On January 1, 2014, two amendments to the Illinois Classification Act (the Act) went into effect. These amendments required additional reporting and create individual liability when the Act is violated. The first yearly report is due by January 31, 2015. With this deadline quickly approaching, let’s refresh your understanding of the increased reporting requirements and how failure to follow those requirements could affect your business.
The Illinois Employee Classification Act
The Act focuses on the classification of individuals as employees or independent contractors in the construction industry. The Act presumes that any individual performing services (whether individually, as a sole proprietor or as a partnership) is an employee unless the individual qualifies as an independent contractor under one of two alternative tests. Substantial fines are imposed for misclassification.
New Requirements
Under the amendment, Contractors are required to file a yearly report with the Illinois Department of Labor regarding the use of independent contractors. The first such report is due by January 31, 2015. No form or sample report has been provided by the Department of Labor, so every contractor required to file a report will have to prepare their own. Each report must contain the name, address and business identification number for the construction company filing the report; name, address, and federal employer identification number for each 1099 individual, sole proprietor or partnership the contractor paid during the previous year; and the amount paid to each such 1099. The amount paid should include not just payments for services, but also payments made for materials and equipment.
The second amendment affects the penalties for willful violations. While one amendment did reduce the fines by $500 for each occurrence, the fines are still $1000.00 per occurrence for the first offense, and $2,000.00 per occurrence for any additional violation within a 5 year period. Plus every day a violation occurs is considered a separate violation, so the fines can quickly add up to a substantial sum. In addition to monetary fines, any officer or agent who willfully fails to follow the Act can be charged with a Class C misdemeanor for their first offence. Any subsequent violation within 5 years of the original violation is considered a Class 4 felony, the fines are doubled, and the contractor will be barred from the right to bid on, and perform, state contracts.
The amendment also created personally liability for all violations and penalties that are assessed under the Act for any officer or agent who knowingly fails to properly report and classify independent contractors and employees.
The alternate tests provided under the Act are confusing and, as a result, provide little guidance to contractors on how to determination whether to classify a subcontractor as a 1099 or W2. While this ambiguity was concerning before, it becomes even more worrisome with the new amendment.
So how can you protect yourself and your business?
Good record keeping is key and additional diligence should be made to ensure the accuracy of the records and compliance with the Act. Ultimately, it is important to make a good faith effort to comply with the Act, as personal liability is only extended to “knowing” violations. In addition, while the Act does not require you include information about corporation subcontractors, it is suggested that detailed records should also be kept on those transactions as well in the event of a Department of Labor audit.
Though no changes were made to the Act affecting the classification process itself, proper classification can be difficult. For example, one element of the sole proprietor or partnership analysis is this issue of obtaining permits. The Act says that a sole proprietor or partnership that obtains and pays for its own licenses or is properly classified as a 1099. However this does not mean that if a contractor obtains licenses or permits for its subs, the sub is automatically deemed to be an employee. Instead the Act says that if the analysis fails under the sole proprietor or partnership analysis, the sub will be considered an “individual” and the contractor will need to comply with the classification analysis for individuals. Fortunately the “individual” analysis uses broader criteria to determine if an individual is an employee or independent contractor. So even when a general obtains a permit for a subcontractor, that subcontractor can still be properly classified as an independent contractor assuming the elements of the individual analysis are met.
The analysis under the Act can be confusing. Neither test creates a clear distinction between an employee and an independent contractor. Proper record keeping and classification is key to avoiding liability. Your corporate attorney should be able to advise you on whether there are any issues with your classifications, and guide you on what information you are required to report.
Should you have any questions about business law or any other laws that may affect your business, or would like to schedule a free initial consultation, please contact Waltz, Palmer & Dawson, LLC at (847)253-8800 or contact us online.
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