Employers in the construction industry will be significantly impacted by the Illinois Employee Classification Act, which becomes effective January 1, 2008. The Act covers all individuals and entities engaged in “constructing, altering, 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 do any part thereof.” This broad definition essentially covers all Illinois general contractors and subcontractors in the construction industry.

Aimed at addressing the industry’s perceived “practice of misclassifying employees as independent contractors,” the Act provides that any individual performing services for a contractor must be classified as an employee except under very limited circumstances. In order to properly classify a person as an independent contractor—rather than an employee—the individual must: (1) be free from control or direction by the contractor, (2) perform a service that is outside the usual course of services performed by the contractor, and (3) be engaged in an independently established trade, occupation, profession, or business. Alternatively, to be considered an independent contractor, the individual must work through a “legitimate sole proprietor or partnership” that meets 12 specific criteria listed in the Act, including, but not limited to, offering services to the public in general, hiring its own employees, performing services free of the control of the contractor, and having a “substantial investment of capital…beyond ordinary tools and equipment and a personal vehicle.”

Several provisions of the Act create significant potential liability for employers:

  • While the Act is enforced by the Illinois Department of Labor, anyone purportedly “aggrieved by a violation” may file their own suit, as an individual or class action, within three years of an alleged violation, seeking remedies including (a) unpaid wages and benefits, (b) compensatory damages of $500 per violation, (c) additional damages for any retaliation, and (d) attorney’s fees and costs. These remedies likely will lead to a significant increase in litigation against construction industry employers.
  • The Illinois Department of Labor can impose substantial civil fines of $1,500 per violation (calculated based on each day that each worker is misclassified) and $2,500 per violation if an employer violates the Act again within five years. Additionally, contractors may be subject to criminal penalties for violations of the Act.
  • Enforcement efforts will include the sharing of information about violators between the Illinois Department of Labor, the Illinois Bureau of Employment Security, the Illinois Department of Revenue and the Illinois Workers’ Compensation Commission. As a result, a negative determination regarding employee status in one agency will likely result in an investigation by other involved agencies.

We recommend that employers in and affiliated with the construction industry take action now to make sure they are classifying workers and service providers consistent with the requirements of the new Act. A detailed analysis of all persons and entities currently classified as independent contractors is prudent to minimize the potential for exposure. Additionally, given that the Illinois Department of Labor and state courts may be tempted to use the Act as guidance in deciding worker classification disputes in industries other than construction, all Illinois employers should consider now evaluating the propriety of current worker classifications.