Employers in Illinois are required to cover all payroll taxes, pay minimum wage and overtime, and contribute to unemployment, worker’s compensation, and medical insurance for all non-exempt employees.
These obligations only apply to a contractor’s “employees,” so contractors often illegally classify their employees as something else (most commonly “independent contractors”). They do this to shift the burden of taxes and insurance onto the worker, with the added bonus of not having to pay minimum wage or overtime. The State of Illinois estimates that $8,700,000 in taxes are lost each year due to misclassification of employees in the construction industry.
Employee Classification Act
To stop employers from misclassifying their workers, Illinois passed the Employee Classification Act (the “ECA”), which provides penalties and remedies (including substantial remedies and rewards for workers) for misclassification in the construction industry.
The ECA broadly applies to all “employees” in the construction process.
This broad definition of employees includes:
- Public and private construction
- Residential and commercial buildings
- Maintenance, renovation, and repair work
- Custom fabricating
- Painting, decorating, and remodeling work
- Moving construction-related materials to or from the job site
- Road, bridge, sewer, railroad, excavation and water works
Exemptions from the Definition of Employee
Anyone performing services for a contractor is presumed to be an “employee.” The only situations in which a contractor does not have to classify its worker as an “employee” (and thus not have to meet the tax, wage, and insurance obligations) is if:
- The worker satisfies the three-part test for an Independent Contractor
- The worker satisfies the twelve-part test for a Sole Proprietorship or Partnership, or
- The worker works via his Bona Fide Corporation or Limited Liability Company
Any person who does not meet all of the requirements of one of these categories is an “employee.” All “employees” are entitled to minimum wage and overtime, insurance coverage, and payment of certain taxes by the employer.
Contractors most frequently misclassify employees as independent contractors. It is important for any worker classified as an independent contractor to check to make sure all three of the following requirements are met:
- he is free from direction or control
- the service performed is outside the usual course of services provided by the contractor, and
- the individual is engaged in an independently established trade, occupation, profession, or business
Legitimate Sole Proprietorship or Partnership
If a worker meets all twelve of the following Sole Proprietorship or Partnership requirements, he is not an “employee”:
- the worker is performing the service free from the direction or control over the means and manner of providing the service, subject only to the right of the contractor for whom the service is provided to specify the desired result
- the worker is not subject to cancellation or destruction upon severance of the relationship with the contractor
- the worker has a substantial investment of capital in the sole proprietorship or partnership beyond ordinary tools and equipment and a personal vehicle
- the worker owns the capital goods and gains the profits and bears the losses of the sole proprietorship or partnership
- the worker makes his services available to the general public or the business community on a continuing basis
- the worker includes services rendered on a Federal Income Tax Schedule as an independent business or profession
- the worker performs services for the contractor under the sole proprietorship’s or partnership’s name
- the worker obtains and pays for any required license or permit in the name of the sole proprietorship or partnership
- the worker furnishes the tools and equipment necessary to provide the service
- the worker hires its own employees without contractor approval, pays the employees without reimbursement from the contractor and reports the employees’ income to the Internal Revenue Service
- the contractor does not represent the worker as an employee of the contractor to its customers, and
- the worker has the right to perform similar services for others on whatever basis and whenever it chooses
Bona Fide Corporation
If a worker has formed a Bona Fide Corporation, he is not an “employee.” Generally, a corporation:
- is capitalized
- has issued corporate stock
- maintains a corporate bank account
- holds itself out as a corporation
- maintains current and complete corporate books and records, including corporate meeting minutes
- has filed Articles of Incorporation
The penalty for the first time an employer misclassifies its employees is $1,500. The penalty is $2,500 for each subsequent violation. Each day that each employee is misclassified is a separate violation. The penalty is doubled if the violations are willful or if the employer obstructs the investigation. Further, a contractor with multiple violations is blacklisted from bidding for public contracts.
Employers are not allowed to discharge or in any way retaliate against a person for exercising any of his rights under the ECA, including:
- making a complaint to an employer, co-worker, organization, or agency
- causing any proceeding to be instituted under the ECA
- testifying in an investigation or proceeding under the ECA
If a contractor does not classify all of the people performing services on his behalf as “employees,” it must post a copy of the ECA’s requirements in a noticeable place at the job site or office.
A violation of any part of the ECA is a Class C misdemeanor.
Damages Recoverable by the Employee
First, a misclassified employee can recover $500 for each of the employer’s violations. Each day an employee is misclassified is a separate violation. If an employee was misclassified for a year and worked six days a week, he could recover $156,000.
Second, a misclassified employee can recover 2x any illegally withheld wages, overtime, benefits, or other compensation. If a misclassified employee made minimum wage (currently $8.25 per hour in Illinois) and worked 60 hours per week, he would only be paid $8.25 for the 20 overtime hours instead of the $12.37 per hour he should be paid (1.5 times hourly rate). Over the course of a year, this would lead to recovery of up to $8,580 solely in lost overtime.
Successful plaintiffs may also recover attorney’s fees and expenses. This means that misclassified employees may be able to shift all costs onto the employer.
Finally, the law contains a whistleblower provision allowing the person initially bringing suit to collect 10% of the amount recovered from the employer. Because the law allows for an employee to bring suit on behalf of similarly situated employees, one worker can sue a contractor on behalf of all misclassified employees. If a contractor/employer had previously misclassified its employees, and willfully misclassified 10 workers for one year having worked six days per week, the whistleblower could recover $1,560,000. [$2,500 per violation x 2 for willful misclassification x 10 misclassified workers x 6 days x 52 weeks x 10%]
A worker cannot waive any of his rights under the ECA. This means that even if the contractor and worker sign an agreement stating that the worker is not entitled to overtime pay, the ECA still requires overtime pay (unless the worker is an independent contractor, sole proprietorship/partnership, or corporation).
All claims must be brought within three years of the last work performed for the contractor. This time period is extended if the employer deterred or prevented the employee from exercising his rights under the law.