New Illinois Law Provides Penalties for Misclassifying Construction Workers as Independent Contractors

Another significant new law that will take effect on January 1, 2008 is the Illinois Employee Classification Act. Under this new law, a construction worker is automatically considered to be an employee of the contractor, rather than an independent contractor, unless the contractor can prove that the construction worker meets the specific exceptions set forth in the act. The stated purpose of the new law is to increase protections for such workers by ensuring they are not misclassified as independent contractors.

The act covers all individuals engaged in "constructing, altering, reconstructing, repairing, rehabilitating, refinishing, refurbishing, remodeling, remediating, renovating, custom fabricating, maintenance, landscaping, improving, wrecking, painting, decorating, demolishing, and adding to or subtracting from any building, structure, highway, roadway, street, bridge, alley, sewer, ditch, sewage disposal plant, water works, parking facility, railroad, excavation or other structure, project, development, real property or improvement, or to any part thereof...." The term “construction" is also defined by the act to include moving construction-related materials to or from the job site, thereby overriding any existing presumption that independent owner-operators transporting equipment and materials to a job site are not employees.

To prove that an individual performing such work is not an employee, a contractor must satisfy either (1) a three-part independent contractor test set forth in the statute or (2) a 12-factor test showing that anyone performing the service is a "legitimate" sole proprietor or partnership.

The three criteria that must be met to satisfy the independent contractor test under the new law are: (1) the individual must be 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) the individual must be involved in an independently established trade, occupation, profession or business. The statute does not appear to permit a balancing of these criteria to determine independent contractor status as is more typically the case under the common law standard. Thus, for example, even if there is no "right to control" the performance of the work, the individual may still be considered an employee if the service he or she performs is not outside the usual course of business of the contractor.

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. To meet this exception, all 12 of these criteria must be satisfied, demonstrating that the independent contractor:

1. Is free from direction or control over the means and manner of providing the service
2. Is not subject to cancellation or destruction upon severance of the relationship with the contractor
3. Has substantial investment beyond ordinary tools and equipment and a personal vehicle
4. Owns the capital goods, gains the profits and bears the losses
5. Makes its services available to the general public on a continuing basis
6. Includes services rendered on a federal income tax schedule as an independent business or profession
7. Performs services under its own business name
8. Obtains and pays for the license or permit in its business name
9. Furnishes its own tools and equipment
10. If necessary, hires its own employees, pays the employees without reimbursement and reports the employees' income to the Internal Revenue Service
11. Is not represented as an employee of the contractor to customers
12. Has the right to perform similar services for others on whatever basis and whenever it chooses

The act stipulates that its provisions cannot be contractually waived, and any attempt to induce an individual to waive his or her rights under the act would be considered a criminal violation. Furthermore, contractors may not retaliate against individuals who assert their rights under the act and must post appropriate notices.

The act authorizes the Illinois Department of Labor to enforce its provisions and to adopt reasonable rules to implement and administer the act. It also calls for government-initiated audits and enforcement actions, and establishes substantial penalties for violations. Additionally, the act gives an "interested party or person aggrieved by a violation" the right to file a private suit in circuit court without having to first exhaust his or her remedies with the Department of Labor. In such a private suit, the plaintiff would have the opportunity to seek back wages and benefits, plus an equal amount in liquidated damages; compensatory damages in an amount of up to $500 per person per day of violation; and attorneys' fees. Presumably, the term "interested party" might also include another construction contractor who is underbid by a violating contractor, or labor unions that can demonstrate damages.

The ramifications of this wide-sweeping legislation are not yet fully apparent. At a minimum, the new law compels construction contractors to assess the individuals and other entities that they have been classifying as independent contractors to ensure that they measure up to one of the act's two tests. For any individuals who do not meet one of the exceptions, contractors must reclassify them as employees, meaning they must make payroll deductions for taxes, provide coverage for workers' compensation and unemployment compensation benefits, contribute to health and welfare and retirement benefits plans where applicable, and pay time and one-half for overtime worked beyond 40 hours in a workweek.