September 2012

By: Nancy E. Joerg, Esq.

The Illinois Department of Employment Security (IDES) is the Illinois state agency that is charged by law with the mission of auditing Illinois companies for unemployment insurance “contribution” purposes.

CONTRIBUTIONS: Almost all companies in Illinois have to pay in taxes called “Contributions” (up to a set dollar maximum each year) to the IDES. It is a cost of doing business in Illinois.

Contributions must be paid to the IDES on each employee who is paid by the company. Each year, the IDES mails the Illinois company a Rate Notice.

RATES: IDES rates change from year to year depending on many factors. One factor is whether ex employees of the company have succeeded in obtaining unemployment insurance benefits from the IDES. If an ex employee draws benefits which are charged to the company’s IDES Account Number, the company’s IDES rate goes up.

If a company’s IDES rate goes up, the company must pay into the IDES a greater amount of Contributions on each employee.

However, a taxpayer company does NOT have to pay to the IDES any Contributions whatsoever on Independent Contractors.

AUDITORS LOOK TO SEE THAT ALL CONTRIBUTIONS HAVE BEEN PAID: When an IDES auditor goes out and audits companies, one of the key issues on the auditor’s mind is whether or not the company has paid all Contributions owed to the IDES on all the employees who were paid by that Illinois company in a given year.

Auditors will check the amount of Contributions that the company has paid into the IDES on each employee AND auditors will ALSO carefully decide if any of the “1099 workers”—also known as subs, freelancers, independent contractors, casual labor, temps, day laborers, etc—have been improperly classified by the company.

If the auditor decides that the company has ten freelancers, for example, who should have been classified as employees for the audit year at issue, the auditor will write up a report at the end of the audit and send the report into the IDES Revenue Unit. Within a few weeks, the company will receive a Notice of Determination and Assessment in the mail. It is, in essence, a tax bill.

SHOULD THE COMPANY PAY THE ASSESSMENT OR PROTEST?: The company now has a decision to make. Should the company pay the Assessment on the ten freelancers? If the company decides to pay the tax (“contributions”) as assessed in the Notice of Determination and Assessment, no additional interest will accrue. Interest is a serious matter here because the IDES charges 2% a month!! (24 a year!!)

However, if a company decides to protest and appeal the Determination and Assessment, then the company is not yet liable for the tax payment. It is not final. It is being contested. The company is protesting and asking for a Hearing. Of course, the company can still pay the tax to stop the extremely high interest—-and still protest and ask for an IDES Administrative Hearing (this is always granted).

The company has only 20 days to decide its course of action!

If a company exceeds the 20 day appeal deadline, all rights of appeal are gone. Now the tax bill (i.e., “contributions” assessed) is final, due, and owing.

Illinois companies frequently call me at this stage of the IDES audit process to ask my legal opinion on what they should do. They ask me, “Is it worth appealing?”

GOOD REASONS TO APPEAL: There are many good reasons to appeal:

Reason 1: If you protest the Determination and Assessment, you don’t have to pay the IDES yet. You don’t have to pay until the matter is final.

Reason 2: If you appeal, you will have a chance to defend your classification decision. You will have an opportunity to give all of your proof, witnesses, evidence, documents, testimony, legal research, mathematical data, etc. before an IDES Administrative Law Judge, who is an attorney familiar with the nuances of independent contractor status. (The IDES auditors are not lawyers. Many have excellent skills and strong bookkeeping and accounting backgrounds, but may not understand the finer legal points of your particular independent contractor situation, for example.)

Reason 3: An IDES Administrative Hearing is a whole new day in court. It is truly another chance to present your case. The IDES Administrative Law Judge may call upon the IDES auditor as a witness and review his reasoning and audit report, but the Administrative Law Judge is free to make his or her own legal decision about the independent contractor classification issue. It is not at all unusual for an Administrative Law Judge to overturn an IDES auditor’s findings, in whole or in part. For example, the Administrative Law Judge may decide, after hearing the testimony of several witnesses, that six of the ten independent contractor witnesses are properly classified by the company. Therefore, the Company now owes a much reduced Assessment (tax bill).

Reason 4: At the IDES Administrative Hearing, new issues can be raised that perhaps the company overlooked during the audit. For example, if the company omitted telling the IDES auditor that some of the independent contractors lived out of state and performed their services out of state, the company may succeed in having these out-of-state workers taken off the list of reclassified workers on “jurisdictional grounds” (i.e., the IDES does not have legal jurisdiction over these workers).

Another issue that is sometimes effectively raised at the Administrative Hearing level is whether the payments are for mere referral services or for wages. If an individual is paid for referring sales or customers to a company, this may not be payment for services under the Illinois Unemployment Insurance Act. Rather, it may simply be a payment that is a “referral fee” and therefore not subject to being considered payment for wages to an employee.

Sometimes the IDES auditor’s math is wrong and this kind of objection can also be raised at the Hearing level even though it was not noticed at the audit level.

Again, an IDES Administrative Hearing on the subject of whether the IDES auditor was correct is a whole new day in court.

Reason 5: If you do not succeed in convincing the IDES Administrative Law Judge as to all of your legal arguments, you can appeal further, by simply writing a protest letter to the IDES Director. This letter is called “the Objections”. Many cases have been won in this manner. In my experience, if the company has a very strong Hearing Record—with powerful testimony and witness evidence, a detailed and persuasive letter of Objections can overturn an Assessment, in whole or in part.

While there are many other compelling reasons to protest and appeal an IDES audit Assessment, these are some of the main considerations.

Defending Independent Contractor status before the IDES can be effectively done, depending on the facts, legal issues, witnesses, evidence, and legal precedents. It is an important decision for a company to make. And it usually has to be made rather quickly, due to very tight and strict appeal deadlines.

For consultations on these complex and time sensitive matters, contact Attorney Nancy E. Joerg, who enjoys a nationwide reputation in assisting 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.