Springfield Business Journal Articles


The Illinois Employee Classification Act

Classification of workers as employees or independent contractors has been a source of problems for businesses for many years. Most governmental agencies, such as the IRS and state taxing authorities, attempt to classify workers as employees, forcing businesses to withhold taxes, pay payroll taxes, pay workers' compensation insurance, provide benefits, etc. Effective January 1, 2008, the Illinois Employee Classification Act (the "Act") forces construction companies in Illinois to treat virtually all of their workers as employees.

For most workers, the classification as employee or independent contractor is made under a facts and circumstances test. In 1987 the IRS listed twenty factors to be used in making the determination. The following factors indicate status as an employee: (1) The company determines when, where, and how the worker is to work; (2) The company provides training to the worker; (3) The worker's services are essential to the company's business operations; (4) The worker's services must be rendered personally; (5) The company hires, supervises, and pays assistants; (6) A continuing relationship between the worker and the company exists; (7) The company establishes set hours of work; (8) The worker must devote substantially full time to the company; (9) Work is performed on the company's premises; (10) The worker must perform services in the order or sequence set by company; (11) The worker must submit regular or written reports to the company; (12) The worker is paid by the hour, week, or month; (13) The company pays the worker's business and/or traveling expenses; (14) The company furnishes significant tools, materials, and other equipment; (15) A lack of investment by the worker in facilities that are used by the worker in performing services; (16) The worker cannot realize a profit or suffer a loss as a result of the worker's services; (17) The worker works only for one company; (18) The worker does not make his or her services available to the general public on a regular and consistent basis; (19) The company has the right to discharge the worker; and (20) The worker has the right to end his relationship with the company at any time he wishes without liability.

Under the new Act, every individual working in construction is deemed to be an employee unless certain tests are met. The definition of "construction" is broad enough to include every contractor and subcontractor doing business in Illinois. Under the Act, "'construction' means any constructing, altering, reconstructing, repairing, rehabilitating, refinishing, refurbishing, remodeling, remediating, renovating, custom fabricating, maintenance, landscaping, improving, wrecking, painting, decorating, demolishing, and adding to or subtracting from any building, structure, highway, roadway, street, bridge, alley, sewer, ditch, sewage disposal plant, water works, parking facility, railroad, excavation or other structure, project, development, real property or improvement, or to do any part thereof, whether or not the performance of the work herein described involves the addition to, or fabrication into, any structure, project, development, real property or improvement herein described of any material or article of merchandise. Construction shall also include moving construction related materials on the job site to or from the job site."

A worker is only an independent contractor if: (1) the individual has been and will continue to be free from control or direction over the performance of the service for the contractor, both under the individual's contract of service and in fact; (2) the service performed by the individual is outside the usual course of services performed by the contractor; and (3) the individual is engaged in an independently established trade, occupation, profession or business; or (4) the individual is deemed a legitimate sole proprietor or partnership.

A sole proprietor or partnership performing services for a contractor as a subcontractor is deemed legitimate if it is shown that: (1) the sole proprietor or partnership is performing the service free from the direction or control over the means and manner of providing the service, subject only to the right of the contractor for whom the service is provided to specify the desired result; (2) the sole proprietor or partnership is not subject to cancellation or destruction upon severance of the relationship with the contractor; (3) the sole proprietor or partnership has a substantial investment of capital in the sole proprietorship or partnership beyond ordinary tools and equipment and a personal vehicle; (4) the sole proprietor or partnership owns the capital goods and gains the profits and bears the losses of the sole proprietorship or partnership; (5) the sole proprietor or partnership makes its services available to the general public or the business community on a continuing basis; (6) the sole proprietor or partnership includes services rendered on a Federal Income Tax Schedule as an independent business or profession; (7) the sole proprietor or partnership performs services for the contractor under the sole proprietorship's or partnership's name; (8) when the services being provided require a license or permit, the sole proprietor or partnership obtains and pays for the license or permit in the sole proprietorship's or partnership's name; (9) the sole proprietor or partnership furnishes the tools and equipment necessary to provide the service; (10) if necessary, the sole proprietor or partnership hires its own employees without contractor approval, pays the employees without reimbursement from the contractor and reports the employees' income to the Internal Revenue Service; (11) the contractor does not represent the sole proprietorship or partnership as an employee of the contractor to its customers; and (12) the sole proprietor or partnership has the right to perform similar services for others on whatever basis and whenever it chooses. As you can see, some of these factors are similar to the IRS factors set forth in 1987.

The Illinois Department of Labor has issued Proposed Rules which also include corporations in the employee classification. Under the proposed rules, an "individual performing services" does not include a bona fide corporation. In determining whether a "corporation" is bona fide, the Department 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 corporate tax returns that are current and complete; or (7) Articles of Incorporation have been filed, in the case of Illinois corporations, with the Secretary of State or, in the case of foreign corporations, as directed by the laws of that jurisdiction.

Penalties for violating the Act can be severe, including collection of taxes, wages, salary, employment benefits, or other compensation denied or lost to the worker and a penalty of $1,500 per violation on a first audit. Penalties for repeat violations within five years are $2,500 per violation. The bottom line is if you are in construction, do not treat any of your workers as independent contractors unless you are absolutely sure the worker qualifies under the Act.
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