; and
20. construction shall also include moving construction-related materials on the job site to or from the job site.

 Note that certain trucking companies are classified as "construction" under this harsh law because of the final sentence: "Construction shall also include moving construction-related materials on the job site to or from the job site."

If you have any questions about the Illinois Employee Classification Act, contact Senior Attorney and Shareholder Nancy Joerg at 630-377-1554 or najoerg@wesselssherman.com.

Warning to Illinois Companies About Employee Classification Act: New Danger!

August 2009
By: Nancy E. Joerg, Esq.


All Illinois companies who are in construction-related industries should be fully aware of the strict legal requirements of the Illinois Employee Classification Act, a brutal law (pushed through by several Unions) which went into effect on January 1, 2008. This terribly punishing law applies to a wide range of Illinois construction-related businesses (some trucking companies, building trades, landscaping, decorating, flooring, etc.).

The law requires covered companies to post special notices in English, Spanish, and Polish and keep specific records. The main thrust of the law is to hammer (severely!) those construction-related companies who "misclassify" independent contractors. Our law firm is currently representing clients who have been hit with assessments from the Illinois Department of Labor (IDOL), some in excess of $200,000.00!!! We are, of course, assisting our clients in fighting back.

Any Illinois businesses who are construction-related should seek immediate legal counsel. Even a small amount of legal assistance can be tremendously helpful should these businesses ever be targeted by the IDOL under this horrible (and powerful!!) new law.

A new danger under this law: Very recently, we have found that the IDOL may try to "fool" companies by sending them a Notice which asks for broad information and records pertaining to a substantial period of time, rather than one particular construction-related project. This approach by the IDOL is not proper, and it is excessively burdensome on the company. Do not answer these IDOL Notices under the Illinois Employee Classification Act without experienced legal counsel. You may expose yourself to over-broad liability. Remember, these IDOL assessments under this new law can be huge.

We recommend that all Illinois construction-related companies who use "1099 independent contractors", "subcontractors", "outside vendors", "casual labor", or any kind of "non-employees" seek preventative legal help at once. The IDOL (at the urging of some Unions) are using this new law to cripple, and in some cases almost destroy, Illinois construction-related companies who use independent contractors of all types.

Don't wait for the ax to fall. Learn everything you can about this law and protect yourselves and your business. There are many (relatively simple) ways to do this. Call Attorney Nancy E. Joerg to learn more about this extremely serious problem and how to coexist with it.

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

Trucking Companies Should Exercise Caution When Setting Up Owner-Operator Escrow Programs

August 2010
By: Nancy E. Joerg, Esq.

It is common practice for a trucking company to have an escrow program under which the company withholds a certain amount from a paycheck so that an escrow fund is established for the individual independent contractor/owner-operator. The typical amount of such an escrow fund might be $2,000.
The reason behind the escrow program is that in the event the independent contractor/owner-operator causes damage, and the trucking company has to pay for those damages, then funds are available for reimbursement.

Although establishing and maintaining the escrow fund is a very popular idea among trucking companies that work with independent contractor/owner-operators, this area is fraught with legal peril.

The federal written lease requirements are found in Title 49 of the Code of Federal Regulations (CFR), Part 376.12. Carriers who use independent contractor/ owner-operators should be sure to familiarize themselves with the federal written lease requirements.

One of the most litigated areas of these requirements relates to escrow funds. The federal requirements describe how a trucking company should set up and maintain its escrow funds, which is purely voluntary on the part of the carrier. However, there are many ways for a trucking company to violate, even accidentally, the strict requirements relating to escrow.

The federal written lease requirements tell carriers, in no uncertain terms, what must be clearly stated in the lease agreement - including all items which can be deducted from escrow by the carrier. The sudden appearance of "miscellaneous" or "unspecified" escrow deductions may lead to a bitter end of the independent contractor relationship - if not legal action against the carrier.

If an escrow fund is established, the lease agreement must cover the following issues (among others): 

1. The lease must specify the amount of the fund to be established with the owner-operator's money and for what specific items and repairs it is to be used.
2. Carriers must give a clear description of each escrow transaction monthly or by clearly indicating on individual settlement sheets the amount and description of any deduction or addition to the escrow fund.
3. The owner-operator may demand an accounting of escrow transactions at any time during the lease.
4. The carrier must pay interest on all escrow funds in an amount at least equal to the yield on a 91-day, 13-week U. S. Treasury bill (see note below*).
5. After termination of the lease, the carrier has 45 days (and no more) to return all escrow funds. There are no exceptions to this rule.

* Interest Rate: On the issue of the interest rate and the interest that must be reported and paid to the independent contractor/owner-operator, the written lease requirements state:

That while the escrow fund is under the control of the carrier, the carrier shall pay interest on the escrow fund on at least a quarterly basis. For purposes of calculating the balance of the escrow fund on which interest must be paid, the carrier may deduct a sum equal to the average advance made to the individual lessor during the period of time for which interest is paid. The interest rate shall be established on the date the interest period begins and shall be at least equal to the average yield or equivalent coupon issue yield on 91-day, 13-week Treasury bills as established in the weekly auction by the Department of the Treasury.

Questions about escrow or any other provision in Independent Contractor Agreements for owner-operators? Call Attorney Nancy E. Joerg of Wessels Sherman's St. Charles, Illinois, office: 630-377-1554 or email her at najoerg@wesselssherman.com.