Kristen E. Prinz
Provided by The Prinz Law
Are you an employee or an independent contractor? Your IDES benefits depend on the answer. And, a contract doesnâ€™t make the difference.
With the number of laid off workersâ€™ rising, the issue of whether you are an employee or an independent contractor is critical to knowing whether you will have any employment security benefits support should your job be eliminated. The Illinois Department of Employment Security (IDES) has a very narrow definition of independent contractor and, if your relationship with an employer does not meet the standard, you may be eligible for employment security benefits and the employer may face hefty penalties.
If your employer defines you as an independent contractor, you likely signed a contract and file Form 1099s for tax purposes. However, for purposes of the IDES, an employment contract is not enough to make turn an employee into an independent contractor. The specifics of your employment are the deciding factor.
Employee or Independent Contractor?
The Illinois Unemployment Insurance Act (the â€œActâ€) defines an employee as an individual performing service for an employing unit, â€œwhether or not such individual employs others in connection with the performance of such servicesâ€ with limited exceptions. 820 ILCS 405/212. An â€œemploying unitâ€ is any individual or organization that employs individuals performing services in Illinois. 820 ILCS 405/204.
The limited exception to status as an employee applies when the relationship meets three criteria:
1. The worker is free from control or direction over the performance of the services, both under contract of service and in fact; AND
2. The service is outside the usual course of business for which the service is performed or the service is performed outside of the usual place of business for the employing unit; AND
3. The worker is engaged in an independently established trade, occupation, profession, or business.
820 ILCS 405/212.
The IDES may also look to the factors established in the Illinois Employee Classification Act for certain industries, including construction, landscaping and painting. 820 ILCS 185/10.
For an employer to avoid IDES contributions and receive an exemption under Section 212, it must establish all three conditions of the independent contractor relationship. Regardless of the terms of your independent contractor agreement, the employer must demonstrate that the relationship is not that of an employee under the Act. A strict burden of proof is placed on the employer seeking the exemption. 56 Ill. Admin. Code Â§2732.200(d)
The three elements required for the exemption must each be examined to determine whether the exemption applies.
Is the Worker Free From Control or Direction?
First, we must examine whether the worker is free from control or direction. For purposes of Section 212, â€œcontrolâ€ or â€œdirectionâ€ means that an employer has the right to control and direct the worker, not only as to the work to be done, but also as to how it should be done, regardless of whether that control is exercised. 56 Ill. Admin. Code Â§2732.200(g). There is no single controlling factor, but the Illinois Administrative Code provides a number of factors to consider, including:
1) Does the employing unit issue assignments or schedule work, set quotas or time requirements;
2) Does the employing unit have the right to change the methods used by the worker in performing his services;
3) Does the employing unit require the worker to follow a routine or schedule;
4) Does the employing unit require the worker to report to a specific location and/or at regular intervals;
5) Does the employing unit require the worker to furnish a record of his time to the firm;
6) Does the employing unit require the worker to perform services a specific number of hours per day or per week;
7) Does the employing unit engage the worker on a permanent basis;
8) Does the employing unit reimburse the worker for expenses incurred;
9) Is the worker eligible for a pension, a bonus, paid vacation, or sick pay;
10) Does the employing unit carry Workers’ Compensation insurance on the worker;
11) Does the employing unit deduct Social Security tax from the worker’s compensation;
12) Does the employing unit report the worker’s income to the Internal Revenue Service on Form W-2;
13) Does the employing unit bond the worker;
14) Does the employing unit furnish the worker with materials and supplies, tools or equipment;
15) Does the employing unit furnish the worker with transportation, samples, a drawing account, business cards, an expense account, or order blanks;
16) Does the employing unit allow the worker to sell noncompetitive lines, or engage in other employment;
17) Does the employing unit restrict the worker in terms and conditions of sale, and choice of customers;
18) Does the employing unit assign or limit the territory in which the individual performs;
19) Does the employing unit set the price and credit terms for the products or service;
20) Does the employing unit reserve the right to approve orders or contracts;
21) Does the employing unit have a right to discharge;
22) Does the employing unit require attendance at meetings or training courses;
23) Does the employing unit have the right to appoint the individual’s supervisors;
24) Does the employing unit have the right to set rules and regulations;
25) Does the employing unit purport to guarantee the product or service performed;
Control may be indicated by any combination of the above factors, even though there is no defined set of factors that will always create an employee relationship.
