February 2012

By: Nancy E. Joerg, Esq.

Businesses across Illinois are being hit with “Notices of Audit” from the Illinois Department of Employment Security (IDES) on a daily basis. When I talk to the business owners who receive these Notices of Audit, they are often very indignant about being audited in these extremely difficult economic times. Often, a client will say to me, “I know why I’m being audited; it is because these government agencies need money!!”

The truth is the IDES, like any governmental agency that monitors taxation, is charged legislatively with the duty to audit Illinois companies, to make sure they are paying their fair share of unemployment insurance taxes (called “contributions”).

DON’T STONEWALL THE AUDITOR: Many clients believe firmly that the best way to deal with an auditor from a government agency is to stonewall the auditor-in other words, give the auditor as little information as possible. While this approach may be appropriate in certain government audit situations, it is a disastrous strategy for dealing with an IDES audit. Let’s look at why.

BURDEN OF PROOF IS ON THE COMPANY: Any Company that pays individuals for services is presumed to be the employer of those individuals unless the Company can prove that the individuals are really independent contractors and not employees. Yep-that is right- the Company is guilty until proven innocent . The Company must prove that the individuals are really independent contractors per the independent contractor tests as laid out by the IDES.

This means that the Company must roll up its sleeves and gather proof to present to the auditor (that the independent contractors the Company pays for services are not its employees). By stonewalling the auditor and doing nothing, it really means that the Company is throwing in the towel and passively “agreeing” that these workers are really employees. Once the auditor reclassifies the individuals to employee status for Illinois unemployment insurance purposes, the Company will be presented with an unwelcome tax bill (called a Determination & Assessment) which it will be legally required to pay.

PROVING INDEPENDENT CONTRACTOR STATUS: There are many ways for a Company to prove to an IDES auditor that the workers at issue are really independent contractors and not employees, per the IDES legal tests. Some effective means of convincing the IDES auditor that the individuals at issue are not employees are: a well drafted independent contractor agreement, invoices in the business name of the independent contractor, websites describing the business of the independent contractor, proof that the independent contractor is incorporated in good standing under his/her own business name, proof that the independent contractor has an independent business reputation, promotional materials or advertising in the business name of the independent contractor, etc. Also, the IDES auditor will ask the Company under audit to fill out a Worker Relationship Questionnaire for each category of independent contractor at issue. Fill out the Worker Relationship Questionnaire very carefully. Each question counts. There are many trick questions.

There are many ways to “skin a cat,” and there are many ways to prove independent contractor status to an IDES auditor. Some ways are of course more effective than others. The important point of this article is that the worst possible strategy is to stonewall the IDES auditor and wait for the ax to fall.

Readers who wish to discuss the defense of the Company in the face of an IDES audit or any aspect of the independent contractor relationship should contact Attorney Nancy E. Joerg of Wessels Sherman’s St. Charles, Illinois office at 630-377-1554 or via email at najoerg@wesselssherman.com.