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Motor Carriers May Be Liable for State Unemployment Taxes for Trucking Independent Contractors in Illinois and Elsewhere

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Motor Carriers May Be Liable for State Unemployment Taxes for Trucking Independent Contractors in Illinois and Elsewhere

Consider these facts: an over-the-road truck driver signs an independent contractor operating agreement with a national trucking company to transport freight. Later, the over-the-road truck driver accidentally hits a utility pole, causing property damage to the owner of the trailer, and leading to termination of the independent contractor operating agreement. Is it possible for the truck driver to obtain unemployment benefits after the termination of the trucking independent contractor operating agreement?

Under Illinois law, the answer is yes, if the facts support finding an employer-employee relationship for the purposes of unemployment tax liability. C.R. Eng., Inc. v. Dep’t. of Empl. Sec., 2014 IL App (1st) 122809, ¶ 69-70. In fact, Illinois is not alone in finding motor carriers liable for state unemployment taxes. The Illinois Court of Appeals cited to state decisions from Colorado and Washington to support finding a motor carrier owed state unemployment taxes. Id. at ¶ 69 (citing SZL, Inc. v. Industrial Claim Appeals Office, 254 P.3d 1180, 1186 (Colo. App. 2011); Western Ports Transportation, Inc. v. Employment Security Department of the State of Washington, 110 Wn. App. 440, 41 P.3d 510, 520 (2002)).

Illinois is one of Several States Recognizing State Unemployment Taxes for Trucking Independent Contractors

Federal and state courts in California, Arizona, Illinois, Colorado, and Washington have found owner-operators to be “employees” in unemployment cases. Illinois, Colorado and Washington have acknowledged that a motor-carrier can be considered an employer liable for state unemployment taxes, even though there may be an independent contractor arrangement for other purposes. C.R. Eng., Inc. v. Dep’t. of Empl. Sec., 2014 IL App (1st) 122809, ¶ 69. In some instances, an owner-operator may be considered an independent contractor in an automobile lawsuit, but may be considered an employee for purposes of receiving unemployment benefits. In fact, the Washington State Court of Appeals allowed the Department to hold a motor carrier liable for state unemployment taxes, even though the owner-operator in that case “owned his own truck, paid for his own truck repairs, fuel and insurance, chose his own routes and could have hired another driver to operate his equipment.” Western Ports Transportation Inc. v. The Employment Security Department, 110 Wn. App. 440, 453 (2002).

Each state varies in how it handles unemployment insurance tax liability. In Illinois, motor carriers must consider the following:

1. The Difficulty in Illinois to Claim an Owner-Operator as an Independent Contractor for Purposes of Unemployment Insurance Tax Liability

A motor-carrier can either:

  • claim an owner operator is an independent contractor under section 212 of the Illinois Unemployment Insurance Act, which applies to all industries; or
  • claim an exemption under section 212.1, which applies only to truck owner-operators. 820 ILCS 405/212, 212.1. Under the Illinois Unemployment Insurance Act, the following must be shown to prove an independent contractor relationship under section 212:

      A. Such individual has been and will continue to be free from control or direction over the performance of such services, both under his contract of service and in fact; and

      B. Such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

      C. Such individual is engaged in an independently established trade, occupation, profession, or business." 820 ILCS 405/212.

All three of the above-mentioned elements must be met for there to be an independent contractor under section 212. C.R. Eng., Inc. v. Dep’t. of Empl. Sec., 2014 IL App (1st) 122809, ¶ 50. If any single element cannot be proven, then there is no independent contractor relationship for the purposes of unemployment tax liability in Illinois. Id. Whether someone is an independent contractor under Section 212 is a fact-intensive inquiry based primarily on how work was performed.

The Existence of A Motor-carrier Independent Contractor Arrangement Maybe Difficult to Prove

It is important to remember that courts will broadly interpret the existence of an employer-employee relationship. In 2014, the Illinois Court of Appeals found that 212(B) did not apply to trucking owner-operators and stated “an employer’s place of business extends to any location where workers regularly represent the employer’s interests.” Id. at ¶ 59. In making this finding, the Illinois Court of Appeals noted:

“it [is] logical to conclude that Mr. Park represented CRE's interests when picking up the freight at the Walmart distribution center in Sterling, Illinois, when transporting the freight along the roadways, and when delivering the freight to the other Walmart distribution centers and/or Walmart retail stores. Accordingly, CRE's place of business extended to all the locations where Mr. Park provided these freight-hauling services; thus, CRE failed to meet the second condition for finding that Mr. Park was an independent contractor under section 212(B), specifically, CRE failed to prove that Mr. Park's services were performed outside all of CRE's places of business.” Id. at 61.

This reasoning by the Illinois Court of Appeals makes it near impossible for most motor carriers to successfully demonstrate an independent contractor relationship for purposes of unemployment tax liability. If an owner-operator is always representing a motor-carrier’s interests by transporting freight on the highways and is, therefore always, at the motor carrier’s “places of business” under section 212, then all the elements of 212 cannot be met and an independent contractor relationship will not exist.

Therefore, a motor-carrier’s best bet is to seek an exemption under section 212.1 of the Illinois Unemployment Insurance Act.

2. The Section 212.1 Exemption Under the Illinois Unemployment Insurance Act

Section 212.1 of the Illinois Unemployment Insurance Act is a special exemption from unemployment tax liability stating truck owner-operators will not be considered employees if the following criteria exists:

  1. the presence of an owner-operator lease contract or registration by the driver with the Illinois Commerce Commission or Interstate Commerce Commissions;
  2. licensing and operating costs are covered by the driver;
  3. the driver determines his or her own schedule;
  4. the driver can terminate the lease and continue performing services for other motor carriers in a similar way;
  5. the driver leases or owns his or her own equipment; and
  6. the driver “[m]aintains a separate business identity, offering or advertising his or her services to the public, by displaying its name and address on the equipment or otherwise.” 820 ILCS 212.1.

It is important to study the wording of section 212.1, especially since ALL of the elements listed in section 212.1 must be met. C.R. Eng., Inc. v. Dep’t. of Empl. Sec., 2014 IL App (1st) 122809, ¶ 70. We encourage you to visit the wording of Section 212.1 here. Section 212.1 includes additional provisions not listed above, which could affect the existence of an employer-employee relationship. For example, if a driver is operating a truck owned by a shareholder or family member of an owner of a motor carrier, then an exemption cannot be claimed under section 212.1. In 2014, the Illinois Appellate Court refused to find an exemption where a motor-carrier offered no evidence and, thus, failed to show a driver maintained a separate business identity by displaying its name to the public on equipment or “otherwise.” C.R. Eng., Inc. v. Dep’t. of Empl. Sec., 2014 IL App (1st) 122809, ¶ 77.

It is difficult for motor-carriers to protect themselves from state unemployment insurance claims. Even with knowledge of state unemployment law, a motor-carrier may still find itself in scenarios where the existence of an independent contractor arrangement is difficult to prove, especially since all the elements of either section 212 or section 212.1 must be met. Therefore, it is best to proceed with the advice of counsel in how to interact with owner-operators to ensure that all requirements for an independent contractor relationship are met under the Illinois Unemployment Insurance Act.

Contact Alex Sweis or James Cook at McKenna Storer for questions about this topic of any other trucking commercial transportation law or Illinois transportation and trucking defense questions.

If you enjoyed this topic you may also be interested in other blogs by our insurance defense attorneys.

Categories Commercial Transportation Law



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