Many clients are convinced that it is “hopeless” to protest the often disappointing results of an Illinois Department of Employment Security (IDES) audit and then win at a Hearing before an IDES Hearing Officer.

It is true that IDES Hearing Officers (called Administrative Law Judges) are employees of the IDES. Therefore, clients often believe that because the Hearing Officers are employees of the IDES, they cannot be objective and unbiased, but rather these Administrative Law Judges will always agree with the IDES auditor and not the Company who has been audited (and then assessed for back “contributions” to the IDES-i.e., back unemployment insurance taxes).

This is surprisingly not true. Over the many years that I have worked with companies in protesting IDES audits and then weathering the experience of an IDES Hearing, I have found that if the Company has sufficient evidence and testimony to convince an IDES Hearing Officer that the workers at issue are independent contractors under Section 212(A), (B), and (C) of the Illinois Unemployment Insurance Act (legal definition of independent contractor), then the IDES Hearing Officer WILL usually cancel the Determination & Assessment (i.e., the tax bill), in whole or in part.

This article is about a very satisfying total legal victory that one of our law firm’s clients (fictitious name, Champion Builders) enjoyed last month. Our client is an Illinois general contractor who builds various commercial projects. Champion Builders manages the project, bids the jobs and is involved in design interpretation services.

Champion Builders uses independent contractors who perform various specialty functions such as spray foam insulation, installation of countertops, painting, installation of cabinets, striping of parking lots, roofing, etc.

SECTION 212: Champion Builders was audited by the IDES for the years 2011 and 2012. The IDES auditor then reclassified the independent contractors to employees, finding that the Company did not meet its burden of proof under Section 212(A), (B), and (C) of the Illinois Unemployment Insurance Act. Section 212 is the strict three-part test evaluating when workers are exempt from employment, in other words are independent contractors under Illinois unemployment insurance law.

Below is the text of Section 212:

“Service performed by an indi­vidual for an employing unit, whether or not such individual employs others in connection with the per­formance of such services, shall be deemed to be employment unless and until it is proven in any proceeding where such issue is involved that –

A. Such individual 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

B. 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 for which such service is performed; and

C. Such individual is engaged in an independently established trade, occu­pation, profession, or busi­ness.”

CLIENT PROTESTED DETERMINATION & ASSESSMENT (TAX BILL): Since the IDES auditor reclassified the independent contractors to employees, although Champion Builders tried very hard to persuade the auditor otherwise, Champion Builders received a Determination & Assessment (tax bill) from the IDES. Champion Builders protested the Determination & Assessment within the strict 20 days allowed by law, and requested a Hearing before an IDES Hearing Officer.

IDES HEARING OFFICER’S DECISION: After five years passed from the date of the Notice of Determination & Assessment, a telephone Hearing was held in July 2019.

In November 2019, the IDES Hearing Officer issued a fair and very well-reasoned written Decision and concluded that Champion Builders met its legal burden with respect to proving that the workers at issue were independent contractors and not employees under Section 212 of the Illinois Unemployment Insurance Act. The IDES Hearing Officer’s findings included the following:

• Section 212A (direction and control): The IDES Hearing Officer noted (with approval) that the independent contractors at issue were given no tools, training, materials or specific instructions by Champion Builders. The Hearing Officer noted that under Section 212(A) of the Illinois Unemployment Insurance Act, Champion Builders may control the outcome of the work (ok for an independent contractor), but not the manner or means in which the work is completed (as would be the case with an employee). The Hearing Officer noted with further approval that the independent contractors bid on work in a competitive process in which they choose whether to take the work offered, thus demonstrating the entrepreneurial posture of an independent contractor, not an employee.
• Section 212B (course or place of business): The IDES Hearing Officer found that the independent contractors at issue did not perform the “same or substantially similar” work as Champion Builders. All had specialties and offered the kind of services that Champion Builders does not offer. This analysis by the IDES Hearing Officer was crucial to the legal victory for Champion Builders. If Champion Builders flunked Section 212(B), the entire case would have been lost. Section 212(A), (B), and (C) is a three-part test. All three parts must be passed to result in a legal finding of independent contractor status.
• Section 212C (independently established): The IDES Hearing Officer found that the independent contractors at issue all held themselves out to the public as working for their own or other companies. The Hearing Officer noted that Champion Builders offered as evidence business cards, t-shirts, signs on trucks, Internet listings and websites for each of the independent contractors at issue. Additionally, some of the independent contractors also had contracts and 1099s from other general contractors (showing that the independent contractors worked for other companies as well as Champion Builders).

Happily, the IDES Hearing Officer decided that the entire Determination & Assessment issued against Champion Builders should be cancelled in total. Naturally the client was very pleased at this result.

IMPORTANCE OF ESTABLISHING AND MAINTAINING INDEPENDENT CONTRACTOR FILES: Note that in this case, Champion Builders had a great deal of evidence for each of the independent contractors to show that the independent contractors were well established businesses in their own right. The auditor didn’t properly appreciate the wealth of evidence of independent contractor status, but the IDES Hearing Officer (a licensed attorney) was able to properly evaluate it.

When I work with clients on reducing their liability and risk in using independent contractors, I always recommend they set up and maintain an independent contractor file on each independent contractor filled with proof of self-employment.

This article is intended to convey a powerful lesson: Yes, an Illinois company can successfully protest the results of an IDES audit, but it is important to have well maintained independent contractor files so that you can prove at an eventual IDES Hearing that the independent contractors are self-employed entities.

For assistance with IDES audits, hearings, and independent contractor agreements (or for consultations on limiting your liability in the use of independent contractors), contact Attorney Nancy E. Joerg, who enjoys a nationwide reputation in working with companies who use Independent Contractors of all types. Nancy Joerg can be reached at Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at najoerg@wesselssherman.com.