Top Five Questions Illinois Accountants Have Regarding IDES Audits

February 2016
By Nancy E. Joerg, Esq.

Because of shifting audit policies by the Illinois Department of Employment Security (IDES), I am receiving an increasing number of concerned phone calls from clients and their accountants. They ask me for clarification about the best way to handle IDES audits.

These are the top five questions and my answers regarding IDES audits of Illinois companies who use independent contractors:

QUESTION #1: How much can the IDES hit our company with if we get a fraud penalty?

ANSWER TO #1: IDES fraud penalties are a whopping 60% of the “contributions owed” as a result of the IDES audit. So, if a company has an assessment of $100,000 excluding interest, the fraud penalty would be $60,000 on top of the $100,000 owed (excluding interest) as a result of the IDES auditor deciding that the independent contractors for the years being audited are misclassified.

QUESTION #2: How much is the IDES interest rate and can that be negotiated down?

ANSWER TO #2: The IDES interest rate is a terrifying 24% per year (or 2% per month). Naturally, if an IDES auditor is auditing a year that is three years back, there is going to be more interest owed on any assessment that issues from that audit (as compared to an audit of just last year for example). Interest attached to IDES audits builds up at an alarming rate.

Unfortunately, IDES auditors do not have the authority to negotiate the interest rate.

QUESTION #3: What are these follow up audits that I keep hearing about?

ANSWER TO #3: The IDES recently started auditing companies that were previously audited by the IDES in recent years. These are called follow up audits. This is a radical departure for the IDES. Until recently, the IDES only audited companies who came up in a random selection or companies that had an independent contractor apply for unemployment insurance benefits (thereby creating what the IDES calls a “controversy”).

More and more follow up audits are being done by the IDES. This is very discouraging to companies who have just weathered an IDES audit and now find out they have go through another IDES audit.

The danger of follow up audits is that 60% fraud penalties become a real issue if the IDES auditor decides the company intentionally continued to classify workers as independent contractors when it was clear from the prior audit that the workers should be classified as employees.

QUESTION #4: Is it worth protesting an IDES audit?

ANSWER TO #4: In my opinion, it is always worthwhile to protest. By timely protesting the Determination & Assessment (tax bill), the company has the opportunity for a Hearing before an Administrative Law Judge. The Administrative Law Judge is an employee of the IDES, but the Administrative Law Judge is charged with the legal responsibility of fairly evaluating the issues involved in the audit and making an independent decision. It is not unusual for the Administrative Law Judge to exercise this independence and make a decision contrary to the decision of the IDES auditor and in favor of the company.

QUESTION #5: What are Objections?

ANSWER TO #5: If the company disagrees with the Decision of the Administrative Law Judge, a letter (called Objections) can be written by the company to object to the Decision. Objections do not have to be long and complex; they are not legal briefs. Objections are simply the written reasons why the company feels the Administrative Law Judge is in error in his/her Decision. The Objections process does not require a new hearing. It is simply a letter in protest of the Administrative Law Judge’s Decision.

 Questions? Consultations on Independent Contractor Status? Call Attorney Nancy E. Joerg of Wessels Sherman’s St. Charles, Illinois office: (630) 377-1554 or email her at najoerg@wesselssherman.com.

U.S. DOL Urges State Departments of Unemployment Insurance to Clamp Down on Worker Misclassification

Over $39 million in federal grants was awarded by the U.S. Department of Labor to 45 states and territories to help reduce the misclassification of employees as independent contractors and enhance unemployment insurance programs. With emotion and fanfare, U.S. Secretary of Labor Thomas Perez on September 22, 2015 explained:

"For more than 80 years, the unemployment insurance system has been a crucial lifeline for millions of working people who lost their job through no fault of their own. These (federal) grants will help states use every tool at their disposal to ensure payments are available to those who are eligible, and take important steps to reduce and recover improper payments.”

A concrete example of an important step is an increase in unemployment insurance audits with resulting assessments for independent contractor misclassification!

This is the second year that the U.S. DOL awarded federal grants to financially support the ability of state unemployment insurance tax programs to identify instances where employers allegedly misclassify employees as independent contractors or fail to report the wages paid to employee workers.

The U.S. Department of Labor’s website proudly announces:

“The Wage and Hour Division is working with the IRS and many states to combat employee misclassification and to ensure that workers get the wages, benefits, and protections to which they are entitled. We have entered into partnerships with 27 states to work together on this issue in a variety of ways – through, for example, information sharing and coordinated enforcement – to ensure that we are all using our resources most strategically, effectively and efficiently to address this significant (misclassification) problem.”

The U.S. DOL has been front and center lately as a champion of employees’ rights and a mortal foe of worker misclassification. It is therefore an increasingly hostile climate for companies using independent contractors.

