Key Issues That Illinois Accountants Should Be Aware Of When Handling IDES Audits

Illinois Department of Employment Security (IDES) audits have changed radically in recent years. Illinois accountants should be aware of the following major changes that have occurred especially with regard to Illinois companies that use independent contractors.

1. The IDES is emphasizing that certain business owners may be personally liable for any assessments that may occur as a result of an IDES audit.
2. IDES auditors lecture the companies they audit that the IDES will not hesitate to assess a 60% fraud charge onto a company that intentionally and willfully misclassifies independent contractors.In the past, the majority of IDES audits have been triggered by misclassified independent contractors who filed for unemployment insurance benefits upon being separated from the company. Random audits were also a big reason for IDES audits. Most recently, IDES audits are triggered because the company has been previously audited by the IDES. These kinds of audits are called FOLLOW-UP AUDITS. I am finding that more and more clients are being hit with these follow-up audits.
3. Illinois companies that are hit with follow-up audits should be particularly sensitive to the fact that they may also be hit with a 60% fraud assessment. If a company was previously audited by the IDES and the company ignored the deficiencies that were found as a result of that prior IDES audit, the IDES can then prove fraud.
4. Accountants who are assisting Illinois trucking companies who use independent contractor owner-operators need to be well versed in the special law and regulations that apply to the trucking industry.

Contact Attorney Nancy E. Joerg (Managing Shareholder of the St. Charles Illinois office of Wessels Sherman) who enjoys a nationwide reputation in working with companies who use Independent Contractors of all types.  Nancy Joerg can be reached at 630-377-1554 or email her at najoerg@wesselssherman.com

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.