Measures are under way to bolster the Illinois Department of Labor’s ability to crack down on contractors who try to dodge tax liabilities by misclassifying workers.
Two new laws were signed this summer by Gov. Pat Quinn, with each set to go into effect Jan. 1, 2014.
House Bill 2649 amends the Employee Classification Act to allow the Illinois Department of Labor to commence an action against an employer before an administrative law judge for misclassifying an employee or taking retaliatory action against an employee for exercising his or her rights under the act.
Under current law, penalties assessed by the department or other relief that may be sought is only recoverable by the department in an action brought by the Illinois Attorney General. The law allows for individual liability in cases where any officer or agent of a corporation “knowingly permits” an employer to violate the provisions of the Employee Classification Act. The individual liability component of the legislation prevents an employer from re-incorporating to avoid liability.
State Sen. Andy Manar, a Bunker Hill Democrat who represents the 48th Legislative District, was the chief Senate sponsor of HB 2649 and has backed similar issues.
“The Employee Classification Act and other labor laws are designed to protect workers’ rights and safety,” Manar said. “I sponsored these measures to ensure that our labor laws are being applied equally to all employers.”
The other new law, House Bill 923, amends the Employee Classification Act to require that a contractor report information to the Department of Labor on individuals, sole proprietors or partnerships that the contractor employs in a calendar year that are not considered “employees” for the purpose of the act.
The report must include: 1) the contractor’s name, address, and business identification number; 2) the individual, sole proprietor, or partnership name, address and federal employee identification number; and 3) the total amount paid to a person or entity not considered an employee.
HB 923 also provides for penalties for lack of reporting and public disclosure of portions of the report. The intent of the bill is to ensure that contractors are correctly classifying employees and paying the appropriate amount of taxes and benefits to employees and the State of Illinois.
In the case of HB 2649, a committee of the Senate pushed through an amendment that gives an employer official notice of a complaint and additional time to answer the complaint. It also lowers the penalties under the act and removes “responsible bidders” on public works projects from the individual liability provisions in the bill. Such bidders already are required to meet a number of specifications to be eligible for state-funded work.
“Under the Prevailing Wage Act, a contractor or subcontractor must record and submit the classification of all its workers to the Illinois Department of Labor. Therefore, employers are already meeting the reporting needs necessary under HB 2649,” according to information from Senate staff.
According to the Department of Labor, the purpose of HB 923 is to address “the common practice” in the construction industry of contractors misclassifying workers as independent contractors in order to avoid tax and labor laws, such as payroll taxes, unemployment insurance requirements, workers’ compensation premiums, and minimum wage requirements.
The bill also creates a provision for individual liability to avoid a circumstance where a person ceases operations and establishes a new entity to avoid individual liability under the act.
The department estimates that employee misclassification costs the state between $55 million and $62 million per year in lost unemployment insurance taxes, as well as between $353 million and $589 million in income taxes, and $121 million in lost workers’ compensation premiums.
The concept of individual liability in labor acts is not a new one. There are individual liability provisions in the Illinois Prevailing Wage Act, the Wage Payment and Collection Act, and the Unemployment Insurance Act.
Under the unemployment act, “knowingly” means having actual knowledge of or acting with deliberate ignorance of or reckless disregard for the relevant statute. There is no definition of knowingly under the Employee Classification Act.
Here is how the complaint aspect would work under HB 2649: Within 120 days of the filing of a complaint, the Department of Labor would notify an employer in writing and provide the employer the location and approximate date of the project, affected contractors and the nature of the allegations being investigated.
If the department believes an employer has misclassified or retaliated against employees, the department will notify the employer in writing of the findings and any penalty, at which time the matter will be referred to an administrative law judge.
The employer then has 28 days from the date of the department’s findings to answer the allegations. Failure to answer constitutes that the findings are admitted as true. However, the employer may file a motion to vacate the final decision issued by the administrative law judge if the employer demonstrates good cause for failing to answer the allegations.
If the judge grants the motion to vacate, the employer has the opportunity to answer.
A final decision by the administrative law judge is subject to the provisions of the Administrative Review Law and is enforceable by the Attorney General’s Office.
The Department of Labor has the authority to adopt rules for the hearing process.
HB 2649 calls for a split of any civil penalties recovered against the contractor — 10 percent to the affected employees and 90 percent to the Department of Labor. The penalty will not exceed $1,000 for each violation found by the first audit by the department; and not exceed $2,000 for each repeat violation found within a five-year period.
The purpose of House Bill 923 is to help state taxing authorities track payments between contractors and subcontractors to make sure construction businesses are not misclassifying workers.
One amendment to the bill adds reporting requirements for any contractor for which either an individual, sole proprietor, or partnership is performing construction services and is not classified as an employee.
The report shall be submitted to the Illinois Department of Labor annually on or before Jan. 31 following the taxable year in which the payment was made.
If a contractor fails to file a report, penalties can be assessed.