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.

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.