Should you classify a worker as an employee or independent contractor? The U.S. Department of Labor (DOL) issued Final Rules revising the standard for determining whether a worker is an employee or independent contractor under the Fair Labor Standards Act (FLSA). The Final Rules took effect on March 11, 2024. These new federal rules do not replace existing Illinois law, so Illinois employers are required to comply with Illinois laws governing classification, as well as the FLSA’s Final Rules.
Illinois Law Regarding Independent Contractors
In Illinois, most classification audits are conducted by the Illinois Department of Employment Security (IDES). The IDES requires a business to pass three criteria to classify an employee as an independent contractor:
1. 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
2. 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
3. Such individual is engaged in an independently established trade, occupation, profession, or business.
Number two above usually ends the inquiry. Simply put, if you have a salesperson, for example, selling the product your company makes, or the service your company sells, they are employees, even if they are outside salespersons. What is an example of something that IS outside the course of the business? IDES gives as an example a hotel hiring someone to clean its pool. A hotel is not in the pool business, so the cleaning of a pool is a task the hotel can properly give to an independent contractor.
Independent Contractors in Construction
Illinois also has the Employee Classification Act, which applies solely to the construction industry. “Construction” is defined very broadly. The Act includes an onerous four-part test, each part of which must be met before classifying someone as an independent contractor. One of the criteria is the same as that discussed above, which is that the service performed must be “outside the usual course of services performed by the contractor.”
Simply put, in Illinois it is very difficult to classify someone as an independent contractor.
The “Economic Reality” Test
Turning to the new federal FLSA Final Rules, the DOL has admitted that the Final Rules reflect a pro-employee view of classification. The FLSA still does not define “independent contractor” but historically has used an “economic reality” test. Under that test, if the worker is economically dependent on a particular business for work, they are an employee, not an independent contractor. If you have a salesperson who you are classifying as an independent contractor who is economically dependent on their commissions from your business, that person is an employee, and you are misclassifying them.
FLSA Final Rule Factors
The FLSA Final Rules outline six factors, all of which still relate somewhat to the previous “economic reality” test. The DOL will now consider the following and none of these factors override any other factors:
- Opportunity for profit or loss depending on managerial skill (Keep in mind, this is not a salesman making more because he sells more, it must involve making more because of “managerial” skill).
- Investments by the worker and the potential employer.
- Degree of permanence of the work relationship (is it one-off, sporadic, or usually long term).
- Nature and degree of control by employer.
- Exent to which the work performed is an integral part of the potential employer’s business (this is a lot like the Illinois test/factor).
- Skills and initiative.
Guidance
The DOL has published helpful guidance on each of these factors. One example is a landscape worker who does work for multiple landscaping companies, and who produces, and pays for his own advertising, negotiates contracts, decides which jobs to perform and for whom. That person is likely an independent contractor.
The new FLSA rules permit consideration of additional factors if they influence whether the worker is economically dependent on the business for work. In other FLSA guidance on the Final Rules, DOL has said that true independent contractors “operate their own separate business, have a federal taxpayer id, and perform work for several entities.”
Employers often think that they can get around these rules by having the employee agree that he or she is an independent contractor. The FLSA says, however, that an employee cannot under any circumstances opt out of being an employee by signing an agreement saying they are instead an independent contractor. This means that employers cannot simply revise their current independent contractor agreements to skirt the rules. Instead, employers must take a hard look at the factors outlined by Illinois and federal law, then apply those factors to their current independent contractors. If necessary, employers must reclassify individuals as employees.
Misclassifying independent contractors can have consequences for both the employer and employee. Should you need guidance for your business, our team of skilled employment law attorneys would be happy to help you navigate both Illinois and federal laws.
Troy Haggestad serves as President of WilliamsMcCarthy LLP and has extensive experience representing business clients in commercial litigation matters involving contractual disputes, shareholder disputes, non-compete litigation, trade secret litigation, insurance coverage litigation, and actions brought under the Uniform Commercial Code. He can be reached at thaggestad@wilmac.com or 815-987-8977.
