Section 212.1 and Payment of Workers' Compensation Premiums

By: Nancy E. Joerg, Esq.

A trucking company client recently called to ask me if he would be violating Section 212.1 of the Illinois Unemployment Insurance Act by himself paying for workers' compensation insurance on his owner-operators. (He wouldn't be charging back the owner-operators for the workers' compensation costs.)

As Keep on Truckin' readers are aware, Section 212.1 of the Illinois Unemployment Insurance Act defines when truck owner-operators are independent contractors and not employees for Illinois Department of Employment Security (IDES) purposes.

Per Section 212(a)(5), the owner-operator must pay all operating and licensing costs in order to be an independent contractor and not an employee for IDES purposes. The costs cannot be separately reimbursed by any other individual or entity.

The treatment of workers' compensation is discussed in the IDES Regulations to Section 212.1. The IDES Regulations state:

Section 212.1(a)(5) is not satisfied unless the individual operating the truck, truck-tractor or tractor pays all costs of licensing and operating the truck, truck-tractor or tractor. Section 212.1(a)(5) is not satisfied if the costs of licensing or operating the truck, truck-tractor or tractor are separately reimbursed by an individual or entity other than the individual operating the truck, truck-tractor or tractor. Costs not directly associated with the operation or licensing of the truck, including but not limited to telephone charges, expenses related to the loading or unloading of cargo and workers' compensation premiums with respect to the operator of a truck, truck-tractor or tractor do not constitute costs of licensing or operating the truck, truck tractor or tractor.

Therefore, the fact that my trucking company client pays for workers' compensation insurance on his owner-operators is not going to be a factor considered by the IDES in deciding whether or not the owner-operators are independent contractors or employees. This should be reassuring news to many trucking companies.

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

Recent Decisions on Independent Contractor Status in Trucking as Viewed by the IDES Under Section 212.1 of the Illinois Unemployment Insurance Act

November 2011
By: Nancy E. Joerg, Esq. 

Life goes on---Carriers continue to use truck drivers as independent contractor owner-operators and the Illinois Department of Employment Security (IDES) continues to audit under Section 212.1 (Truck Owner-Operator).

Section 212.1 of the Illinois Unemployment Insurance Act defines when truck owner-operators are independent contractors [and not employees for Illinois Department of Employment Security (IDES) purposes only].

Section 212.1 is an IDES exemption from employment-in other words, any truck owner-operator who meets all the criteria for Section 212.1 will not be treated as an employee for Illinois unemployment insurance purposes (this has nothing whatsoever to do with the IRS and its view of independent contractor status for truckers and owner-operators).

In reviewing IDES Decisions from IDES Administrative Hearings over the past year, it is clear that there are certain issues that keep popping up. In this article, I will hit some of the legal issues that seem to repeatedly arise in IDES Hearings on the subject of whether truck owner-operators are exempt from employment under Section 212.1:

• JURISDICTION: Are the owner-operators at issue performing services which constitute employment in Illinois? Or, are they performing services which are in another state such as Indiana (and therefore should not even be involved with an IDES audit). Section 207 of the Illinois Unemployment Insurance Act deals with determining in which state a worker's services constitute employment. When a Carrier is audited by the IDES and there are out-of-state owner-operators, the Carrier should make the argument that those out-of-state drivers should be removed from the IDES audit.

In one of the recent IDES Decisions, the IDES looked at Section 207 and noted that although the Carrier was an Indiana corporation with a warehouse located in Indiana, the Carrier also had a warehouse located in Illinois and the individuals named in the audit performed services in Illinois. The Administrative Law Judge (ALJ) conducting the Hearing decided (unfortunately for the Carrier) that the services of the drivers named in the audit constituted Illinois employment rather than employment in another state.

