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Illinois Companies Should Be Aware of a New Initiative by the Illinois Department of Employment Security (IDES): FRAUD PENALTIES!

September 2014

By: Nancy E. Joerg, Esq.

The Illinois Department of Employment Security (IDES) has had available (for many years) the legal ability to hit an Illinois company under IDES audit with a fraud penalty. This is nothing new.

SECTION 1402 DETAILS FRAUD PENALTY: This fraud penalty, as described in Section 1402of the Illinois Unemployment Insurance Act, can be as high as 60% of the contributions owedby the company under audit by the IDES. However, in past years, the IDES auditors have not imposed this fraud penalty against the Illinois companies they are auditing. Unfortunately, this is changing, and it is a scary situation.

Along with the newly enforced fraud penalty, there is also the uncertainty of which companies will be hit with the fraud penalty by the IDES auditor and for what reason.

In the 25 years in which I have defended clients before the IDES on all sorts of legal matters, including hundreds of IDES audits and hearings, I have never - not even once - had a client company hit with an IDES fraud penalty. Sadly, I can no longer say that.

SUPPLEMENTAL DETERMINATION & ASSESSMENT INDICATES FRAUD PENALTY: Just one week ago, one of my clients received a "Supplemental Determination and Assessment." In reviewing the "Supplemental Determination and Assessment," it clearly indicated this was a fraudpenalty (money now owed to the IDES) and added to the Determination and Assessment (money owed to the IDES as a result of the audit) the client had already received.

This "Supplemental Determination and Assessment" was very unexpected because the IDES had already audited the client for two years, and the client had already received a Notice of Determination and Assessment in the mail from the IDES. The client had already timely protested the Determination and Assessment - and has been waiting patiently for a Notice of Hearing so that it could defend itself in an IDES hearing and hopefully have the Determination and Assessment cancelled. The last thing the client (or I) was expecting to come in the mail was a "Supplemental Determination and Assessment" adding a substantial fraud penalty to the original Determination and Assessment it was already protesting.

NO INDICATION AS TO WHY COMPANY IS BEING HIT WITH FRAUD PENALTY: The Supplemental Determination and Assessment did not indicate WHY the client was being hit with a fraud penalty. There was no explanation by the IDES whatsoever on the "Supplemental Determination and Assessment." The client (and I), at this early stage, can only guess why the auditor and the auditor's supervisor decided to hit this particular client with a fraud penalty. One possible reason that this client was selected for a fraud penalty is that the client had previously, years ago, experienced another IDES audit on the issue of worker misclassification.

Once we receive the Notice of Hearing, then we can inspect the client's audit file and read over the auditor's notes and Report from the audit. Then, hopefully we will understand the auditor's rationale for the fraud penalty in this case. One can only assume that the fraud penalty is there because the auditor or the auditor's supervisor believes there was intentional wrongdoing by the client (probably concerning the issue of independent contractor status and alleged intentional misclassification).

IDES IS NOW MORE AGGRESSIVE: I am concerned that this is the beginning of a new era in IDES audits. Not only is the IDES more aggressive during this past year in terms of multi-year audits, but the IDES is now increasing the pain (for those Illinois companies audited) with the imposition of fraud penalties which, by law, can be substantial (up to 60% of the contributions owed as a result of the IDES audit).

Because of this very grave situation, Illinois companies that are audited by the IDES and still wish to continue using independent contractors (even after going through an unsuccessful audit or hearing on this issue), should consult an attorney about how to restructure and strengthen their independent contractor relationship. Independent contractor agreements should be reviewed and websites should be scrutinized by an experienced attorney. Clearly, the stakes are now much higher in using independent contractors in Illinois.

FREE COPY OF REGULATIONS PERTAINING TO SECTION 1402 FRAUD PENALTY: If any readers of this article want a copy of the Illinois Unemployment Insurance Act, Section 1402 as it pertains to fraud penalties or wishes a free copy of the Regulations pertaining to the fraud penalty law, please contact my legal assistant Tammy Nelson (630-377-1554 or tanelson@wesselssherman.com). I will continue to keep my readers updated as more becomes known about this new and developing situation concerning fraud penalties.

For assistance with IDES audits, hearings, and independent contractor agreements (or for consultations on limiting your liability in the use of independent contractors), contact Attorney Nancy E. Joerg, who enjoys a nationwide reputation in working with companies who use Independent Contractors of all types. Nancy Joerg can be reached at Wessels Sherman's St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.

Areas of Practice: Nancy Joerg represents employers in administrative actions, hearings, and audits before the Illinois Department of Human Rights, the Equal Employment Opportunity Commission, the Cook County Commission on Human Rights, the Illinois Department of Employment Security, the Illinois Department of Labor, and the U.S. Department of Labor.

She represents employers in all types of unemployment insurance (IDES) audits and hearings, independent contractor matters, discrimination charges, Employee Classification Act complaints, employee termination issues, and wage & hour issues (including exempt/non-exempt status for overtime, deductions from wages, and state and federal wage claims). Nancy Joerg effectively counsels and advises clients concerning preventive efforts such as the preparation and review of severance and release agreements, independent contractor owner-operator agreements, independent contractor-based manuals and websites, employee handbooks and personnel policies, anti-harassment training, sex harassment investigations, and the development of strategies to help ensure exemptions from overtime.

Nancy Joerg has been honored, year after year, by her peers as a "Leading Lawyer," a distinction earned by fewer than five percent of lawyers who are licensed to practice in the State of Illinois. She has also been recognized in the National Law Journal for "excellence and achievements by the legal community." She was honored as one of "Chicago's Top Attorneys of 2012."

Nancy Joerg was selected (by other lawyers in Illinois) as Top Lawyer in labor and employment law in the Western Suburbs of Chicago as featured in the March/April 2013 issue of West Suburban Living Magazine in conjunction with Leading Lawyers Network Advisory Board.

Nancy Joerg has been recognized in 2013 and 2014 in The Legal Network as a Top Lawyer in Illinois for the highest in ethical standards and professional excellence.

In June 2014, Nancy Joerg was honored by Legal Leaders as a "Top Rated Lawyer in Labor and Employment Law" based on her standing as an AV preeminent attorney.

In April 2014, Nancy Joerg was named as one of the Top Ten Women Attorneys in Kane, Kendall & DeKalb counties, as published in Law & Lawyers magazine.