BY BRIAN WASAG Of CONTRACTORs staff
CHICAGO — Illinois contractors who intentionally misclassify their workers as independent contractors could face $2,500 fines and a ban on state construction jobs under a new law that goes into effect here Jan. 1.
Illinois Gov. Rod Blagojevich signed the Employee Classification Act in August. The law, House Bill 1795, addresses the issue of employers who categorize employees as independent contractors to avoid payroll, Social Security and unemployment insurance taxes. Illinois lawmakers say the law will prevent contractors from misclassi fying workers and leaving employees without protections such as minimum wage, overtime pay, unemployment and workers’ compensation insurance.
“The Employee Classification Act is compromise legislation that seeks to address a real problem in Illinois,” said Evan Williams, vice president of external relations for the Mechanical Contractors Association of Chicago.
A 2005 study examining five years worth of state audits found that 17.8% of the audited Illinois employers had misclassified their workers as independent contractors, Williams said. The same study estimated that Illinois construction employers did not properly pay an annual average of $23.2 million in workers compensation premiums.
“Such practice by employers shifts a greater burden to contractors who are properly classifying their employees,” Williams said.
The Illinois law presumes an individual performing work for a construction contractor is an employee unless the individual meets certain criteria known as the ABC test. To be an independent contractor, the individual must be free from control or direction over the performance of the contract. The service performed also must be outside the usual course of business of the contractor, and the individual must be in an independently established trade, occupation, profession or business. There also are exceptions to the ABC test for legitimate sole proprietors or partnerships.
“Contractors do need to pay careful attention to the details of the law,” Williams said. “H.B. 1795 does not merely codify the Internal Revenue Service guidelines on independent contractors. Rather, the law creates a two-stage process for determining how an individual performing construction services is to be classified. Contractors that hire sole proprietorships or partnerships face a difficult 12-step cumulative test in order to classify those sole proprietorships and partnerships as independent contractors.”
The Illinois Department of Labor, which will enforce the law, may assess penalties of up to $1,500 for each violation found in a first audit and up to $2,500 for each repeat violation within five years. For any second or subsequent violations within five years, the department will bar the employer from receiving any state contracts for four years.
S.J. Peters, executive director of the Plumbing and Mechanical Contractors Association of Northern Illinois, said the majority of contractors who adhere to fair work rules welcome the new legislation.
“For the employers who previously took advantage of this loophole to unfairly reduce employment costs at the expense of their own misclassified workers and to the detriment of employers who followed the intent of law, it’s time to pay up and do what’s right,” he said.
“However, follow-through and enforcement [of the law] are crucial if the goal is truly to level the playing field in construction.”
Williams said the Illinois Department of Labor is hiring five new investigators, an attorney and a complaint processor to enforce the act. The agency also is establishing an online complaint system.
“The Illinois Department of Labor is taking a serious approach to enforcing the new legislation,” he said. “Penalties under the act can add up quickly, and a broad private right of action is created in the law. Contractors will want to carefully review their employee classification procedures and work with the appropriate professionals to ensure compliance.”
Peters said contractors should allow themselves enough time to become accustomed to the new law once it takes effect next year.
“Any new law taking effect requires a period of adjustment, and even legitimate contractors may be questioned at first about the status of their workforce. Our advice is to be patient and cooperative since the ultimate aim is to make the employment process fair across the board,” he said.
The Illinois law precedes the federal Independent Contractor Proper Classification Act proposed in September by U.S. Senators Barack Obama, Richard Durbin, Edward Kennedy and Patty Murray.
The legislation aims to close the Section 530 Safe Harbor loophole in federal tax law that allows employers to classify workers as independent contractors rather than as employees.
“There is no reason why a national law should not be enacted...” Peters said. “The construction industry is already a complicated, competitive and often high-risk occupation — particularly for the contractor, who is actually footing the bill. Measures that address fair and consistent employment practices can only benefit this industry in the long run.”