By: Nancy E. Joerg, Esq.
Senior Attorney and Shareholder
Illinois has a very strict test, Section 212.1 of the Illinois Unemployment Insurance Act. This rather short but tough test defines when truck drivers are independent contractors and when they are employees for Illinois unemployment insurance purposes.
Section 212.1 decides for Illinois Department of Employment Security (IDES) purposes when an owner-operator is either an independent contractor or an employee. Section 212.1 has no relationship to IRS purposes; it is strictly for IDES unemployment insurance purposes.
When an IDES auditor decides to audit your Company, the auditor will look to Section 212.1 to decide if your owner-operators are really independent contractors or employees. Section 212.1 has six parts to it. The truck driver must pass all six parts in order to be found to be an independent contractor/owner-operator.
If the auditor finds that the truck driver is really your trucking company's employee rather than its independent contractor/owner operator, then your trucking company will unfortunately owe back unemployment insurance taxes to the IDES (at 24% per year!).
For trucking companies that have many owner-operators, when an auditor finds that the owner-operators are really employees and not independent contractors, the tax bill mounts up fast and it is not unusual to see trucking companies with very high IDES tax bills as the result of an IDES audit. Therefore, it is important for Illinois trucking companies who use independent contractor/owner-operators to make sure that the owner-operators can pass all six parts of Section 212.1 .
The most confusing part of Section 212.1 is the fourth part, Section 212.1(a)(4). This fourth part talks about the nature of the ownership of the truck. It warns Illinois trucking companies that the owner-operator must hold title to his own truck or lease the equipment (meaning lease his truck) from an unrelated third party (such as PENSKE or another truck rental company). Section 212.1 warns that if the actual Company [meaning the carrier that the independent contractor/owner-operator hauls for] owns the truck, then the owner-operator is found an employee for IDES purposes.
Obviously there are trucking companies all over Illinois who mistakenly classify their truck drivers as independent contractor/owner-operators even though those truck drivers are driving Company trucks. Those companies are at risk! If those trucking companies are audited by the IDES, there is no question that those truck drivers will be found to be employees for IDES purposes.
However, where Section 212.1 gets more difficult to understand is when:
- the independent contractor/owner-operator drives a truck upon which the carrier holds the security interest, or
- drives a truck which the owner-operator is lease-purchasing from the carrier, or
- drives a truck which is owned, controlled, or operated by or in common with the carrier (directly or indirectly), or a family member of a shareholder of the carrier, or an owner/partner in the carrier company.
If a family member of a shareholder of a carrier has a security interest or an ownership interest in a truck being driven by an independent contractor/owner-operator of the carrier, then the IDES would surely find that owner-operator to be an employee upon audit. This is a harsh reality. Sadly, many trucking companies do not find out about the harshness and strictness of Section 212.1 until they are audited, and then it is too late!
Callers sometimes ask me how a "family member of a shareholder" of a carrier is defined by Section 212.1. Section 212.1 actually answers this question by stating (in its fine print) that a family member means any parent, sibling, child, sibling of a parent, or any of the foregoing relations by marriage. So... if any of these individuals described as family members have an ownership or security interest in a truck driven by an independent contractor/owner-operator, then that driver will be reclassified to employee status upon audit.
The Regulations to Section 212.1 try to explain some of these complexities. The following is an example from the Regulations to Section 212.1(a)(4), the portion of the six-part test upon which I am focusing in this article:
Example: Adams operates a truck for XYZ Trucking Company (Adams is the alleged independent contractor/owner-operator for XYZ Trucking Company). XYZ is a corporation in which Jones is the majority shareholder. While Adams holds title to the truck, ABC Trucking Company, of which Jones is the sole proprietor, holds a lien on Adams' truck. Section 212.1 does not exempt the services Adams performs for XYZ from the Act's definition of employment (in other words, Adams is found to be an employee of the carrier, XYZ Trucking Company) since ABC is owned or controlled in common with XYZ.
If an Illinois trucking company is using independent contractor/owner-operators who do not own the truck outright but are lease-purchasing from another entity or have security interests or liens on their equipment, it would be a wise idea to have those relationships carefully evaluated by an attorney who is extremely knowledgeable in the intricacies of Section 212.1(a)(4). This is a complex legal area.
In future articles, I will go deeper into the other five parts of the six-part test of Section 212.1. It is important for all Illinois carriers who use independent contractor/owner-operators to be extremely familiar with Section 212.1 because, as I have stated above, all six parts of the six-part test must be passed with flying colors or else the owner-operators will be reclassified to employee status.
If readers have an unemployment insurance claim, audit, hearing, or any unemployment insurance questions, please contact Senior Attorney & Shareholder Nancy Joerg at 630-377-1554 or via email at firstname.lastname@example.org.