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On May 27, 2014 the Illinois Supreme Court issued a modified opinion in Bartlow v. Costigan, 2014 IL 115152 (Ill. 2014). The case involved constitutional challenges to the Illinois Employee Classification Act, 820 ILCS 185/1 et seq.  The opinion should give pause to any company employing independent contractors.

The Plaintiffs in the case were the owners of a construction company named Jack’s Roofing. Jack’s Roofing installed siding, windows, seamless gutters, and roofs. The Illinois Department of Labor sent Jack’s Roofing a notice of investigation explaining that it had received a complaint that Jack’s Roofing was violating the Act by misclassifying its employees as independent contractors. The Department made a determination that Jacks had violated the Act by misclassifying ten individuals and calculated a potential penalty of $1,683,000. In response, Jack’s filed a lawsuit to declare the Act unconstitutional. Jack’s argued that the Act was unconstitutional because it was too vague to understand, and failed to provide contractors with due process in investigations conducted by the Department of Labor. The Court rejected both arguments and upheld the validity of the Act.

The Act Broadly Categorizes Construction Services

The Act was enacted to “address the practice of misclassifying employees as independent contractors” in the construction industry. 820 ILCS 185/3. Consistent with this goal, the Act broadly provides that any individual “performing services” for a construction contractor is “deemed to be an employee of the employer.” 820 ILCS 185/10(a) (West 2010).

In turn, the statutory term “performing services” is extremely broadly defined:

“[T]he performance of any constructing, altering, reconstructing, repairing, rehabilitating, refinishing, 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, whether or not the performance of the work herein described involves the addition to, or fabrication into, any structure, project, development, real property or improvement herein described of any material or article of merchandise. Construction shall also include moving construction related materials on the job site to or from the job site.” 820 ILCS 185/5

The Act does provide a few exceptions, which Jack’s argued were too vague to pass constitutional muster. For example, an individual performing services for a contractor is not deemed to be an employee of the contractor if it is shown:

(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 under subsection (c) of this Section.

Under Subsection (c), the Act deems “legitimate” and exempts from the Act’s provisions any sole proprietorship or partnership performing services for a construction contractor as a subcontractor if it is shown that:

“(1) the sole proprietor or partnership is performing the service free from the direction or control over the means and manner of providing the service, subject only to the right of the contractor for whom the service is provided to specify the desired result;

(2) the sole proprietor or partnership is not subject to cancellation or destruction upon severance of the relationship with the contractor;

(3) the sole proprietor or partnership has a substantial investment of capital in the sole proprietorship or partnership beyond ordinary tools and equipment and a personal vehicle;

(4) the sole proprietor or partnership owns the capital goods and gains the profits and bears the losses of the sole proprietorship or partnership;

(5) the sole proprietor or partnership makes its services available to the general public or the business community on a continuing basis;

(6) the sole proprietor or partnership includes services rendered on a Federal Income Tax Schedule as an independent business or profession;

(7) the sole proprietor or partnership performs services for the contractor under the sole proprietorship’s or partnership’s name;

(8) when the services being provided require a license or permit, the sole proprietor or partnership obtains and pays for the license or permit in the sole proprietorship’s or partnership’s name;

(9) the sole proprietor or partnership furnishes the tools and equipment necessary to provide the service;

(10) if necessary, the sole proprietor or partnership hires its own employees without contractor approval, pays the employees without reimbursement from the contractor and reports the employees’ income to the Internal Revenue Service;

(11) the contractor does not represent the sole proprietorship or partnership as an employee of the contractor to its customers; and

(12) the sole proprietor or partnership has the right to perform similar services for others on whatever basis and whenever it chooses.” 820 ILCS 185/10(c) (West 2010).

The Act Provides for Substantial Penalties against Contractors Misclassifying Employees

The Act subjects violators to substantial penalties, such as a civil penalty of up to $1,000 for each violation. 820 ILCS 185/40. The penalty can be assessed per misclassified employee. Under the Act each day the violation continues constitutes a separate and distinction violation.

Moreover, the Act permits individuals to file lawsuits to recover lost wages, benefits, compensatory damages, and attorney’s fees. The Act prohibits construction employers or entities from retaliatory discharge of employees for exercising their rights under the Act and authorizes the imposition of penalties for any retaliation. 820 ILCS 185/55. The Act also prohibits the waiver of any of its provisions and makes it a Class C misdemeanor for an employer to attempt to induce any individual to waive any provision of the Act. 820 ILCS 185/70.

Compliance with the Act Requires Careful Planning

The Court’s opinion will likely embolden the Department of Labor to continue and possibly increase its investigations.  The Court was unsympathetic to Jack’s Roofing’s argument that the Act requires contractors to obtain, prior to any hiring decisions, financial and scheduling information about potential subcontractors. The Court indicated that Jack’s Roofing failed to show why obtaining that information was burdensome or unreasonable.

In light of the Court’s opinion, the best practice for contractors to ensure compliance with the Act is to verify that all “independent contractors” hired by the contractor clearly fall within the exceptions contained in Section 10 of the Act. Subcontractors should be required to furnish the stated information before entering into a subcontract to ensure that he or she is properly classified as either an independent contractor or an employee.”  Otherwise, contractors run the risk of violating the Act.

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