On January 1, 2008, the Employee Classification Act (formerly House Bill 1795) becomes law in the State of Illinois. It applies to all private sector general contractors and subcontractors who perform construction work, which is broadly defined in §5 of the Act to include most types of construction. The purpose of the Act is to "address the practice of misclassifying employees as independent contractors" and it establishes serious penalties for employers that violate its requirements. The bill was backed by organized labor as well as the State government, which sees the law as a means to enhance the collection of employee taxes as well as keep certain employers from avoiding responsibility for worker’s compensation and medical insurance coverage.

Who is an "Employee" Under the Act? Section 10(a) of the Act provides that any individual performing services for a contractor is deemed to be its employee, however the contractor may classify that person, unless the individual meets the four part test set forth in Section 10(b). This includes a showing that: (1) the individual is "free from control or direction over the performance" of the work being done; (2) the service being performed by the individual is "outside the usual course of services performed by the contractor;" and (3) the individual is engaged in an "independently established trade, occupation, profession or business;" or (4) the individual is deemed a "legitimate sole proprietor or partnership" under Section 10(c). Section 10(c), in turn, details 12 factors which will determine if the individual in question is a "legitimate" sole proprietorship or partnership. Hence the sole proprietor or partnership must:

• perform the service for the contractor "free from the direction or control over the means and manner of providing the service;"

• not be subject to dissolution upon severance of the relationship with the contractor;

• have a "substantial investment of capital in the [business] beyond ordinary tools and equipment and a personal vehicle;"

• "own the capital goods and gain the profits or bear the loss" of the business;

• make its services available to the general public or business community on a continuing basis;

• include services rendered on a federal income tax schedule under the business’ name;

• perform services for the contractor under the business’ name;

• where the services require a license, obtain and pay for the license in the business’ name;

• furnish the tools and equipment necessary to provide the service;

• hire its own employees without contractor approval, pay them without reimbursement from the contractor, and report their income to the IRS;

• not be held out by the contractor to the public as its own employee; and

• have the right to perform similar services for others as it chooses.

A sole proprietor or partnership that does not meet this standard "shall be deemed an individual for the purposes of [the] Act," which thereby makes that person an "employee." (§§10(a), (e)).

Enforcement and Penalties under the Act. The Department of Labor is responsible for enforcing the Act. It can begin an investigation based on a complaint filed by "any interested party," and can subpoena documents and witnesses as a part of its investigation. (§25(a)). If the Department believes that there has been a violation of the Act, it has many enforcement options available to it. It can issue a cease and desist order, require other affirmative action by the contractor, collect wages or benefits due, and assess a "civil penalty" not to exceed $1,500 for each violation in a first audit, and up to $2,500 for a repeat violation during the next five years. These penalties are doubled in the case of a willful violation, a finding of which can also subject the contractor to a Class C misdemeanor for a first offense, and a Class 4 felony for subsequent offenses within five years. (§25(b), 40, 45). It should be noted that for each individual misclassified, and for each day the violation continues, a separate violation and therefore a separate penalty occurs. (§40). These penalties can be collected by the Department, a "person aggrieved" by a violation or by an "interested party" in a civil action. The Department may seek court enforcement through a contempt order against a contractor that violates a Department order. (§35). An aggrieved employee or "interested party" may also file a private lawsuit against a contractor and can recover unpaid wages, benefits, liquidated damages, compensatory damages and $500 for each violation of the Act, as well as costs and attorney’s fees. It is also a violation of the Act for an employer to retaliate against an individual for exercising rights under the Act. (§55). Finally, the Department can seek debarment of an offending contractor from eligibility for State contracts on the occurrence of a second violation within five years. (§42).

Getting Ready for the Act’s Enforcement The foregoing summary of the Act should convince any construction industry employer to be extremely careful before classifying a person as an "independent contractor" instead as an "employee," unless there is strict compliance with the law. If a violation of the Act is found, the amount of wages and benefits owed by the contractor may pale in comparison to the various civil and criminal "statutory penalties" that may be assessed against it by the Department of Labor. Further, the specter of contract debarment and criminal penalties further underscores the need to be wary. Also, the non-union contractor especially should be alert to the potential for a union that claims to be an "interested party" to couple litigation under the Act with an attempt to organize its employees. Given the potential usefulness of this new law to the government as well as to unions and plaintiffs’ trial lawyers, construction industry firms would be well advised to review the status of any of their independent contractors under the Act prior to January 2008.

Call the NIHBA office to purchase a copy of the Employee Classification Seminar on disk for $26.

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