The Illinois Employee Classification Act, which became effective January 1, 2008, imposes severe penalties on employers in the construction industry who misclassify workers as independent contractors rather than employees. Virtually every general contractor and subcontractor in Illinois is subject to the Act as it applies to all construction work performed within the State of Illinois. The term “construction” is broadly defined to include all individuals and entities engaged in “constructing, altering, 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.”
The stated purpose of the Act is to remedy “the practice of misclassifying employees as independent contractors” in order to avoid tax and labor law obligations, including payroll taxes, unemployment insurance taxes, worker’s compensation premiums and overtime and related wage laws. The Act provides that any individual performing services for a contractor must be classified as an employee of that contractor unless certain conditions are met. To properly classify a worker as an independent contractor under the act, the worker must meet the following three conditions: (1) be free from control or direction by the contractor, (2) perform a service that is outside the usual course of services performed by the contractor, and (3) be engaged in an independently established trade, occupation, profession or business.
Alternatively, an individual can be classified as an independent contractor if that individual works through a “legitimate sole proprietor or partnership” that meets 12 specific requirements listed in the Act. The twelve requirements for a legitimate sole proprietor or partnership include, among others, offering services to the general public, hiring its own employees, performing services free of the control of the contractor, and having a substantial investment of capital “beyond ordinary tolls and equipment and a personal vehicle.”
Any construction contractor that has one or more individuals who are not classified as employees must post a summary of the requirements of the Act in English, Spanish and Polish in a noticeable place on each job site as well as in their offices.
The Illinois Department of Labor is responsible for enforcing the Act and has authority to conduct investigations and send investigators to visit and inspect the job site as well as obtain any documentation related to the determination of whether an individual is an employee of the contractor or an independent contractor. The Department may also subpoena all books, records and witnesses as needed to conduct its investigation. Moreover, any interested party who has a reasonable belief that a contactor has violated the Act may file a complaint with the Department.
If the Department concludes that a violation has occurred, the Department may issue cease and desist orders, recommend the commencement of a civil action, collect any wages, salary, employment benefits or other compensation denied the individual, assess civil penalties as well as take any other reasonable action to eliminate the unlawful practice or remedy the effect of the violation.
The penalties for violating the Act can be severe. Contractors that violate the Act will be subject to civil penalties up to $1,500 for each violation found in the first audit, and up to $2,500 for each repeat violation found by the Department within a five-year period. Each violation of the Act, for each person and for each day the violation continues constitutes a separate and distinct violation. For any second or subsequent violation within five years of a previous violation, the Department will place the contractor on a debarment list and no state contract will be awarded to the contractor until four years have elapsed from the date of the last violation. Contactors who are found to have willfully violated the Act or who obstruct the Department’s enforcement efforts are subject to penalties up to double the statutory amount, punitive damages and criminal penalties as specified in the Act.
Finally, if the Illinois Department of Labor determines that a contractor has violated the Act, the Department must notify the Illinois Department of Employment Security, the Illinois Department of Revenue, the Office of the State Comptroller and the Illinois Workers’ Compensation Commission, and each those agencies will check such contractor’s compliance with the respective tax and employment laws.
If your business is subject to the Act and it has classified any workers as independent contractors, it is imperative that the arrangement be reviewed by competent counsel to assure compliance with the Act. The time to cure any violations of the Act is now – before the Illinois Department of Labor institutes an investigation or an interested party files a complaint.