Illinois has enacted the Employee Classification Act (“Act”) that will have significant impact on contractors, subcontractors, and other companies engaged in construction work and related transportation activities in Illinois. The Act takes effect on January 1, 2008. Governor Blagojevich said that when workers are misclassified as independent contractors, they are being denied basic protections to which employees would be entitled. Employers are also getting away with avoiding income taxes and other obligations like payroll and social security taxes, and workers’ compensation premiums. Governor Blagojevich added that the bill will help increase protections for workers, and will also help law-abiding contractors who are being underbid by contractors who cut their labor costs by misclassifying their workers.

Overview of the Act

The Act tightens and clarifies the definition of independent contactor and will apply to a broad segment of businesses engaged in constructionrelated activities. The Act basically classifies individuals performing services for a contractor as an employee except as provided in only two of the subsections in the Act. As a result of this inclusive definition of employee, covered employers, regardless of their size, will have to start treating individuals now being treated as independent contactors as employees. Therefore, if workers are classified as employees, the employers must make payroll deductions for taxes, provide workers’ compensation and unemployment compensation coverage, and contributing to applicable health and welfare and retirement benefit plans. Further, if the employees are classified as non-exempt employees under the Fair Labor Standards Act (“FLSA”), it will also mean complying with overtime requirements.

Scope of the Act’s Coverage

The Act will broadly cover all forms of construction-related activity, including construction, alteration, reconstruction, repair, rehabilitation, renovation, improvement, maintenance, landscaping, wrecking and other changes to real property, roads, bridges, sewers and related structures, and may even cover businesses whose primary focus is not construction. In addition, the Act will also extend the definition of construction to include the movement of equipment and material to and from the job site, including hauling equipment and material to a job site. However, the Act will not hold a contractor responsible for a subcontractor’s treatment of its employees.

Definition of Independent Contactor/Employee

The basic premise of the Act is that an individual performing services for a contractor is deemed to be an employee of the employer except as provided as follows:

(1) the individual has been and will continue to be free from control or direction over the performance of the service for the contractor, both under the individual's contract of service and in fact;

(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; or

(4) the individual is deemed a legitimate sole proprietor or partnership.

Therefore, the employer can only classify the worker as independent contractor if one of these exceptions applies. If the employer claims that the worker falls under the exception for sole proprietor or partnership, it must satisfy a twelve-prong test as set forth in the Act in order to label the worker as independent contractor.

Enforcement of the Act

The Illinois Department of Labor (“IDOL”) will enforce the new law and may audit employer records, subpoena witnesses and documents, issue cease-and-desist order, and seek other remedies, including civil penalties. If the IDOL determines that the employer has violated the Act, the IDOL will require the employer to provide the employee in question same benefits and compensation that it provides to all its other employees. The Act does not refer to the period of time for which the employer must go back to provide the employee the benefits and compensation.

Civil and Criminal Penalties

An employer who violates any of the provisions of the Act is subject to a civil penalty not to exceed $1,500 for each violation found in the first audit and $2,500 for each subsequent violation found by the IDOL within a five-year period. In addition, if the IDOL finds that the employer willfully violated the Act, the employer is subject to Class C misdemeanor for the first offense, and is subject to Class 4 felony for a second and any subsequent violation of the Act within a five-year period. Lastly, the Act provides for a private right of action.

Prohibition of Retaliation

The Act further provides for the prohibition of retaliation against any person for exercising any rights granted under the Act.