By: Nancy E. Joerg, Esq.
The Illinois Employee Classification Act, which became effective January 1, 2008, brings a new independent contractor crisis with it.
WHO IS COVERED?: 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.
PENALTIES AND CRIMINAL CHARGES: If the construction related company who uses independent contractors is found in violation of the Employee Classification Act, the 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.
The Rules for the Illinois Employee Classification Act have been finalized. (The Illinois General Assembly permanently adopted the Rules on July 31, 2008). This article will discuss three key points that have been addressed in the finalized Rules:
- What constitutes a bona fide corporation?
- What records must be kept?
- What notice must be posted?
BONA FIDE CORPORATIONS
In the "Definitions" section of the Rules for the Illinois Employee Classification Act, the definition of an "individual performing services" (i.e., alleged independent contractor) does not include a bona fide corporation. This seems to strongly suggest that bona fide corporations would not be considered potential employees under the Illinois Employee Classification Act. This is big news and in fact begins to answer the most common question people have been posing to me ever since this new law came into existence – whether or not corporations would be excluded from coverage under this new law. Of course, the question remains, "What is a bona fide corporation?"
The Rules state that in determining whether a "corporation" is bona fide, the IDOL may consider, among other factors, whether:
1) the corporation is capitalized;
2) the corporation has issued corporate stock;
3) the corporation maintains a corporate bank account;
4) there is an intermingling of corporate and personal accounts or funds;
5) the corporation holds itself out as a corporation;
6) the corporation maintains corporate books and records, including corporate meeting minutes, and files corporate tax returns that are current and complete; AND
7) Articles of Incorporation have been filed and the corporation is in good standing, in the case of Illinois corporations, with the Illinois Secretary of State or, in the case of foreign corporations, as directed by the laws of that jurisdiction. [Note: This is just one factor of the test.]
In determining whether a limited liability company (LLC) is bona fide for purposes of the Act, the Department shall consider, among other factors, whether:
1) the LLC has assets;
2) the LLC maintains a company bank account;
3) there is an intermingling of company and personal accounts or funds;
4) the LLC holds itself out as an LLC;
5) the LLC makes necessary tax filings that are current and complete; AND
6) Articles of Organization have been filed and the LLC is in good standing, in the case of Illinois LLCs with the Illinois Secretary of State or, in the case of foreign LLCs, as directed by the laws of that jurisdiction.
At this point in time, we do not know how these factors will be evaluated by the IDOL.
RECORD KEEPING REQUIREMENTS
There are strict record keeping requirements in the Rules to the Illinois Employee Classification Act. You must keep the documents specified in the Rules, on each independent contractor, for a period of THREE years. If you violate the record keeping requirements, you violate the Employee Classification Act!
Records that must be maintained for each independent contractor include, but are not limited to:
1) their names, addresses, phone numbers, Social Security numbers, Individual Tax Identification Numbers and Federal Employer Identification Numbers;
2) the type of work performed and the total number of days and hours worked;
3) the method, frequency and basis on which wages were paid or payments were made;
4) all invoices, billing statements or other payment records, including the dates of payments, and any miscellaneous income paid or deductions made;
5) copies of all contracts, agreements, applications and policy or employment manuals; AND
6) any federal and State tax documents.
POSTING REQUIREMENTS
The Illinois Employee Classification Act requires you to post the IDOL's Notice about the Illinois Employee Classification Act (in English, Spanish, and Polish) in a conspicuous place on each job site where the independent contractors perform services and in each of your offices. Where it is not practicable to post a notice on the job site, you must give a copy of the Notice to each independent contractor.
TIP: Give each of your independent contractors a copy of the Notice for them to keep, and have them sign and date another copy for you to keep in each independent contractor's file to prove that the independent contractor received the Notice. Do this on a yearly basis.
REVIEW YOUR INDEPENDENT CONTRACTOR RELATIONSHIPS
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.
