Potential changes to independent contractor rules may impact many illinois businesses

Many small businesses rely on independent contractors, freelancers and other gig-workers to perform needed tasks.

The advantages are significant: by using an independent contractor we can avoid paying payroll taxes and other costs of employment like workers' compensation and have the flexibility of choosing when and where we use a person's service. The popularity of the "gig-economy" has exploded in the past few years.

But this may soon change. That's because new worker classification rules from the U.S. Department of Labor are likely to come into effect shortly. And the impact of these rules could be significant for many.

The new rules will consider a number of "economic reality" factors including the permanency of the relationship between the contractor and the company, the nature and degree of control a company has over that worker and the contractor's opportunities for profit and loss.

But most importantly the proposed rule will take a harder look at the contractor's role in the business and will rely heavily on the "extent to which the work performed is an integral part of the employer's business."

What does that actually mean?

The DOL gives this example:

A large farm grows tomatoes that it sells to distributors. The farm pays workers to pick the tomatoes during the harvest season. Because picking tomatoes is an integral part of farming tomatoes, and the company is in the business of farming tomatoes, the tomato pickers are integral to the company's business. The integral factor indicates employee status.

This could be significant for any business that relies on independent contractors to do work that is considered "integral."

So how to prepare? Here are a few steps to take.

• Consider centralizing your decision.

"I always recommend to my clients to have a tighter centralized decision-maker to determine who can be engaged as contractors," said Andrew Boling, of Kelleher + Holland, LLC in North Barrington. "Sometimes in larger decentralized corporations, there are multiple individuals making this decision who are outside of the traditional HR and legal and this can be a problem. Small businesses should rely on a single person or a small team to do this so that decisions can be more consistent."

• Use a staffing company.

Boling also recommends, where possible, using a staffing agency or a Professional Employer Organization (PEO) instead of hiring workers directly. These organizations are outsourcing firms that provide services directly to small and mid-sized businesses. They reduce the risk to their clients by acting as the employers of record and take responsibility for taxes, benefits and other employee-related costs and would also be better suited to determine which of their employees can be classified as independent contractors.

•Require incorporation.

Many experts feel that requiring your independent contractors to incorporate themselves as a corporation or even a Limited Liability Company helps to make the case that the contractor is indeed a separate, stand-alone business and would not be considered a worker. But doing this doesn't guarantee that the DOL will agree.

"You need to comply with all the economic reality tests," said Glenn Gaffney, an attorney based in Glendale Heights. "Just having your contractors incorporate doesn't mean you'll be in the clear."

• Take look hard at how you're using your contractors.

Economic reality means that your independent contractors need to be truly independent. They should, like any business, be able to use their own tools, hire their own employees, schedule their work when they want and control how their services are performed. Most importantly, they shouldn't be "integral" to your business.

"You have to be really careful about whether the core of your business is built around using independent contractor labor to run the business essentially or produce whatever goods or services are used for your business," said Nicholas Crawford, an attorney based in Crystal Lake.

Crawford said this evaluation must come not just about your own business, but about the business of your contractor.

"Let's say you have an independent truck driver and he does some work for you, but he says he's got other work," he said. "You have to determine what the economic reality looks like for that driver. Like, are you 50 percent of his livelihood or 90 percent? The answer would impact his classification with your company."

Paying close attention to these rules is important not just to stay in compliance with the DOL, but also with the Illinois Department of Employment Security (IDES), which applies the same rules.

"If you're a business and you're labeling people independent contractors, probably the last person to knock on your door would be the DOL. The ones that'll knock on your door the loudest and can be the most difficult are the IDES," Gaffney said. "Because all it takes is one person that you've identified as an independent contractor to be laid off or somehow discharged, and that person then files the claim for unemployment and then you've opened up a can of worms."