A client recently asked me about a new State of Illinois law the Employee Classification Act (if the link is expired, then check Google), public act 095-0026, which became effective January 1, 2008. I thought that a brief post might be useful considering that there might be some confusion regarding this Act. Additionally, I’ve noticed a few fliers from HR consulting organizations creating fear and charging a lot of money to educate businesses in what’s a narrowly construed law.

The fact is no one is really sure how, when or if this new Act will be enforced. And, there aren’t any interpretive regulations yet (there are proposed rules available in PDF format at this link; if the link is expired, then search Google). The law basically provides more narrow but explicit definitions of what an independent contractor is, and it only applies to the construction, trucking, landscaping and related trades.

For my client, a trucking company, it’s not a big deal because the independent contractor agreement that I drafted for them months ago is already compliant with the new law. In fact, as long as a business’ independent contractor agreement strictly complies with federal and most states’ laws regarding independent contractors, that business will probably already be compliant. It’s a good idea for any affected business to audit their independent contractor agreements for compliance with this law–better safe than sorry (it’s also cheaper!).

The Act is enforced by the Illinois Department of Labor, one of our state’s more bureaucratic organizations (or as a colleague once said: “They screw everybody equally.”). The basic intent of the law is to prevent construction, landscaping, trucking and similar businesses from “misclassifying employees” as “independent contractors” in order to avoid paying payroll taxes, overtime, workers comp, insurance, etc.

So long as a business maintains strict adherence to the usual independent contractor rules of lack of control over the contractor, which includes hours, equipment, methods of work, etc., that business will probably be in compliance. Also, keep in mind that because the law is new and hasn’t been tested, the Illinois Department of Labor might go easy on businesses that, even though they may have violated the law, are acting in good faith. However, be mindful that the Internal Revenue Service, the Illinois Department of Employment Security, the Illinois Department of Revenue, and other business taxing agencies, might not take a lenient approach.

In short, don’t mess around with employee misclassification in any industry. Generally, the costs to clean up mistakes always exceed the costs to avoid them in the first place.