Is the worker performing a service outside the normal course of business or is the service performed outside the place of business?
Next, is determining whether the workerâ€™s service is either (1) outside the usual course of the employing unitâ€™s business, or (2) performed outside the employing unitâ€™s place of business. These two factors are in the alternative so either one may meet the required element for exemption. 56 Ill. Admin. Code Â§2732.200(f). However, the interpretation of these factors is important. The Illinois Administrative Code (the â€œCodeâ€) explains that â€œ[s]ervices which merely render the place of business more pleasant or are not necessary to the employing unit’s business are outside the usual course of business.â€ 56 Ill. Admin. Code Â§2732.200(f)(1). To establish this factor, a business must show that the worker is performing services that are not normally provided by the business. The second factor is a bit more tricky. It is not enough that the service is performed off premise. IDES will examine the occupation and â€œfactual context in which the services are performed.â€ 56 Ill. Admin. Code Â§2732.200(f)(2). One example of this is a saleman representing his employing unitâ€™s interest in an off-premise territory is operating within the employing unitâ€™s place of business. 56 Ill. Admin. Code Â§2732.200(f)(2).
Is the worker engaged in an independently established trade, occupation or business?
Finally, we must examine whether the worker is engaged in an independently established trade, occupation or business. The Code defines this element as meaning that the individual â€œhas a proprietary interest in the business which he can sell, give away or operate without hinderance from any other party.â€ 56 Ill. Admin. Code Â§2732.200(e). The Code provides thirteen factors that might indicate that the individual meets is engaged in an independently established trade, occupation or business. None of these factors is considered a deciding factor, but rather specific circumstances of this business will be determinitive. The factors examined include:
1) The individual’s interest in the business is not subject to cancellation or destruction upon severance of the relationship;
2) The individual has an investment of capital and owns the capital goods of the business enterprise;
3) The individual gains the profits and bears the losses of the business enterprise;
4) The individual makes his services available to the general public or the business community on a continuing basis;
5) The individual includes the individual’s services on a Federal Income Tax Schedule as an independent business or profession;
6) The individual performs services for the employing unit under his own business name;
7) The individual has a shop or office of his own;
8) The employing unit does not represent the individual as an employee of the firm to its customers;
9) The individual hires his own helpers or employees, without the employing unit’s approval, pays them without reimbursement from the employing unit, and reports their income to the Internal Revenue Service;
10) The individual has an account number with the Agency and reports the wages of his workers quarterly to the Agency;
11) The individual has the right to perform similar services for others on whatever basis and whenever he chooses;
12) The individual maintains a business listing in the telephone directory or in appropriate trade journals;
13) If the services require a license, the individual has obtained and paid for the license in his own name.
Regardless of whether some or all of the factors of an independently established trade, occupation or business exist; it is the true nature of the service provided that will establish this requirement.
To meet the exemption and establish an independent contractor relationship for purposes of unemployment insurance contributions, an employing unit should keep in mind that all three elements are required and it is not enough to meet one or two. An independent contractor who believes that he/she is an employee that has been wrongly classified can trigger an IDES audit that can have significant costs to an employer. Both parties are better served by establishing an appropriately classified relationship from the beginning.
ABOUT THE AUTHOR: Kristen E. Prinz
Kristen Prinz is the founder and owner of The Prinz Law Firm, P.C., a Chicago employment law firm with a focus on discrimination and retaliation.
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