New Illinois Law Provides Penalties for Misclassifying Employees as Independent Contractors

On August 6, 2007, Illinois Governor Rod Blagojevich signed into law H.B. 1795, the Employee Classification Act.  Under the new law, construction workers are automatically deemed to be employees of the contractor unless the worker meets the specific exceptions set forth in the Act.  As Governor Blagojevich explained, the purpose of the new law is “to increase protections for workers” by ensuring they are protected by basic employment and labor laws and “to help law-abiding contractors, who are being underbid by contractors who misclassify their workers [as independent contractors].” 

The Act’s exceptions fall into two basic categories: (1) those that satisfy the Act’s independent contractor test; and (2) “legitimate” sole proprietors or partnerships.  To meet the independent contractor test under the new law, the individual must be: (1) free from control or direction over the performance of the contract; (2) the service performed by the individual must be outside the usual course of business of the contractor; and (3) in an independently established trade, occupation, profession or business.  All three criteria must be satisfied to meet this exception.  The law does not appear to permit a balancing of these criteria to determine independent contractor status, and does not give controlling weight to any single criterion, such as the “right to control,” as is more typically the case in common law cases addressing this question.

The sole proprietor/partnership exception contains a detailed 12-factor test analyzing various aspects of the relationship between the individual performing services and the construction contractor.  All 12 criteria must be satisfied to meet this exception.  Once again, there appears to be no “balancing” of factors and no “controlling factor” under this exception.

The provisions of this Act cannot be waived, and, indeed, the Act criminalizes any attempt by an employer to induce an employee to waive his or her rights under the Act.  There are “no retaliation” provisions and notice posting requirements in the Act, as well.

In passing this Act, Illinois follows several other states (e.g., Massachusetts, New Mexico and Oregon) that have passed similar statutes.  The Illinois statute, however, differs from the statutes passed in the above-mentioned states in that it gives private parties the right to file suit in state court.  Notably, while the Act authorizes the Illinois Department of Labor to enforce the Act, it also broadly gives “any interested party” the right to file a private suit in circuit court without first going to the Department of Labor.  In a private suit, the “interested party” would have the opportunity to seek back wages, back benefits, compensatory or other damages due to the violation, liquidated damages, compensation for unlawful retaliation and attorneys’ fees.

The questions raised by and ramifications of this wide-sweeping legislation are not yet all apparent.  Just a few examples include:

• Does the independent contractor exception require incorporation of the subcontractor?  It appears so, as otherwise it would be the sole proprietor/partnership 12-factor test that would apply.  And while insisting on proof of incorporation may be the safest course for contractors to take when hiring subcontractors, the impact of such a change in operations will profoundly affect “owner-operators” and other sole proprietors who have long done work in the construction arena.
• What does this law mean when it requires that a subcontractor, in order to qualify as an independent contractor, provide a service that is “outside the usual course of business of the contractor” by whom the subcontractor is employed?  For example, if a contractor has its own fleet of trucks but also subcontracts “overflow” trucking work to other trucking companies, will that scenario meet this criterion?
• How does a sole proprietorship demonstrate that it has “a substantial investment of capital…beyond ordinary tools and equipment and a personal vehicle” (factor three of the 12-factor test)?  What are considered “ordinary tools and equipment” in this context?

None of these questions are addressed by the statute.  The Illinois Department of Labor has the authority to adopt reasonable rules to implement and administer the Act, but whether and when that will occur is unknown.

At a minimum, the new law means that construction contractors need to assess the individuals and other entities that they have been classifying as independent contractors to ensure they meet one of the Act’s two enumerated exceptions.  In addition, given the broad language of the Act, employers should be aware that the class of potential plaintiffs may not be limited solely to individual workers misclassified as independent contractors, but could involve any party that can demonstrate damages arising out of employee misclassification (such as another construction contractor who is underbid by a violating contractor, or labor unions).  Indeed, Building Trade Unions lobbied heavily in favor of this law and it is expected that they will take the lead in filing claims and, potentially, class action lawsuits under this new law.

The new law goes into effect January 1, 2008.

Additional Information

If you would like advice on your company’s current independent contractor classification procedures, please contact your Illinois Ogletree Deakins counsel at 312-558-1220 or the Client Services Department at 866-287-2576 or via e-mail at clientservices@ogletreedeakins.com.

Note: This article was published in the August 16, 2007 issue of the Construction eAuthority.