Independent Contractor vs Employee: What Is the Difference In Illinois

Imagine you own a small coffee shop in Rockford. Business is booming and you need help. You hire Courtney to pull espresso shots.

You think, "I'll just call her an independent contractor. It's easier and cheaper that way." Six months later, you get a letter from the IRS. They say Courtney is actually your employee, and now you owe thousands in back taxes and fines. Ouch!

This is a real problem for many small business owners in Illinois. About 1 to 3 in 10 employers get it wrong. That mistake can cost you big time.

This article will help you understand the difference, and why it is important for your business. 

What Is an Employee?

An employee is someone who works for you regularly, and you control how they work. As the employer you control:

• What the employee does for a job
• How the employee does the job
• When the employee does the job
• The tools the employee uses to do the job

Not only do you have control over their work, you also:

• Pay their payroll taxes
• May be required to offer them employee benefits
• Must follow various employment laws
• Provide workers’ compensation insurance

If you own a chain of coffee shops, your employees might be the store managers, baristas, and cooks. 

What Is an Independent Contractor?

An independent contractor is someone you hire when you need something specific done. They are their own boss, or they work for a different company. 

Most often they work for clients other than you, and are in a different industry. 

In contrast to an employee, an independent contractor controls:

• What they do for a job
• How they do the job
• When they do the job
• The tools they use for the job

Using the coffee shop example above, an independent contractor may be the plumber you hire to fix the leaky faucet in your bathroom, or the paving company you hired to re-pave your parking lot.

How to Tell the Difference

Figuring out if someone is an employee or an independent contractor isn't always easy. Not surprisingly, different government agencies have their own tests. 

Illinois Department of Labor

The IDOL assumes all workers are employees unless:

• The worker is free from control or direction over the performance of his or her work.

• The service the worker is performing is outside the typical services offered by the hiring business.
• The worker is engaged in an independently established trade, occupation, profession, or business.

All three factors must be true for a worker to be classified as an independent contractor. The Illinois Department of Employment Security uses the same test.  

Illinois Employee Classification Act

The Act applies to workers providing services to construction contractors. Workers will be presumed to be employees unless proven they are either an independent contractor or a legitimate sole proprietor or partnership. 

The Act follows the same set of factors as the IDOL and IDES for the independent contractor test. 

A worker will be considered a legitimate sole proprietor or partnership if:

• The worker is free from direction and control.
• The worker is not subject to cancelation or destruction upon severance of the relationship with the hiring business. 
• The worker has a substantial investment in his/her business beyond ordinary tools, equipment, and a personal vehicle. 
• The worker owns the capital goods and shares in the profit and losses of his/her business.
• The worker makes his/her service available to more than just the hiring business.
• The worker reports income on a Federal Income Tax Schedule as an independent business or profession.
• The worker performs services for the hiring business under a business name.
• When the service the worker performs requires a permit or license, the worker pays for and obtains the license or permit.
• The worker provides his/her own tools and equipment. 
• If the worker hires its own employees, the worker does so without approval or direction from the hiring business, pays the employees without reimbursement from the hiring business, and reports the employees’ income to the IRS. 
• The hiring business does not represent the worker as an employee to others. 
• The worker has the right to perform similar services for others whenever and however he/she wants. 

Fair Labor Standards Act

The FLSA is a federal law establishing minimum wage, overtime, and other employment rules. The Department considers:

• The opportunity for profit or loss depending on the worker’s managerial skill.
• Investments by the worker and the potential employer.
• The degree of permanence of the work relationship.
• The nature and degree of control.
• The extent to which the work performed is an integral part of the potential employer’s business.
• The skill and initiative of the worker.

Despite the minor differences between the tests, there are some common threads in the factors:

1. Control: Who decides how, when, and where the work is done?
2. Similarity: Is the work performed a core offering of the hiring business?
3. Independence: Can the worker make a profit or loss? Do they work for others?
4. Skill: Does the work require special skills that the worker brings to the job?

No single factor determines a worker's status. Small business owners must look at the whole picture when making the decision.

Independent Contractor Agreements

Having an independent contractor agreement in place is a good idea. It can outline expectations and describe the work relationship. 

On its own though, it will not turn an employee into an independent contractor. 

The way the relationship between you and the worker actually works will carry more weight. 

Why Does the Difference Matter?

There are many advantages to a business using an independent contractor. 

Cost Independent contractors are cheaper to hire because you don’t have to pay taxes on them, there are no benefits or overhead costs, and you don’t have to onboard or train them.

Compliance There are a whole host of Federal and Illinois employment laws that you have to follow when you hire employees. Fewer of these laws apply to independent contractors, making the compliance burden less of a headache. 

Oversight You hire an independent contractor for their expertise. You don’t have to train them or tell them how to do their job. 

Liability You will generally not be liable for the actions of an independent contractor. 

Even though hiring independent contractors have advantages, the consequences of classifying an employee as an independent contractor can be severe: 

• Fines and penalties
• Back taxes and interest
• Lawsuits by employees
• Enforcement action from Illinois and federal governmental agencies
• Legal liability for your employee’s accidents or mistakes which cause harm
• Loss of government contracts
• Damage to your reputation

Understanding the difference is crucial for small business owners in Illinois. Hiring independent contractors can save money, but classifying them incorrectly can lead to serious problems.

Each situation is unique. And the analysis can be complicated. If you have any doubt, it is best to speak with a small business lawyer. 

Getting advice early is key to avoiding costly mistakes.

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Disclaimer: The information contained in this article has been prepared by Small Business Legal Solutions LLC for general informational purposes only. Nothing in this article is intended to constitute legal advice on any subject matter. The materials in this article are not intended to and do not create an attorney-client relationship. Do not act or refrain to act based on any information contained in this article  without first personally consulting with an attorney. Every circumstance is different and must be judged on its own merits.