Recently plaintiffs’ attorneys have been increasingly deploying a new and potentially lucrative weapon from their arsenal of independent contractor misclassification claims against motor carriers, this time in the unemployment tax context utilizing the Illinois False Claims Act (IFCA) . IFCA is an anti-fraud statute modeled after the federal False Claims Act which was enacted to reward private citizens (also referred to as “relators”) who bring wrongdoing to light and to encourage whistleblowing and disclosure of fraud against the government by offering them a portion of the government’s recovery in a suit brought by the relator for the benefit of the government (referred to as a “qui tam” action).

The increasingly common IFCA claim is that a carrier is misclassifying drivers as independent contractors and thus defrauding the state of Illinois of unemployment tax contributions. Under IFCA, a relator with a valid claim is potentially entitled to an award of 30 percent of the alleged damages sustained by the state , which, in the unemployment tax context could be quite significant with a limitations period of at least four years. While wages subject to Illinois unemployment tax contributions are currently capped annually at $13,590 per worker at a maximum rate of 8.1 percent, for motor carriers with larger fleets this can add up quickly and provide the potential for a significant recovery by one or more disgruntled owner-operator qui tam relators and their attorneys.

Fortunately, and consistent with its stated purpose, IFCA expressly provides several potential bars to such qui tam actions including, but not limited to, (1) the allegations involved are already the subject of a civil suit or administrative civil money penalty proceeding in which the state is already a party, or (2) substantially similar allegations or transactions were already publicly disclosed in the context of some other court or administrative proceeding, an investigation, or by the news media. These IFCA restraints are intended to prevent “tag along” legal actions where the government is already aware of the alleged wrongdoing, and the qui tam action, therefore, serves no purpose. For example, if the Illinois Department of Employment Security (IDES) has already conducted an unemployment tax audit and issued an assessment to a motor carrier (or determined no assessment was needed), a relator’s IFCA lawsuit regarding alleged liability for the same time period should be dismissed under IFCA’s government action bar.

In an IFCA action involving state unemployment tax, an additional important defense involves IDES’ lack of authority to assess and collect unemployment tax contributions for alleged employees whose services are not localized in, based in, or directed from Illinois. While there is a common misconception that a worker’s state of residence dictates where the individual’s alleged wages must be reported and corresponding unemployment tax contributions paid, as in most states, Illinois’ unemployment code provides a multistep analysis for determining proper jurisdiction. Illinois’ jurisdiction analysis begins with determining where the service is localized. If the services are not localized in Illinois, then the IDES must determine whether the services are based in Illinois. If the services are neither based nor localized in Illinois, IDES must determine whether the services were “directed or controlled” from Illinois, and, if so, whether some of the service was also performed in Illinois. If none of the first three steps of the jurisdiction analysis make clear in which state proper unemployment tax jurisdiction lies, only then should the IDES default to the alleged employee’s state of residence.

Given the interstate nature of the trucking industry, owner-operators’ services are often performed over the road in various states. As such, a regional or long-haul owner-operator’s services will arguably not be localized in any single state nor based in any one state. Instead, proper unemployment tax jurisdiction should lie in the state from which each owner-operator receives dispatch information if the owner-operator has also performed some service in that state. Typically, performance of service in a state can be shown via freight pick-up or delivery location, miles traveled, and/or fuel stops.

For purposes of defending against IFCA claims involving alleged unpaid Illinois unemployment tax liability as well as potential unemployment tax audits by the IDES, current Illinois based motor carriers might wish to consider relocating their dispatch operations outside the state of Illinois, in a more independent contractor friendly state where their owner-operators also typically perform at least some service. Indiana, for example, is generally considered much lower risk for owner-operator reclassification than Illinois and has enacted a more broadly applicable statutory owner-operator exemption from the definition of “employment” for state unemployment tax purposes.

For more information, you may reach out to Rebecca Trenner, Kelli Block, or Andrew Butcher at Scopelitis.

[1] 740 ILCS 175/1 et seq.

[2] 31 U.S.C. §§ 3729-3733 (2006); United States v. Bank of Farmington, 166 F.3d 853, 857-58 (7^th Cir, 1999).

[3] Moreover, an IFCA defendant may be liable to the state for the costs of any civil action brought to recover any such damages. 740 ILCS 175/3(a)(1) and (2); see also 740 ILCS 175/4(a).

[4] In fact, the statutory four-year statute of limitations may be extended for a willful failure to pay unemployment tax contributions. 820 ILCS 405/2207.

[5] 740 ILCS 175/4(e).

[6] Bank of Farmington, 166 F.3d at 858—859.

[7] 820 ILCS 405/207.