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IDES Audits: Burden of Proof is on the Company – Don’t Take a Passive Approach!!
When companies are suddenly audited by the Illinois Department of Employment Security (IDES), these audited companies start out assuming that they are “innocent until proven guilty” on the independent contractor issue. WRONG!
The legal requirement for an audited company using independent contractors is that the company is presumed by the IDES to be the legal employer of the independent contractors. In other words, employment is presumed by the IDES auditor unless independent contractor status can be proven by the audited company. This drives clients crazy! Clients often say to me:
“These workers are so independent! Anyone can see that! They set their own schedule. I can’t control them! I wish I could!! Why should we have to prove that they are independent contractors?”
Since the harsh legal reality is that the company must PROVE the independent contractors are in fact self-employed (and therefore not the employees of the audited company), this means audited companies cannot take a passive approach.
STRICT LEGAL TEST: The IDES auditor usually uses a very strict legal test – Section 212(A), (B), and (C) of the Illinois Unemployment Insurance Act – to define when a worker is an independent contractor and when the worker is an employee.
Companies who have been notified by the IDES that they are going to be audited by the IDES should spend some time understanding Section 212(A), (B), and (C) — or whatever part of the Illinois Unemployment Insurance Act might pertain to the kinds of independent contractors used by the Company (for example, independent contractor real estate appraisers may fall under Section 217.2 and truck owner-operators may fall under Section 212.1).
SECTION 212(A), (B), (C): Below is the Section 212(A), (B), (C) test, using an independent contractor radon tester as an example:
Section 212. Service performed by an individual (radon tester) for an employing unit (ABC Radon Detection), 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 –
- Such individual (radon tester) 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 (ABC Radon Detection) for which such service is performed; and
- Such individual (radon tester) is engaged in an independently established trade, occupation, profession, or business.
The Company under IDES audit must plan how it is going to prove that the worker meets ALL three parts of Section 212.
REGULATIONS TO SECTION 212(A), (B), (C)—CONTACT US FOR A FREE COPY: There are Regulations to Section 212(A), (B), and (C) which describe in detail how each part of the ABC test is evaluated. Readers who would like a free copy of the Regulations should contact Legal Assistant Tammy Nelson at Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at email@example.com.
EXAMPLES OF PROOF: From a practical standpoint, the audited company must provide documentation to the IDES auditor to convince the auditor that the worker is self-employed. In the absence of such convincing proof, the auditor will find that the worker is an employee. The auditor will then assess back unemployment insurance “contributions” (money now owed to the IDES!) onto the company being audited. (There is also a whopping 24% per year interest added to that often significant assessment!)
Examples of documentation which go toward proving independent contractor status include the independent contractor’s business card, copies of online listings by the independent contractor promoting his/her business, proof that the independent contractor is a corporation in good standing, proof that the independent contractor pays for all business expenses, etc. The more an independent contractor promotes his/her business in his/her business name, the more believable it is that the independent contractor is truly self-employed.
Additionally, the Company’s independent contractor agreement should be reviewed by an attorney very familiar with the legal burdens of proving independent contractor status for IDES purposes. The Company’s website (and how it describes independent contractors) should be carefully analyzed as well. Know your weak spots ahead of the IDES audit. Map out your strategy.
AUDIT PROCESS CAN BE COMPLICATED: If possible, seek legal counsel prior to participating in an IDES audit. The audit process can be complicated. There can be many legal issues and significant financial risk. Audits can be extended by the IDES to cover several years.
The COVID-19 pandemic has not changed the manner in which the IDES audits or the legal tests and legal presumptions. The same serious risks remain on the audited company.
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. For over 30 years, Nancy Joerg has assisted audited companies in handling the defense of independent contractor status. Nancy Joerg can be reached at Wessels Sherman’s St. Charles, Illinois office: 630-377-1554 or email her at firstname.lastname@example.org.
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