In January of 2008, Illinois passed the Illinois Employee Classification Act (820 ILCS 185/1-999).  In essence, the Act purports to prevent the misclassification of an employee as an independent contractor while conducting construction related activities.  The law is basically an effort to prevent contractors  from avoiding the  payment of overtime benefits, payroll taxes, Workman’s compensation, etc.

However, many view the Act  has yet another overreaching piece of legislation intended on benefiting a few while harming a great many small business owners.  For instance, the new law requires that no unincorporated or unorganized sole proprietor or partnership be classified as an independent contractor unless they satisfy all twelve elements enumerated in the Act. This applies to construction, trucking, landscaping and related trades, as defined under the Act.  In essence, the law provides more narrow but explicit definitions of what constitutes an independent contractor.

This places the risk directly on the contractor should any of its independent contractors actually be classified as employees under the new law. Of course, this seems burdensome to the contractor since they may now be faced with having to require that each of their unorganized subcontractors organize to avoid any potential risk.

The most significant issue under the new law appears to be filing income taxes. The sole proprietor must file his or her income taxes relating to the independent business to avoid being classified as an employee under the Act.  Seemingly, contractors conducting construction and the other related activities are now directly at risk for any such failure of their subcontractors to file.

This law would also seem to certainly benefit the labor unions.  Labor unions or any other interested parties, including competitors, former employees or anyone else can report a construction or construction-related company using “employees” as independent contractors.  (The AFL-CIO and Teamsters strongly supported the passage of this law).

The effects of this new law could potentially be staggering.  Besides the obvious disadvantages to contractors, the labor unions will now apparently enjoy even greater power to force unionization. This could be very detrimental to small business in this State. But, keep in mind, the law is new and no interpretative regulations or decisions yet exist. Many have argued against the constitutionality of such a wide-sweeping and overreaching piece of legislation.  However, until the law is repealed or amended, contractors should take the conservative route.

Requiring that each independent subcontractor incorporate or otherwise organize is impractical.  Fortunately, requiring incorporation is not required, only the most conservative approach recommended by many practitioners. I advise that contractors utilize an independent contractor agreement drafted specifically to comply with the provisions of the new law. Any contractors already using such agreements should have their attorneys review them to ensure compliance with the Act.

Contractors need to maintain avoidance of the qualifications typically defining an employee under Federal and/or State law.  This includes control over the subcontractor, including hours, equipment, methods of work, among other items.  Thus, any independent contractor agreement should specifically address the qualifications used to determine the definition of an employee under all applicable laws, including  the Act.