How to Determine Worker Classification
In our experience, many employers have trouble determining whether their workers should be classified as employees or independent contractors – and with good reason! The definitions are vague, subjective, and vary among the relevant agencies. In Illinois, this analysis usually falls to the Illinois Department of Employment Security (IDES) and the Internal Revenue Service (IRS).
Any worker that by law should be an employee but is treated as an independent contractor is considered “misclassified.” This mistake opens the hiring company to a lot of legal risk, so it’s important to know and abide by the agencies’ rules regarding worker classification.
The Illinois Department of Employment Security (IDES) Test
Under Illinois law, anyone performing services for a company is assumed to be an employee unless the company can show all three of the following:
- the individual can perform their services free from “control or direction” of the company;
- the service performed is outside the usual course of services performed by the company or outside of all the places of business of the company for which that type of service is performed, and;
- the individual is engaged in an independently established trade, occupation, profession, or business.
Keep in mind that the IDES and Illinois courts will automatically assume a worker is an employee, and the burden is on the company to prove their independent contractor status. If it’s unclear, the courts will probably decide the worker is an employee.
1) Control or Direction
The more control a company has over when, where, and how the worker does their job, the more likely it is that the worker is an employee. The administrative code lists 25 contributing factors (no single one is enough to decide). Specifically:
- Does the company issue assignments or schedule work, and/or set quotas or time requirements?
- Does the company have the right to change the methods used by the worker?
- Does the company require the worker to follow a routine or schedule?
- Does the company require the worker to report to a specific location and/or at regular intervals?
- Does the company require the worker to provide timesheets?
- Does the company require the worker to work a specific number of hours?
- Does the company engage the worker on a permanent basis?
- Does the company reimburse the worker for expenses incurred?
- Is the worker eligible for benefits (a pension, a bonus, paid vacation or sick pay)?
- Does the company carry workers’ compensation insurance on the worker?
- Does the company deduct employment taxes from the worker’s compensation?
- Does the company file a W-2 for the worker?
- Does the company bond the worker?
- Does the company give the worker materials and supplies, tools or equipment?
- Does the company give the worker transportation, samples, business cards, or an expense account?
- Does the company allow the worker to engage in other employment/sell to other companies?
- Does the company restrict the worker in terms and conditions of sale and choice of customers?
- Does the company assign or limit the territory in which the individual performs?
- Does the company set the price and credit terms for the worker’s products or service?
- Does the company reserve the right to approve orders or contracts?
- Does the company have a right to fire the worker?
- Does the company require attendance at meetings or training courses?
- Does the company have the right to appoint the worker’s supervisors?
- Does the company have the right to set rules and regulations?
- Does the company guarantee the product or service performed by the worker?
Each “Yes” indicates more direction and control, and tips the scales towards employee classification. Each “No” indicates less direction and control, and strengthens the case for independent contractor status. If most answers are “Yes”, the worker is probably an employee.
2) Usual Course of Services
The most important question here is whether the services are necessary to the business of the company or “merely incidental”. For example, movers are necessary to a moving company, chauffeurs to a dispatch service, and drivers to a package delivery service. If the work conducted is fundamental to the business, the worker is almost certainly an employee.
- A. McMahon Building v. Department of Employment Security
- EZ Movers, Inc. v. Rowell; O’Hare-Midway Limousine Service, Inc. v. Baker
- United Delivery Service, Ltd. v. Didrickson
The second half of this factor, “outside of all the places of business of the company for which that type of service is performed”, doesn’t really apply in most cases. Even if it appears like a worker is working outside the company’s place of business (at home, out doing deliveries), that might not be the case. For example, Illinois’ administrative code judges that typists working from home are still in “places of business” for the employer. Delivery personnel and salesmen aren’t “outside all places of business in which that service is performed” because they “represent [the employer’s] interest” everywhere they go. So usually, this second half doesn’t help sway factor two.
- CR England v. Department of Employment Security
- SC v. Department of Employment Security
3) Independently Established Trade, Occupation, Profession, or Business
The most important question is whether the worker has such economic independence that their work “could survive any relationship with the particular person contracting for services.” Essentially, would the worker be able to continue their business if they ended their relationship with the company? The code lists 13 factors to weigh here:
- The worker’s business is not subject to destruction upon severance of the relationship;
- The worker has an investment of capital and owns the capital goods of the business enterprise;
- The worker gains profits and bears losses of the business enterprise;
- The worker makes his or her services available to the public or business community regularly;
- The worker files taxes as an independent business;
- The worker performs services for the company under his or her own business name;
- The worker has a shop or office of his or her own;
- The company does not call the worker an employee;
- The worker hires his or her own helpers or employees (without the company’s approval or reimbursement);
- The worker reports the wages of his or her workers monthly or quarterly, as the case may be, to the IDES;
- The worker has the right to perform similar services for others without restriction by the company (although be careful, even if they can work for other companies, they might be an employee of all the companies they work at);
- The worker has a business listing in the telephone directory or elsewhere;
- If the services require a license, the worker has obtained and paid for the license in his or her own name (the same rule applies to tools/machinery).
Each “Yes” is a sign that the worker has their own established business (i.e. they’re an independent contractor). If most answers are “No”, the worker is probably an employee.
The Internal Revenue Service (IRS) Test
The IRS has its own test, largely similar to the IDES test. The IRS considers three main categories with several sub-categories that all factor into their determination:
Including details like:
- The type of instructions the company gives the worker;
- How much instruction the company gives the worker;
- How much training the company gives the worker; and
- How the company evaluates the worker, whether based on how the work is performed or on the end result (leans towards employee or contractor status, respectively).
Including details like:
- Who invests in the equipment;
- Whether there are unreimbursed expenses;
- Whether the worker has an opportunity for profit and loss;
- Whether the worker makes services available to others; and
- How the worker is paid, whether wages or flat fees (indicating employee or contractor status, respectively)
Including details like:
- Whether there is a written contract;
- Whether the worker gets employee benefits;
- How permanent the relationship is; and
- Whether the worker provides services that are a key activity of the business.
Tendencies within Government Agencies
Employee By Default
When it comes to classifying employees, different agencies have different tests. These tests are often confusing and difficult to apply, and tend to assume that workers are employees unless proven otherwise.
Highlighting the “Core Function” Test
Recently, agencies have put more weight on the “core function” test when determining a worker’s classification. This means the government will look at whether the services in question contribute to the core function of the business. If so, that person will be classified as an employee.