Employee Misclassification Act

The Employee Misclassification Act is a hot button topic at both state and federal levels. The act currently only applies to employers in the construction industry. The U.S. Department of Labor’s Wage and Hour Division launched an employee misclassification initiative several years ago and has taken steps to increase enforcement, including an information-sharing agreement with the IRS to ensure violators pay employment-related taxes

Law abiding employers face a competitive disadvantage when they compete for business or bid for jobs against employers who misclassify. Misclassifying employers have artificially low costs because they have not covered the cost of unemployment insurance contributions and workers’ compensation for their employees. Law abiding businesses that properly classify their employees subsidize businesses that misclassify and they can end up paying higher unemployment insurance contributions, workers’ compensation premiums, and taxes than would be required if all employers followed Illinois law.​

How Misclassification Occurs:

  • Misclassification occurs if any employer treats workers as “independent contractors” when they are actually employees.​ Some employers use this tactic to avoid compliance with the Employee Classification Act and fail to pay:
    • Unemployment benefits for individuals Unemployment Insurance (UI)
    • Workers’ Compensation
    • Minimum wage and overtime
    • Social Security
    • Tax withholding

Service performed by an individual for an employing unit, whether or not such individual employs others in connection with performing such services, shall be deemed to be employment unless and until it is proven in any proceeding where such issue is involved that:

  1. Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact; and
  2. Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
  3. Such individuals are engaged in an independently established trade, occupation, profession, or business.

Consequences of misclassifying employees as “Independent Contractors” may include:

  • Interest on delinquent unemployment insurance trust contributions at an annual rate of 24 percent
  • Financial penalties for failing to report wages paid to employees
  • Financial penalties for willfully failing to make contributions to the unemployment insurance trust.

Additionally, officers and employees who willfully cause a business to fail to make payments into the system can now be held personally liable for the payments due from the business.

An employer that knowingly and willfully fails to obtain insurance may be fined up to $500 for every day of noncompliance, with a minimum fine of $10,000. Corporate officers can be held personally liable if the company fails to pay the penalty. In addition, corporate officers who are found to have negligently failed to obtain insurance are guilty of a Class A misdemeanor; if they are found to have knowingly failed to obtain insurance, they are guilty of a Class 4 felony. An employee who is injured during the time the employer was uninsured may sue the employer in civil court, where damages are unlimited.​​