Illinois Employee Classification Act, New Get Tough Policies - Business - Contractor Talk

Illinois Employee Classification Act, New Get Tough Policies

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Old 02-13-2008, 04:05 PM   #1
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Illinois Employee Classification Act, New Get Tough Policies

This is a follow up article regarding some new, "Get Tough" policies and laws that just went into effect in Illinois, as of January 1st of this year, 2008.


Businesses violating new state contractor law face harsh penalties

February 12, 2008
Business owners need to be careful in their contracting practices since the Illinois Employee Classification Act became effective Jan. 1. The act was enacted to punish businesses who contract with individuals as independent contractors instead of hiring them as employees. By hiring independent contractors, a business avoids potential unemployment claims, and the individual is responsible for paying his or her own taxes. The act creates a new and stringent test to determine whether a person can be classified as an independent contractor instead of an employee and provides for extremely harsh penalties for violations.

If a business hires a person who is not properly classified as an employee, there may be a violation of the act. It applies to "construction" workers. But don't be fooled - the word "construction" is broadly defined and basically includes any work done on any property - for example, decorating a building is considered "construction" as is digging a ditch. "Construction" also includes delivery of construction materials. Employers who hire independent contractors to perform "construction" services are required to display certain posters and failure to display the poster also violates the act. Finally, each day a violation continues constitutes a separate violation. This is a critical point because fines increase daily.

Here is a hypothetical situation that shows the potential effect. Assume a business hires a worker for $10 an hour to help renovate a kitchen for 10 days but does not classify the worker as an employee. The following penalties may apply if the state prosecutes the violation:

Click to enlarge image

1. A fine of $15,000 ($1,500 per day)
2. If the act was "willfully" violated, penalties of an additional $15,000, plus punitive damages of another $15,000

3. A Class C misdemeanor

4. The amount of actual damages from lost benefits

5. Additional damages in the amount awarded under No. 4 above

6. $5,000 as compensatory damages

7. Payment of all attorney fees and costs

This equates to more than $50,000 in damages and penalties and a criminal record for hiring someone to help renovate a kitchen. And that's only the state's portion. The act also allows the worker or an "interested party" to sue for $500 per day plus related damages.

Because the penalties are so stiff, businesses need to be extremely careful when hiring "construction" individuals as independent contractors. If a business wants to hire an individual who will be subject to the business' control, the business can either (1) make sure a 12-factor test is met and hire the individual as an independent contractor, (2) hire the individual as an employee, or (3) hire a company owned by the individual to do the work. Some of the 12 factors are not under the business' control; therefore, the second and third options are the safest. If the business does not want to hire a new employee, the third option allows the individual to do the work, and the business is not exposed to the potential liability of violating the act. If the individual creates a new company, the new company can then contract with the business. This is an added expense to the worker and makes things more complicated. All in all, this is one law you don't want to violate, even unintentionally, and it makes sense to double check the law before paying individuals for "construction" work.

Markus May represents business clients as well as clients who desire to start businesses or buy and sell businesses in the Chicagoland area and is a frequent speaker on related topics. He practices law with Johnson, Westra, Broecker, Whittaker & Newitt and can be contacted at 630-665-9600 or [email protected].
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