Misclassified employees force taxpayers to subsidize costs, harm economy
Illinois led nation in auditing problem employers

[August 15, 2014]  CHICAGO – Illinois employers wrongly classified nearly 20,000 of their workers as independent contractors rather than full-time employees in 2013, skipping out on more than $250 million in wages and contributions to funds that support laid-off and injured workers, the Illinois Department of Employment Security said today.

Taxpayers ultimately cover the costs of misclassified workers because it robs the state of payroll taxes normally removed from a worker’s paycheck. Those funds typically are not removed from payments given to independent contractors. In some cases, a homeowner could be responsible for costs incurred if a misclassified worker is injured while working on the owner’s dwelling.

“The consequences of misclassification are easy to see when a worker is hurt or an honest business owner is under-bid for a project. What hides in plain sight are the socialized costs that occur when a dishonest employer deceives a customer and cuts corners by not playing by the rules,” IDES Director Jay Rowell said.

“The labor movement is about creating strong communities and protecting workers from unscrupulous employers,” said Chicago Federation of Labor President Jorge Ramirez. “Tactics like worker misclassification erodes that by violating workers’ employment and labor rights.”

The audits also showed that Illinois held the most productive employer auditing effort in the nation, according to data compiled by the Bureau of Labor Statistics. Illinois audited 3,635 employers in 2013. In doing so it identified 19,765 misclassified employees, $245.6 million in unreported taxable wages and $5.1 million in unreported contributions that fund unemployment insurance benefits. Illinois led by a wide margin all other states in Effective Audit Measures.

Fighting misclassification fraud is critical to workers, employers and taxpayers. Workers benefit because misclassification leads to less money in trust funds used to pay unemployment insurance and worker’s compensation claims. Employers benefit because companies that misclassify workers can under-bid law-abiding employers by as much as 30 percent. Taxpayers benefit because employers who misclassify employees typically do not carry insurance, or do not carry insurance at appropriate levels to protect the consumer if a worker is injured on the job. If a worker who has been misclassified and could arguably be considered an employee of the homeowner, the homeowner bears liability for any injury.

Generally speaking, to be considered an independent contractor, a worker must be free from direction or control. A worker is not an independent contractor just because an employer designates him or her as such – even if the worker agrees to the designation. Employers breaking the law could face fines of at least $10,000 and up to 60 percent interest on failed payments. The Illinois Department of Labor, Illinois Department of Employment Security, Illinois Department of Revenue and Illinois Workers’ Compensation Commission are working together to help responsible business owners and punish fraud. More is available at www.illinoismisclassification.com

Like several other states, Illinois uses the ABC test to determine if an individual is an employee or an independent contractor. Construction related workers are presumed employees, and not independent contractors, unless the company can prove that the worker is A) free from direction and control of the company and B) the work performed is generally outside the scope of work performed by the company and C) the worker is engaged in an independently established trade or business.

[Text received; ILLINOIS DEPARTMENT OF EMPLOYMENT SECURITY]