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Misclassifying your workers could put your private practice at financial risk. Learn how to protect yourself from costly penalties.
You receive a notice from the Illinois Department of Employment Security (IDES) about a misclassification audit. What does this mean? Could this jeopardize your practice?
Many employers misclassify employees as independent contractors — a potentially costly mistake. This article will outline the differences between employees and independent contractors and the risks of misclassifying workers in Illinois.
Misclassification: Understanding the Basics
Misclassification occurs when an employer incorrectly designates a worker as a contractor rather than an employee. Business owners are well aware of the financial obligations of hiring an employee. Employers must withhold income taxes and pay payroll taxes on employees’ income but are not required to do so for contractors. Thus, the allure of cost savings often tempts employers to opt for contractor classification.
Meanwhile, employers who correctly classify their workforce members as employees face a competitive disadvantage when others misclassify their staff, paying higher unemployment insurance contributions and taxes.
The incentives to skirt the law are apparent. However, the state actively seeks to curtail misclassification, conducting audits and penalizing Illinois employers who don’t correctly classify their workers.
Employees vs. Independent Contractors: Making the Right Decision
One of the easiest ways to determine whether a new hire should be an employee or an independent contractor is to consider the control the practice intends to have over the worker. The more control an employer will exert, the more likely that the proper classification is “employee.”
The degree of control hinges on several factors. IDES focuses on three main criteria, with the balance of control shifting away from the employer and towards the worker under the following conditions.
Freedom from Control or Direction
Does your practice give the worker freedom in how to perform their tasks? For example, if your practice dictates a nurse’s work hours, methods, and procedures, IDES is more likely to consider the nurse an employee.
Service Outside the Usual Course of Business
Does the worker perform services outside the usual course of your business or away from your physical location? For instance, if a therapist works 40+ hours per week at your office and performs services central to your operations (such as psychotherapy), IDES is more likely to view the therapist as an employee.
Independent Trade or Business
Is the worker engaged in an independently established trade or business? A physician who runs their own practice and occasionally contracts with your clinic is more likely to be considered an independent contractor, especially if they provide services to multiple clients and are not economically dependent on your practice.
You can often identify proper classification when creating the job description and requirements. A worker applying for a role with varied, undefined tasks is likely an employee, while someone hired for a specific task or project may be an independent contractor.
The Role of Contracts in Worker Classification
Contracts are crucial for outlining work responsibilities, particularly for independent contractors. A well-drafted contract can clarify your practice’s level of control over a worker. However, IDES will look beyond the contract to assess the actual working conditions. To avoid misclassification, ensure that your contracts reflect the true working relationship.
See our article “Why You Need an Independent Contractor Agreement for your 1099 Staff.”
Impact on Workers
Misclassification has significant consequences for workers. Independent contractors miss out on important benefits and protections, such as health insurance, retirement plans, workers’ compensation, and unemployment insurance. Contractors are also responsible for paying self-employment taxes, which can significantly reduce their take-home pay. Misclassification can leave workers less financially secure, which could lead disgruntled workers to blow the whistle on their employers.
Audits and Consequences
The Illinois Department of Employment Security (IDES) monitors and enforces classification. The agency conducts audits, often triggered by random selection, worker complaints, or tips from other agencies. When IDES suspects misclassification, they will send a notice to initiate an audit.
Regardless of the ultimate findings, misclassification audits are thorough and time-consuming, involving a detailed review of your financial records and interviews with your staff to assess the working relationships within your practice.
If the IDES audit determines that your practice misclassified employees, you can expect severe consequences, which may include:
- Retroactive tax withholdings
- Interest on delinquent state unemployment insurance contributions
- Back wages
- Financial penalties for failing to report wages paid
Moreover, in Illinois, officers and employees may be personally liable for payments due from the business if the violations were willful rather than inadvertent.
These penalties can be devastating. Depending on the extent of the misclassification, the financial impact alone can put a practice out of business. In addition, an IDES investigation can tarnish a practice’s reputation.
Get legal help.
Do you want to ensure that you correctly classify your new hires? Perhaps your business model has changed, and you’re unsure how it affects your staff members’ classifications. Or maybe you received an audit notification from a state agency. The complexities surrounding employee classification make guidance from a healthcare attorney essential.
If your practice is located in a state where Jackson LLP has licensed attorneys, our firm can assist in classification questions, preparing contracts, and assisting you during an audit. Reach out for a free consultation.
This article is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.
