Independent contractor status can seem financially advantageous to some businesses—no employment taxes, no benefits required—but it can and often does result in excessive liability for companies.

How can you tell if an individual is really an employee?  The rule is: if the individual provides services (a) at your place of business (b) that are essential to the purpose of your business, then they will be deemed an employee.  This rule is modified for contract-based services. If your company is in the business of placing individuals for work with a client’s business (e.g., a staffing company), then an individual placed with a client will be deemed your company’s employee even if they are not working at your place of business.

An employee’s desire to be treated as a contractor does not matter. Even when an individual insists on being treated as an independent contractor, the individual may still seek wages as an employee and win!  In one case, even though the contractor insisted on being treated as a contractor at the time of hiring, the court held that she was, in fact, an employee. Overtime pay is another fertile area for plaintiff’s attorney to seek compensation after the fact—and since an independent contractor is likely not clocking in/out each day, defending against an outrageous claim of overtime pay can be challenging.

Incorrectly categorizing employees carries big penalties. Interest of 5% per month—that’s 60% annually!—is assessed on the unpaid amount from the date the wages were allegedly due under Illinois Minimum Wage Law and the Illinois Wage Payment and Collection Act . Also, successful “employees” are entitled to reimbursement for attorneys’ fees, so you can bet there are a slew of attorneys who are willing to take on these types of cases. Worse yet is personal liability.  Individual owners, directors, officers or managing agents may be held personally liable if they “knowingly permit” the violation. 

Our experience helped salvage a wrongful classification. One of our clients sought project-based assistance from an individual who insisted the work she was supposed to perform would be on a “corp-to-corp” basis and not as an employee. To demonstrate her business was legitimate for a corp-to-corp relationship, she supplied our client with incorporation records, proof of general liability insurance, and a voided check from a corporate checking account. However, when the contract fell through because of her inability to perform, she filed a wage claim with the Illinois Department of Labor (“IDOL”) claiming she was an employee.  By the time the IDOL set the case for hearing, more than two years had elapsed.  The statutory interest was so high that it more than doubled the client’s exposure, with the potential for attorneys’ fees and individual liability, too.

Although this individual likely would have been deemed an employee by the IDOL, we still were able to help this client. We discovered that the individual held a full-time job when she began work for our client. By showing that she lied about her time records, we were able to settle the matter for a small fraction of the claim.

Worried about your independent contractors?  We can assess whether an individual performing services can properly be treated as an independent contractor.  Please give us a call!