What Are the Consequences of Misclassifying Employees in Illinois?

 Posted on December 20, 2022 in Employee Misclassification

Employers may hire multiple different types of workers, but they will need to be sure these workers are classified correctly. Inaccurate worker classification—which labels someone an independent contractor when they should be classified as an employee—can result in significant penalties that could have an impact on a business's bottom line. By understanding the potential penalties, employers can ensure that they take the necessary steps to classify workers correctly.

Classifying Workers as Employees or Independent Contractors

Employees work directly for an employer, and they are entitled to certain benefits, including coverage by workers' compensation insurance, the ability to collect unemployment benefits, the right to receive minimum wage and overtime pay, and the ability to receive benefits such as health insurance through an employer. Independent contractors are considered to be self-employed, and most of these benefits will be unavailable to them. To determine how workers should be classified, employers will need to consider rules put in place at both the state and federal level. These include:

• Behavioral control - An employer will have direct control over the work performed by employees. If a worker is able to decide when, where, and how they complete work, they may be classified as an independent contractor.

• Course of business - To be classified as an independent contractor, a worker must usually be involved in activities that are outside of an employer's usual business activities, or the work a person performs must take place in locations other than an employer's offices or facilities.

• Independent trade - An independent contractor must have an independently established business or occupation. They may have their own business in which they provide services to multiple clients. If a worker provides services solely to a single employer and has not taken steps to establish an independent business entity, they may be considered an employee.

Penalties for Worker Misclassification in Illinois

Under the Illinois Employee Classification Act, employers may be required to pay a civil penalty of $1,000 for each violation involving misclassification of workers. If a second audit is performed within five years of a previous penalty, an employer may be charged with a $2,000 penalty for each violation. Willful violations of the Employee Classification Act may result in criminal charges, and an employer may be charged with a Class C misdemeanor for a first offense and a Class 4 felony for a second or subsequent offense. They may also be required to pay double the amount of the statutory penalties, as well as punitive damages paid to an employee who suffered harm due to misclassification. Officers of a corporation who allowed misclassification to occur may also be held personally liable for penalties and violations.

Federal Tax Consequences of Worker Misclassification

Misclassification of workers will usually result in the failure to withhold income taxes from a person's wages and file the correct tax forms. The IRS may impose penalties for these violations, including: 

• A $50 penalty for each W-2 form that an employer failed to file correctly.

• A penalty for failure to withhold income taxes, which is calculated as 1.5 percent of the wages paid to a worker.

• 40 percent of an employee's FICA taxes and 100 percent of the employer's matching FICA taxes.

• A penalty for failure to pay taxes, which is calculated as .5 percent of the amount of unpaid taxes each month, up to a total of 25 percent of the total amount of unpaid taxes.

Additional fines and penalties may apply if a person is accused of intentionally misclassifying workers or committing tax fraud. Criminal charges may apply in these cases, and if convicted, a person may be sentenced to up to one year in prison and fined up to $10,000, and they may also be personally liable for the taxes that are owed to the IRS.

Contact Our Schaumburg Employment Law Attorney

If you are an employer who is unsure about how to properly classify your workers, or if you have been accused of worker misclassification, contact The Miller Law Firm, P.C. today. Our Illinois employment lawyer can help you understand the rules related to worker classification and advise you on the best way to avoid penalties and fines. We can also represent you in negotiations with the IRS or state agencies if violations have occurred. Call 847-995-1205 to schedule a free consultation and get the legal help you need.

Sources:

https://www.ilga.gov/legislation/ilcs/ilcs3.asp?ActID=2898&ChapterID=68

https://www.irs.gov/newsroom/irs-reminds-business-owners-to-correctly-identify-workers-as-employees-or-independent-contractors

https://news.bloombergtax.com/daily-tax-report/employee-misclassification-too-big-to-ignore