IDES Audits Are Resuming!: Illinois Companies Who Use Independent Contractors Should Prepare Prior To Receiving A Notice Of IDES Audit!
We are seeing Illinois Department of Employment Security (IDES) audits starting to resume!
When an Illinois company who uses independent contractors is audited by the IDES, the company often thinks they are “innocent until proven guilty” on the independent contractor issue. WRONG!
WORKERS ARE PRESUMED TO BE EMPLOYEES: The legal requirement for a company using independent contractors in Illinois is that the company is presumed by the IDES to be the legal employer of the independent contractors. Therefore, when a company pays the worker to perform services, those workers are presumed to be the employees of the company upon audit.
COMPANY MUST PROVE THE WORKERS ARE PROPERLY CLASSIFIED AS INDEPENDENT CONTRACTORS: Companies using independent contractors should be seriously preparing to defend themselves, way before there is an IDES audit. The company must be able to prove to the IDES that the workers are properly classified as independent contractors and not employees of the company.
INDEPENDENT CONTRACTOR TEST USED BY IDES: The IDES uses a very strict three-part test when evaluating whether or not workers are properly classified as independent contractors. The three-part test for independent contractor status is contained in Section 212 of the Illinois Unemployment Insurance Act. (Section 212 has nothing to do with the IRS or any other test or any other Agency. It applies only to IDES unemployment insurance matters.)
Here is the three-part test (using a flooring installer as an example):
Section 212. Service performed by an individual (i.e., flooring installer) for an employing unit (i.e., ABC Home Improvement), whether or not such individual employs others in connection with the performance of such services, shall be deemed to be employment [which means the mobile notary will be considered an employee] unless and until it is proven in any proceeding where such issue is involved that –
- Such individual (i.e., flooring installer) has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact; and
- Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise (i.e., ABC Home Improvement) for which such service is performed; and
- Such individual (flooring installer) is engaged in an independently established trade, occupation, profession, or business.
PREPARATION IS ESSENTIAL: The Company under IDES audit must plan how it is going to prove for each independent contractor that the worker meets the legal requirements of the IDES independent contractor test that is going to be used to determine whether the worker is misclassified.
Therefore, if there are any independent contractor agreements, they should be carefully reviewed to see if the independent contractor agreements support and strengthen independent contractor status. Invoices from the independent contractors should be examined. IRS 1099 forms for the year in question should be evaluated. The Company’s website and how it describes independent contractors should be carefully analyzed as well. Know and if possible eliminate your weak spots ahead of the IDES audit. Map out your defense strategy.
DIFFICULT ISSUES ARISE DURING AN IDES AUDIT: Many difficult issues and concerns pop up throughout an IDES audit. Examples are:
1) which documents and records to submit to the auditor?;
2) how many years can the auditor cover in the audit?;
3) can the auditor jump to sister/related companies to audit?;
4) who should work directly with the auditor?;
5) what is the potential liability for any misclassification found?;
6) how should the various Questionnaires be prepared for submission?;
7) what legal defenses should the company raise?
Due to the considerable legal complexity of an IDES audit, it is best to have an in-depth strategy session (between the company and an experienced attorney who has handled many such IDES audits) prior to the company’s first interaction with the IDES auditor. This kind of strategy session is particularly important in the current COVID-19 era during which many strange and confusing IDES decisions have been handed down....changing the legal landscape for Independent Contractor coverage by the IDES.
Consultation early on with an attorney experienced with IDES audits can make a big difference in the outcome of an IDES audit. Don’t wait to receive the Notice of IDES Audit!
Questions? If you have questions or wish to schedule a consultation to review and defend your company’s usage of independent contractors, please call Attorney Nancy E. Joerg of Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at firstname.lastname@example.org.