Is Incorporation the
Magic Answer to using
Independent Contractors Safely
under the Illinois Employee
Classification Act?!?
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
www.w-p.com
IMPORTANT NOTE: After the writing of this article in November 2007, the Proposed Rules for the Illinois Employee Classification Act were issued by the Illinois Department of Labor. The required Poster has also been issued by the Illinois Department of Labor. Please see the Update at the end of the article.
Clients want to know if the right approach to lowering their liability under the Illinois Employee Classification Act is to insist that all of their independent contractors incorporate immediately. This is the question that everyone is asking me, ever since this harsh new law was passed.
The callers are clearly hoping that their independent contractors, if they become incorporated, will not be reclassified to employee status under the severe terms of the new law, the Illinois Employee Classification Act (formerly HB 1795 – now Public Act 95-0026).
For those readers who are not up on the current news involving this extraordinarily punitive new law, the Illinois Employee Classification Act was recently passed by the Illinois legislature and signed into law by Governor Blagojevich. This law becomes effective January 1, 2008.
Under the Illinois Employee Classification Act, if the Illinois Department of Labor finds that a company is using misclassified construction-related independent contractors (including painters, drywallers, landscapers, truck drivers who haul to and from construction sites, carpenters, brick layers, masons, electricians, etc.), then the company will be hit with very severe civil and possibly criminal penalties.
BOUNTY HUNTERS: To make matters worse, under this new law, any individual who “turns in” the company who is allegedly misclassifying the independent contractors will get a 10% reward (yep, we are talking about bounty hunters here!). So, many construction-related companies are understandably nervous about how to protect themselves in the face of what is sure to be a blood bath starting January 1, 2008.
TWO DEFINITIONS OF INDEPENDENT CONTRACTOR STATUS: There are two definitions of independent contractor status in this new law. One is a three-part test; one is a 12-part test. If a company is found to have misclassified independent contractors, then the company is liable for civil and even criminal penalties. So, companies are looking for ways to lower their liability.
Many callers ask me if merely incorporating independent contractors is the magic answer to lowering liability under this new law. This is an interesting question because it raises many other questions. For example, under the 12-part test, the independent contractor is not an employee if the individual is deemed to be a legitimate sole proprietor or partnership. (To be deemed a legitimate sole proprietor or partnership, all factors of the 12-part test must be met.)
Will Illinois Department of Labor auditors enforcing this law apply the 12-part test to corporations? Logic tells us that the 12-part test was “not intended” to be applied to corporations. Was this truly the thinking of the drafters of the 12-part test, or was this simply an oversight? We simply don’t know at this point in time. There are no Regulations yet to the Illinois Employee Classification Act. Until the Regulations are issued, we don’t know how corporations will be treated under this new law. IMPORTANT NOTE: After the writing of this article in November 2007, the Proposed Rules for the Illinois Employee Classification Act were issued by the Illinois Department of Labor. The required Poster has also been issued by the Illinois Department of Labor. Please see the Update at the end of the article.
The three-part test does not reference the fact that it is intended to apply to any particular business entity. It does not reference proprietorship, partnership, or corporation. So many people speculate that the three-part test might be intended for all kinds of entities (including corporations) whereas the 12-part test is intended only to be applied to partnerships or sold proprietorships, but this interpretation, to me, makes no sense. Why would the drafters of the Illinois Employee Classification Act intend to be stricter with bona fide corporations? Why would the drafters of this new law intend to analyze more severely an independent contractor relationship between a company and a legitimate corporation? To me, this interpretation is absurd.
Therefore, I believe that both the three-part test and the 12-part test were intended to apply to sole proprietorships and partnerships but not to legitimate corporations in “good standing” – but we won’t know the true “bottom line” on this issue until the Regulations, audits, Hearing Decisions, Court Decisions, etc. start flowing.
