Illinois Employee Classification Act:
A First Look at the Emergency Rules
And Whether Corporations will be Excluded

By
Nancy E. Joerg, Esq.
Senior Attorney and Shareholder
Wessels Pautsch & Sherman P.C.
St. Charles, Illinois
(630) 377-1554

najoerg@stch.w-p.com
http://www.w-p.com/

UPDATE!: THE ILLINOIS DEPARTMENT OF LABOR'S PROPOSED RULES WERE PUBLISHED IN THE ILLINOIS REGISTER ON JANUARY 11, 2008. THE ILLINOIS DEPARTMENT OF LABOR IS ACCEPTING PUBLIC COMMENTS THROUGH MONDAY, FEBRUARY 25, 2008. FOR INSTRUCTIONS ON SUBMITTING COMMENTS, SEE THE ILLINOIS DEPARTMENT OF LABOR'S WEBSITE AT: http://www.state.il.us/Agency/IDOL/forms/pdfs/ECARulesTMP.pdf.

The Illinois Employee Classification Act, which became effective January 1, 2008, brings a new independent contractor crisis with it.

WHO IS COVERED?: Under this new law, a company such as a construction company, a trucking company which hauls gravel or road building materials, a landscape company, and a wide variety of other construction related companies, can be challenged by the Illinois Department of Labor (IDOL) and "interested parties" on how the company classifies workers as either employees or independent contractors.

PENALTIES AND CRIMINAL CHARGES: If the construction related company who uses independent contractors is found in violation of the Employee Classification Act, the company could be hit with substantial financial penalties, possible shut down of its business or job sites, and, most worrying to many, misdemeanor or felony criminal charges.

EMERGENCY RULES PUBLISHED: In late December 2007, the IDOL filed Emergency Rules for the Illinois Employee Classification Act with the Illinois Secretary of State. The Emergency Rules became effective on January 1, 2008 for 150 days (approximately five months). These Emergency Rules show how the IDOL intends to interpret and enforce the Illinois Employee Classification Act.

PROPOSED RULES TO BE PUBLISHED: In late January 2008, the Secretary of State intends to publish the IDOL's "Proposed Rules" for the Illinois Employee Classification Act (we can expect them to be identical to the Emergency Rules published at the end of December 2007 as this is what the IDOL has stated).

PUBLIC COMMENT PERIOD: Once these Proposed Rules are published in the Illinois Register, there will then be a public comment period. The public comment period will run for 45 days after the date of publication of the Proposed Rules.

The Public Comment period is important because it gives "the public" a chance to be heard on how they feel the Illinois Employee Classification Act should be fairly interpreted and enforced.

In this article, I will address what the Emergency Rules have to say about whether a corporation will be excluded from coverage under this new law.

What is a Bona Fide Corporation?

In the "Definitions" section of the new Rules, Section 240.110, the definition of an "individual performing services" (i.e., alleged independent contractor) does not include a bona fide corporation. This seems to strongly suggest that bona fide corporations would not be considered potential employees under this new law. This is big news and in fact begins to answer the most common question people have been posing to me ever since this new law came into existence - whether or not corporations would be excluded from coverage under this new law. Of course, the question remains, "What is a bona fide corporation?"

The Emergency Rules state that in determining whether a "corporation" is bona fide, the IDOL may consider, among other factors, whether:

•a) the "corporation" is capitalized;

•b) the "corporation" has issued corporate stock;

•c) the "corporation" maintains a corporate bank account;

•d) there is an intermingling of corporate and personal accounts or funds;

•e) the "corporation" holds itself out as a corporation;

•f) the "corporation" maintains corporate books and records, including corporate meeting minutes and corporate tax returns that are current and complete; or

•g) Articles of Incorporation have been filed, in the case of Illinois "corporations," with the Secretary of State or, in the case of foreign "corporations," as directed by the laws of that jurisdiction.

Notice that the definition uses the phrase, "the Department may consider, among other factors, whether:..." so we are still left with the uneasy situation where we do not know HOW an Illinois Department of Labor auditor will actually analyze whether or not a corporation is bona fide.

What are the other factors the IDOL may consider? How will the IDOL determine if a corporation is capitalized? What standard will the IDOL use? How will the IDOL determine if there is an intermingling of corporate and personal accounts or funds? How would the IDOL define "intermingling"? How will the IDOL decide if a corporation holds itself out as a corporation? What proof will the IDOL require?

Regarding Part "g)" Articles of Incorporation being filed with the Secretary of State - is the IDOL going to look to see whether a corporation is in good standing? What if the corporation has been involuntarily dissolved? The IDOL doesn't speak to that issue. So there is much that lies ahead in the battle over whether or not a corporation is bona fide. There is sure to be much litigation!