Questions? Consultations on Independent Contractor Status? Call Attorney Nancy E. Joerg of Wessels Sherman’s St. Charles, Illinois office: (630) 377-1554 or email her at najoerg@wesselssherman.com.

Written Notice Required to Document Change in Pay!

November, 2015
By Nancy E. Joerg, Esq.

Another legal requirement for Illinois employers to follow! The Illinois Wage Payment and Collection Act now requires Illinois employers to provide a written notice to the employee of his/her rate of pay when the employee begins to work for an employer.

Additionally, if the employer changes the rate of pay at some point, a new written notice must be given to the employee. This Illinois law became effective August 22, 2014.

Below is an excerpt from Section 300.630 Records and Notice Requirements of the Illinois Wage Payment and Collection Act which states the following with regard to this requirement:

• An employer is required to notify an employee in writing, at the time of hiring, of the rate of pay. An employee commencing work shall reflect mutual assent to the rate of pay.
• An employer shall not change an agreement regarding the payment of wages and compensation without first notifying the employee prior to the effective date of the change. 
• The employer shall place the arrangement in writing at the time of the change and present the change to the employee unless impossible to do so.

Because of extraordinary circumstances, the immediate placement in writing may not be able to be accomplished, but this inability to do so must be immediately rectified.

An employer cannot rely upon an employee's continued employment as affirmation that the employee consented to an adverse modification of the employee's rate of compensation when the employee was not notified in writing of the modification prior to its effective date.

However, when the employee continues to work after being notified of a change in writing, the employee shall be presumed to have assented to the change, absent evidence to the contrary. An employer may not retroactively adversely affect the wages earned by an employee.

IMPORTANT TIP: Have the employee sign and date a copy of the written notification of salary change, and keep the signed and dated copy in the employee’s personnel file.

Questions?: Contact Nancy Joerg at Wessels Sherman's St. Charles, Illinois office: (630) 377-1554 or email her at najoerg@wesselssherman.com.

Illinois Accountants Need to React to Stern Warnings from the IDES Regarding Future Fraud Penalties for Independent Contractor Misclassification

December, 2015

Illinois accountants should be acutely aware that one of the newest audit strategies of the increasingly aggressive Illinois Department of Employment Security (IDES) is to give Illinois companies (who are currently being audited) stern warnings of hefty fraud penalties that these companies may face in the future!

HEFTY FRAUD PENALTIES: The standard routine that IDES auditors follow is to unleash the topic of future 60% fraud penalties at the “exit interview.” 

The exit interview is the final communication that the IDES auditor has with the company being audited. The IDES auditor solemnly informs  the company (or its representative) that if the company persists in wrongly classifying these workers as independent contractors (because the company now presumably knows, due to the current IDES audit, what it must change in terms of classifying workers as independent contractors ), then the company faces a bleak future of possible massive fraud penalties (and possible personal liability) for its alleged INTENTIONAL WRONGDOING!

AGGRESSIVE FOLLOW-UP AUDITS: To make matters even more dangerous, IDES audit supervisors have very recently started assigning FOLLOW-UP AUDITS in great numbers! Hitting previously audited companies with follow-up audits is a brand new and worrying audit strategy by the IDES!

So, if you have a client who has been audited before by the IDES (and whose independent contractors were reclassified to employee status by the IDES auditor!), that client may well be selected now for a FOLLOW-UP AUDIT!

Illinois companies who face a FOLLOW-UP AUDIT should brace themselves for Determination and Assessments (audit tax bills) with 24% interest – and then ANOTHER 60% fraud penalty on top of that – if they are found to have intentionally MISCLASSIFIED their independent contractors.  

Explain to your clients that 60% fraud penalties are the devastating weapon that IDES auditors will unleash at these FOLLOW-UP AUDITS.

In view of the combination of 1) potential fraud penalties of 60% and 2) follow-up IDES audits of Illinois companies who have had prior misclassification difficulties with IDES auditors and hearing officers, it is very important to restructure and make strategic changes to the Independent Contractor relationship. 

Please contact me so that we can evaluate your clients’ current independent contractor usage and risks and also discuss ideas for damage control in the event the IDES contacts your clients for follow up audits.

My office number is 630-377-1554. My cell number is 630-440-1945. My email address is najoerg@wesselssherman.com. I look forward to hearing from you sometime soon.

FREE COPY OF REGULATIONS PERTAINING TO SECTION 1402 FRAUD PENALTY: Also, if any readers of this article want a copy of the Illinois Unemployment Insurance Act as it relates to fraud penalties (Section 1402) or wishes a free copy of the Regulations pertaining to the fraud penalty law, please contact my legal assistant Tammy Nelson (tanelson@wesselssherman.com or 630-377-1554). I will continue to keep accountants updated as more becomes known about the new and developing situation concerning fraud penalties and IDES audits in general. 

Now is the time to act to protect Illinois clients who use independent contractors. 

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.