Important Information for Business Insurance Holders

JOHN P. COONEY & ASSOCIATES
Attorneys at Law

I have been involved with the Home Builders Association of Illinois since 1991. Over the years, HBAI requested that I review a number of bills and issue opinions on them. I was asked to review and comment on the Employee Classification Act shortly after the bill was introduced. I was, and remain, vehemently opposed to the bill, and now the Act. The following addresses some concerns, potential means to address those concerns and pitfalls awaiting the unwary.

When the Employee Classification Act, Public Act 95-0026 (“Act”), goes into law on January 1, 2008, it will have a significant affect on the way contractors conduct business in Illinois. The Act applies to all entities (individuals, corporations, limited liability companies, associations, partnerships and individuals) that perform any type of business that is involved with the construction industry. The Act presumes that all subcontractors are employees of the contractor. The contractor can dispute the effect of this presumption but only if the contractor can establish by a preponderance of the evidence that the subcontractor fits into a multi-step statutory scheme. The Act contains severe civil and criminal penalties for non-compliance and for misidentification of a subcontractor. Furthermore, the Act requires the Department of Labor, Illinois Department of Revenue, Illinois Department of Employment Security and the Illinois Industrial Commission to share information regarding the Act and determination of employee/independent contractor status. Such information can be shared with the Internal Revenue Service.

The Act applies to subcontractors that are individuals, sole proprietors and partnerships and places the burden on the contractor to prove that the subcontractors are not employees. There is a dual three part and twelve part test that will apply in making this determination. The Contractor is required to comply with all parts of the tests. The elements that the Department will look at include but are not limited to the amount of control over the subcontractor; services provided by the subcontractor; relationship (financial and economic) between the contractor and subcontractor; and the subcontractor’s capitalization, tools, equipment, licenses and third party contracts. These tests apply to individual who work for contractors and for those individuals who claim to be legitimate sole proprietorships or partnerships.
The Act does not appear to include those subcontractors who are legitimate corporations or limited liability companies. These entities are creatures of statute and must comply with the applicable enabling legislation in order to be recognized a legitimate entities. While this sounds difficult to achieve, it is not. Most attorneys can assist you in the creation and maintenance of the books and records to become a corporation/LLC.

The Act does not define the terms “individual,” “sole proprietorship” and “partnerships” to include corporations and limited liability companies; therefore, it appears the Act was not intended to apply to these types of subcontractors. However, the Act does not specifically exclude them from the Act. This means that the Courts and the Department will be left to make this interpretation/determination.
The penalties are severe and an action can be brought by an person that is deemed to be an “interested party.” The Department can perform its own investigation or an interested party can refer it to the Department or file a civil action in the circuit court. The first investigation can result in fines up to $1,500.00/per person/per day. Second investigation can result in fines up to $2,500/per person/per day. The fines can be doubled if the violations are determined to be willful and punitive damages up to the amount of the penalty assessed. In addition, an interested party who turns in a contractor who is found to be in violation can receive ten percent (10%) of the amounts recovered.

In addition to the above penalties and fines, the contractor will be liable to the new employees for all benefits not provided to them, taxes for federal withholding, social security, Medicare/Medicaid and state withholding. Failure to report and pay these taxes will subject the contractor to state and federal penalties, interest and potential criminal violations.

The Act establishes criminal penalties if the violations are found to be willful. The first willful violation of any provision of the Act may result in a charge of a Class C Misdemeanor. The second or subsequent willful violation within 5 years may result in a charge of a Class 4 Felony.

As a preemptive action a contractor should only hire those subcontractors that are legitimate corporations or limited liability companies. The business relationship should be memorialized in a written subcontract agreement. The subcontract agreement should contain representations and warranties that address the provisions set forth in the two tests in the Act. Among other terms, the subcontract agreement should contain requirements that the subcontractors maintain adequate insurance; remain in good standing with the Illinois Secretary of State, if a corporation or limited liability company; and, and that the subcontractor be required to provide adequate notice if the relationship and/or status of the subcontractor changes during the course of the subcontract.

The Department has not established the rules and regulations as to the enforcement of the Act and the Act has not been tested in the Courts. I cannot conclusively state that drafting a subcontract agreement to clearly identify and define the relationship with your subcontractors will provide you with complete protection from liability under the Act. I can tell you that you have two options available to you:

Option One – no nothing. Let the Court or Department control the determination of the relationships you have and assess penalties if you are found to be in violation.

Option Two – be proactive. Define your own business relationships. Establish in writing that your subcontractors fall outside of the parameters of the Act by contracting around the limitations and qualifications under the Act.



PITFALLS

Waivers

The Act prohibits contractors from requiring subcontractors to waive the application of the Act to them. In fact, a contractor who induces an individual to waive any provision of the Act can be charged with a Class C Misdemeanor.

Inducement not to bring an action.

The Act further provides for an extension of the statute of limitations for those contractors who force or deter the subcontractor from seeking the application of the Act. The statute of limitations will run for three years from the date the last work was performed. This appears to allow the individual to seek the application of the Act for all time prior this period of time. Therefore, this will not provide protection but will only extend the period of time an action may be brought.

Notice Provision

The Act requires all contractors that claim one or more individuals are not employees to post notice of the Act. The Notice is required to be posted at the contractor’s offices and at all job sites where the work is performed. The Department of Labor will create the Notice setting forth the requirements of the Act (in English, Spanish and Polish). The Notice will be made available for no charge.

Since the Notice provision is part of the Act, the contractor’s failure to post the Notice shall constitute a violation of the Act. The Contractor may be subject to all civil and criminal penalties of the Act for failing to post such Notice.

The Notice provisions are not yet available but the Act does not eliminate this obligation.