• SCOPE OF SECTION 212.1: Section 212.1 is only applicable to truck owner-operators. Therefore, the services of loaders, sorters, dispatchers and others cannot be brought under the Section 212.1 exemption for purposes of an audit.
• SEPARATE BUSINESS IDENTITY: Under a recent IDES Decision, the ALJ noted that the owner-operators must maintain a separate business identity, offering or advertising their services to the public by displaying their name on their equipment or otherwise. If they don't, they will fail Section 212.1 and will not be exempt from employment under that law (i.e., they will not be considered independent contractors).
• INCORPORATED IN ANOTHER STATE: Another recent IDES Decision addressed the matter of a Carrier (which happened to be a Utah corporation) that had its owner-operators working out of a distribution center located in Illinois. The ALJ decided under Section 207 of the Illinois Unemployment Insurance Act that Illinois law (and not Utah law) should be applied and that the owner-operators at issue are under the Illinois Unemployment Insurance Act as they perform services in Illinois and one of the Carrier's bases of operations is in Illinois. Therefore, Illinois law was applied in the IDES audit at issue.
• IDES IS ALLOWED TO IGNORE THE CONTRACT BETWEEN THE CARRIER AND THE OWNER-OPERATOR: Another issue that came up in another recent IDES Hearing is whether it is constitutional for the IDES to ignore a contract between the Carrier and the owner-operator (and instead make its own independent decision as a state unemployment insurance agency as to whether the owner-operator is an independent contractor or an employee for IDES purposes). The Decision found that the IDES can constitutionally ignore the contract between the parties and make its own decision (the Illinois Supreme Court has said that the IDES has the right to make its own independent analysis of the independent contractor relationship and not be bound by the independent contractor agreement between the parties).
• LICENSING & OPERATING COSTS: Another IDES Decision found that the owner-operator at issue was an employee and not an independent contractor because the Carrier paid the Illinois tolls that the owner-operator incurred while driving for the Carrier (and also the Carrier provided the owner-operator with a subsidy in the purchase of the fuel). Because of these generous activities by the Carrier, the owner-operator was found to be an employee under Section 212.1 of the Illinois Unemployment Insurance Act.
• USING A SEPARATE CORPORATION TO LEASE TRUCKS: Under another recent IDES Hearing Decision, the Carrier had used a separate corporation to lease trucks to the drivers. The Decision found that this was too close of a relationship to satisfy Section 212.1. If a Carrier leases a tractor from a firm operated and owned by the Carrier directly or indirectly, the owner-operator will be considered an employee for purposes of Section 212.1.

As the reader can see, constitutional arguments have been put forth by the attorneys of Carriers who are under IDES audit. In those cases, so far, the constitutional arguments have not been successful in shielding the Carrier under audit from Section 212.1. Likewise, the Administrative Law Judges are strictly interpreting Section 212.1 and the owner-operators involved in those audits. The owner-operators will be found to be employees of the Carriers unless the Carriers can pass each and every part of Section 212.1. It is a strict and unforgiving test.

All Carriers should be fully aware of the various provisions of Section 212.1 so that if they are audited by the IDES, they will be in a solid position to convince the auditor that the owner-operators are not employees.

Have an experienced attorney review your independent contractor relationships, independent contractor agreements, website, manuals, training materials, etc. before any challenges to independent contractor status arise. Lower your risk in every way possible now. Do a "self audit" of all independent contractor relationships so you are fully prepared before the IDES auditor arrives on your doorstep. Restructure and strengthen independent contractor relationships where there are opportunities to do so.

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

Ownership of the Truck is Extremely Important for Independent Contractor/Owner Operators in Illinois

July 2009
By: Nancy E. Joerg, Esq.

Illinois has a very strict test, Section 212.1 of the Illinois Unemployment Insurance Act. This rather short but tough test defines when truck drivers are independent contractors and when they are employees for Illinois unemployment insurance purposes.

Section 212.1 decides for Illinois Department of Employment Security (IDES) purposes when an owner-operator is either an independent contractor or an employee. Section 212.1 has no relationship to IRS purposes; it is strictly for IDES unemployment insurance purposes.

When an IDES auditor decides to audit your Company, the auditor will look to Section 212.1 to decide if your owner-operators are really independent contractors or employees. Section 212.1 has six parts to it. The truck driver must pass all six parts in order to be found to be an independent contractor/owner-operator. 
 
