NEWSLETTER - SMALL BUSINESS

Redefining Construction Contractors

By Ross Miller, Assistant Director, Illinois SBDC at Bradley University
Winter 2008

The Illinois Employee Classification Act has gone into effect as of January 1, 2008. This law addresses construction contractors misclassifying workers as independent contractors. Independent contractors can still be hired as long as they meet the requirements. Complying with additional criteria is required if the independent contractor is a sole proprietorship or a partnership.

The worker is considered an employee unless it is shown that:

1.)the individual is free from control or direction over the performance of the service for the contractor, and
2.) the service performed 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, and (if required);
4.) the individual is deemed a legitimate sole proprietor or partnership under subsection (c) of Section 10 of the law.

There are 12 criteria that must be satisfied for sole proprietors and partnerships. Which includes:

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.

This does not force contractors to only be organized as corporations. Sole proprietorships and partnerships in the construction industry will need to be familiar with the requirements and prove compliance with their prime contractors.

Construction contractors that violate the Act are subject to civil penalties up to $1,500 for each violation. Each violation, for each person and for each day the violation, continues is a distinct violation. The penalty goes up to $2,500 if discovered during a 5-year period after the initial violation.

Individuals can file a private lawsuit within three years from the final date of performing services for the contractor. The individual is entitled to collect wages, salary, employment benefits or other compensation denied or lost due to the violation, an equal amount of liquidated damages, and compensatory damages.

This is a good time for every business to review their independent contractor situations. In September, 2007, Senators Obama and Durbin proposed the Independent Contractor Proper Classification Act of 2007, which could impose similar restrictions on businesses in all industries.