January 03, 2008

Contractors Hiring Individuals as Subcontractors May Find that New Illinois Statute Would Classify the Individuals as Employees

January 03, 2008

The Employee Classification Act became effective January 1, 2008.  The stated purpose of the Act “is intended to address the practice of mis-classifying employees as independent contractors.”  As a result, a contractor who engages an individual or partnership under a subcontract may find that said contractor may be deemed to be an employee of the contractor.

Under the definition of contractor, the statute includes any general contractor or subcontractor “permitted by law to do business within the state of Illinois who engages in construction as defined in this Act.”  “Construction” is defined very extensively and includes almost any type of improvement involving real estate whether under, upon or above any real estate.  The definition, as used in this Act, includes the following:

…any structure, project, development, real property or improvement, or to do any part thereof, whether or not the performance of the work herein described involves the addition to, or fabrication into, any structure, project, development, real property or improvement herein described of any material or article of merchandise.  Construction shall also include moving construction related materials on the job site to or from the job site.

The language of the statute deems the individual to be an employee unless it passes the three-part test.  The individual is deemed to be an employee of the contractor unless it can be shown that 1) the individual will be free from control in the performance of service for the contractor; 2) the service 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.

Even if the individual has passed the three-part test, it will be deemed to be an employee unless it meets all of the requirements of the twelve-part test.

  1. The individual must have direction and control over the means of providing the service;
  2. The agreement shall not be subject to cancellation upon severance of the relationship between the two;
  3. The individual’s interest must involve a substantial investment of capital beyond ordinary tools and equipment;
  4. The individual must be subject to the gains or losses;
  5. The individual’s services must be available to the general public;
  6. The individual must use a Federal Income Tax schedule to show the business as independent;
  7. The services must be performed under the individual’s name;
  8. The individual must pay for the license or permit in the individual’s own name;
  9. The individual must furnish the tools and equipment to perform the service;
  10. The individual must hire his own employees and pay them without reimbursement from the contractor and must also report the employee’s income to the IRS;
  11. The individual must not be shown as an employee of the contractor; and
  12. The individual has the right to perform similar service for others.

The contractor must post a notice in a conspicuous place on each site where the individual, who performs services, is not classified as an employee.  The notice requires that it be posted in “English, Spanish and Polish.”  The mere failure of the contractor to designate an individual as an employee when the individual does not satisfy the prior requirements shall constitute a violation of this Act.


The enforcement of this Act carries significant penalties.  The Department of Labor is authorized to inspect all documents to determine whether the individual is an employee and may compel, by subpoena, the attendance and testimony of witnesses and the production of all records.  The Department is further permitted to take any affirmative action to collect wages or compensation denied or lost to the individual improperly classified and to assess civil penalties.

With reference to penalties, any entity that violates any provisions of this Act shall be subject to a civil penalty up to $1,500 for each violation found in the first audit and a civil penalty of up to $2,500 for each repeat violation within a five-year period.  The amount of the penalty may be recovered in a civil action filed by the Director of Laboror a person aggrieved by a violation of this Act.  The interested party may be awarded 10% of the amount recovered.  In view of the numerous “interested parties,” this will be a new significant class of litigants.

For a second violation within five years, the individual shall not be awarded any state contract until four years have elapsed from the date of the last violation.

Further penalties are imposed for any other possible violation of this Act.  Any entity or employer that willfully violates the Act commits a Class C misdemeanor and with the second or subsequent violation within a five-year period commits a Class 4 felony.  Should the employer or entity retaliate in any way against any person for exercising rights under this Act, such retaliation shall subject the employer or entity to civil penalties, or a private cause of action, or both.  If that person makes a complaint to some organization or agency, institutes proceedings under this Act or testifies in any investigation, any retaliation by the employer or entity would constitute a further violation of this Act.

Finally, the person aggrieved by a violation of this Act may file suit in the circuit court and would be entitled to collect the financial loss due to the violation, compensatory damages up to $500 for each violation, as well as attorney’s fees and costs.

However, the legislature was thoughtful enough to exclude from the Act the state, its officers, agencies or political subdivisions, as well as the federal government.

Editor’s Note:

This legislation was the product of the unions in the state of Illinois.  Unions have failed in their attempts to organize the employees in this state but have found that the cooperation of our Illinois legislators is not as difficult. Can the average home owner be considered a contractor?  As stated above, the definition of a contractor is an individual “permitted by law to do business within the state of Illinois who engages in construction as defined by this Act.”  If so, is that definition broad enough to include the homeowner?

A question remains as to whether the classification of an “employee” under this Act will extend to other areas of liability.  Will that “employee” under the Employee Classification Act extend to the definition of employee under the Workers’ Compensation Act?  The Employee Classification Act does include a provision that the Department of Labor shall share information with the Industrial Commission.

Underwriters of contractor’s liability and workers’ compensation insurance policies should be aware that this new statute might increase the number of tradesmen who would be classified as employees?  Should the contractor insist on a “hold harmless” agreement with the individual if this Act results in the subcontractor to be deemed an employee?  The legislative minutes reveal that the bill’s sponsors were speaking on behalf of unions and the opponents on behalf of business.  The votes documented the partisan nature of the legislation with the House approval being 64-51 and the Senate 38-19.

Frank J. Wiedner, Editor Wiedner & McAuliffe, Ltd One North Franklin, #1900 Chicago, IL 60606 (312) 855-1105