If the auditor finds that the truck driver is really your trucking company's employee rather than its independent contractor/owner operator, then your trucking company will unfortunately owe back unemployment insurance taxes to the IDES (at 24% per year!).

For trucking companies that have many owner-operators, when an auditor finds that the owner-operators are really employees and not independent contractors, the tax bill mounts up fast and it is not unusual to see trucking companies with very high IDES tax bills as the result of an IDES audit. Therefore, it is important for Illinois trucking companies who use independent contractor/owner-operators to make sure that the owner-operators can pass all six parts of Section 212.1 .

The most confusing part of Section 212.1 is the fourth part, Section 212.1(a)(4). This fourth part talks about the nature of the ownership of the truck. It warns Illinois trucking companies that the owner-operator must hold title to his own truck or lease the equipment (meaning lease his truck) from an unrelated third party (such as PENSKE or another truck rental company). Section 212.1 warns that if the actual Company [meaning the carrier that the independent contractor/owner-operator hauls for] owns the truck, then the owner-operator is found an employee for IDES purposes.

Obviously there are trucking companies all over Illinois who mistakenly classify their truck drivers as independent contractor/owner-operators even though those truck drivers are driving Company trucks. Those companies are at risk! If those trucking companies are audited by the IDES, there is no question that those truck drivers will be found to be employees for IDES purposes.
However, where Section 212.1 gets more difficult to understand is when:

• the independent contractor/owner-operator drives a truck upon which the carrier holds the security interest, or
• drives a truck which the owner-operator is lease-purchasing from the carrier, or
• drives a truck which is owned, controlled, or operated by or in common with the carrier (directly or indirectly), or a family member of a shareholder of the carrier, or an owner/partner in the carrier company.

If a family member of a shareholder of a carrier has a security interest or an ownership interest in a truck being driven by an independent contractor/owner-operator of the carrier, then the IDES would surely find that owner-operator to be an employee upon audit. This is a harsh reality. Sadly, many trucking companies do not find out about the harshness and strictness of Section 212.1 until they are audited, and then it is too late!

Callers sometimes ask me how a "family member of a shareholder" of a carrier is defined by Section 212.1. Section 212.1 actually answers this question by stating (in its fine print) that a family member means any parent, sibling, child, sibling of a parent, or any of the foregoing relations by marriage. So... if any of these individuals described as family members have an ownership or security interest in a truck driven by an independent contractor/owner-operator, then that driver will be reclassified to employee status upon audit.

The Regulations to Section 212.1 try to explain some of these complexities. The following is an example from the Regulations to Section 212.1(a)(4), the portion of the six-part test upon which I am focusing in this article:

Example: Adams operates a truck for XYZ Trucking Company (Adams is the alleged independent contractor/owner-operator for XYZ Trucking Company). XYZ is a corporation in which Jones is the majority shareholder. While Adams holds title to the truck, ABC Trucking Company, of which Jones is the sole proprietor, holds a lien on Adams' truck. Section 212.1 does not exempt the services Adams performs for XYZ from the Act's definition of employment (in other words, Adams is found to be an employee of the carrier, XYZ Trucking Company) since ABC is owned or controlled in common with XYZ.

If an Illinois trucking company is using independent contractor/owner-operators who do not own the truck outright but are lease-purchasing from another entity or have security interests or liens on their equipment, it would be a wise idea to have those relationships carefully evaluated by an attorney who is extremely knowledgeable in the intricacies of Section 212.1(a)(4). This is a complex legal area.

In future articles, I will go deeper into the other five parts of the six-part test of Section 212.1. It is important for all Illinois carriers who use independent contractor/owner-operators to be extremely familiar with Section 212.1 because, as I have stated above, all six parts of the six-part test must be passed with flying colors or else the owner-operators will be reclassified to employee status.

If readers have an unemployment insurance claim, audit, hearing, or any unemployment insurance questions, please contact Senior Attorney & Shareholder Nancy Joerg at 630-377-1554 or via email at najoerg@wesselssherman.com.