In my opinion, it would be too risky to assume that incorporated independent contractors are automatically exempt from being classified as employees under this new law. Consequently, I am advising people who call me (and ask this question) to not assume that simply because an independent contractor is incorporated that you, the company using the independent contractor, have no potential liability under this new law. We simply do not know at this point in time. Nobody knows and will not know for sure until Regulations come out, IDOL audits begin, Courts interpret the law, and we see how all of this “shakes out.”
CORPORATIONS SHOULD BE IN GOOD STANDING: Another note of caution – if you decide that you want to restrict your independent contractor use to only those independent contractors who are incorporated, then make sure that the corporation is actually “in good standing.”
Independent contractors will often incorporate at the request of a company who uses their services, but then the independent contractor does nothing more to ensure that he or she remains a bona fide corporation in good standing. There are many steps that a corporation must take in order to see that it remains “in good standing” with the state. Simply incorporating a business is not enough – that is just the first step. There are taxes that a corporation must pay in order to remain in good standing, as well as several types of required paperwork.
Therefore, request Certificates of Good Standing from your independent contractors on a yearly basis to make sure you are dealing with truly incorporated independent contractors – who are often the very strongest type legally. You must care whether you are dealing with a bona fide corporation or a “sham corporation” (i.e., one that has been involuntarily dissolved and is no longer in good standing). IMPORTANT NOTE: After the writing of this article in November 2007, the Proposed Rules for the Illinois Employee Classification Act were issued by the Illinois Department of Labor. The required Poster has also been issued by the Illinois Department of Labor. Please see the Update at the end of the article.
CAN I INSIST THAT MY INDEPENDENT CONTRACTORS INCORPORATE?: Callers often ask “Can I insist that independent contractors incorporate? Isn’t that a form of direction and control over them?” This is yet another interesting issue.
My opinion is that it is not exercising direction and control to let independent contractors know that you cannot work with them unless they are bona fide, true, legitimate corporations (and you need proof of this status). You need to see (and keep copies of) their Articles of Incorporation, and they need to be in good standing for you to work with them. You have not made the decision that they should incorporate; they make the decision. Your decision is that you will only work with incorporated independent contractors, and it is up to them to decide whether or not they will in fact incorporate. It is up to them to decide who they will go to in order to become incorporated. It is their decision whether or not they will remain in “good standing.”
So, this is no more direction and control over the independent contractor than if you told an independent contractor roofer that you can only work with him if he is indeed a licensed roofer who has proof of insurance coverage. These are subtle issues, but I firmly believe that it is not direction and control to insist upon “credentials” from independent contractors. Rather, it is a wise business decision to insist that you will only work with incorporated independent contractors in good standing.
►UPDATE! –PROPOSED RULES AND REQUIRED POSTING HAVE BEEN ISSUED BY THE ILLINOIS DEPARTMENT OF LABOR
The Illinois Department of Labor has issued the Proposed Rules for the Illinois Employee Classification Act. The IDOL has also issued the required Poster and the Complaint Form. These documents can be obtained on the IDOL website at: http://www.state.il.us/Agency/IDOL/Laws/Law185.htm
Per the Proposed Rules, an "individual performing services" does not include a bona fide corporation. In determining whether a "corporation" is bona fide, the Illinois Department of Labor may consider, among other factors, whether:
- the "corporation" is capitalized;
- the "corporation" has issued corporate stock;
- the "corporation" maintains a corporate bank account;
- there is an intermingling of corporate and personal accounts or
funds;
- the "corporation" holds itself out as a corporation;
- the "corporation” maintains corporate books and records, including
corporate meeting minutes and corporate tax returns that are
current and complete; or
- 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.
Wessels Pautsch & Sherman P.C. WEBSITE: Please visit the Wessels Pautsch & Sherman P.C. website – www.w-p.com –for continuous updates as to all of the information we receive on the new Illinois Employee Classification Act. Tough times are surely ahead for construction-related companies who use independent contractors. In this case, knowledge is power. Keep yourself up to date on all issues involving this new law.
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 Proposed Rules, and the required Poster.
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: 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: 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.