These Emergency Rules raise more questions than provide answers. It would be far simpler if the IDOL had simply stated that if a corporation is in good standing on the Secretary of State's website, it will be considered to be a bona fide corporation, but that apparently is not the avenue these Emergency Rules are taking. That being said, I still think the following principles are imperative for any construction or construction-related company that uses independent contractors in the State of Illinois:

•§ Make sure that the independent contractors are incorporated and that their corporations are in good standing on the Illinois Secretary of State's website.

•§ Check the following regarding the corporations of the independent contractors:

•Ø Are the corporations capitalized?

•Ø Have the corporations issued corporate stock?

•Ø Do the corporations maintain a corporate bank account?

•Ø Is there any intermingling of corporate and personal accounts or funds?

•Ø Do the corporations hold themselves out as corporations?

•Ø Do the corporations maintain corporate books and records including corporate meeting minutes and corporate tax returns that are current and complete?

•Ø Have Articles of Incorporation been filed with the Illinois Secretary of State?

USE INCORPORATED INDEPENDENT CONTRACTORS TO HELP LIMIT LIABILITY: I know that readers of this article are going to be jumping up and down in anger and frustration while shouting: "How in the world can we do that? We don't control and direct these independent contractors and their corporations." I quite agree with you, but this is the limited guidance we are getting now from these Emergency Rules. For those readers who wish to try to reduce their liability under the new Illinois Employee Classification Act, using incorporated independent contractors who can meet as many of these guidelines as possible in the Emergency Rules is certainly the way to go.

REVIEW YOUR INDEPENDENT CONTRACTOR RELATIONSHIPS: This is an important period of time in which construction companies and construction-related companies should be reviewing their independent contractor agreements and their independent contractor relationships and practices. Your independent contractor agreement must be carefully drafted to be consistent with this new law and any other independent contractor laws from other Agencies. It is a time to carefully assess independent contractor relationships, contracts, and practices. This is the period in Illinois history when it is particularly important for construction and construction-related companies to really sit down, take the time, and lower liability in every way possible. If you would like to consult with me, I would be happy to assist.

Again, once the proposed Rules are published, there will be a 45-day comment period. Wessels Pautsch & Sherman P.C. will be submitting comments at that time. If any readers have any suggestions for comments that they would like us to consider making, please email me at najoerg@stch.w-p.com.

FREE INFORMATION: Readers can contact Legal Assistant Tammy Nelson at 630-377-1554 or tanelson@stch.w-p.com for a free copy of the Illinois Employee Classification Act, the Emergency Rules, and the required Poster. Please also visit our website at http://www.w-p.com/.

If you have any questions about the Illinois Employee Classification Act, contact Senior Attorney and Shareholder Nancy Joerg at 630-377-1554 or najoerg@stch.w-p.com.

TELECONFERENCES: We are having a series of dynamic teleconferences presented by WP&S attorneys entitled "Illinois Employee Classification Act: How Construction and Construction-Related Companies (including trucking) Who Use Independent Contractor Can Protect Themselves!" In just one valuable hour OVER THE TELEPHONE, you and an unlimited number of your staff members will gain a deep understanding of the Illinois Employee Classification Act for only $95 which includes useful handouts. The teleconferences are scheduled for: Thursday, January 24, 2008; Tuesday, March 25, 2008; Thursday, May 29, 2008; Thursday, July 24, 2008; Thursday, September 25, 2008; and Tuesday, November 18, 2008. To register, contact us at 630-377-1554. Check the WP&S website for our entire series of teleconferences on the Illinois Employee Classification Act: http://www.w-p.com/.

NEW CD ABOUT EMPLOYEE CLASSIFICATION ACT: In this brand new CD, Wessels Pautsch & Sherman P.C. Senior Attorneys Nancy Joerg and Jeff Risch will present valuable information on how construction and construction-related companies (including trucking companies) can protect themselves from the frightening and radical new Illinois law called the "Employee Classification Act." This professionally recorded CD is $48. This is the most cost-effective and time efficient way for a company to understand the Illinois Employee Classification Act. Call Masterpiece Audio Productions at 630-587-6505 to order any of our popular CDs.

Biographical Information for Nancy E. Joerg

Nancy E. Joerg is a senior attorney and shareholder at Wessels Pautsch & Sherman P.C., a labor and employment law firm concentrating exclusively in the representation of management. Wessels Pautsch & Sherman P.C. maintains offices in St. Charles and Chicago, Illinois; Milwaukee, Wisconsin; Davenport, Iowa; Minneapolis, Minnesota; and Indianapolis, Indiana. (Ms. Joerg can be reached at the St. Charles, Illinois office at 630-377-1554.)

Ms. Joerg defends trucking, construction, and many kinds of companies in audits and hearings before various state agencies (including the Illinois Department of Employment Security and the Illinois Department of Labor) on the issue of independent contractor status and other issues of employment law. She is deeply involved in consulting with construction and trucking companies who are concerned about the Illinois Employee Classification Act. Ms. Joerg reviews and drafts IDES owner-operator leases, independent contractor agreements, and employee handbooks. Ms. Joerg also defends companies before the EEOC and the IDHR as to discrimination cases of all kinds.