The requirements of the Illinois Wage Payment and Collection Act (the “Act”), 820 ILCS 115/1 et seq., can be a landmine for unwary employers. Employers who negotiate with vendors and customers as part of their day-to-day business often presume that the same type of behavior will work when an employee demands disputed compensation. But the Act has strict rules about what must be paid to departing employees and how quickly these payments must be made; failure to comply with these rules can result in liability for both the company and its executives and owners.
This article addresses some of the most common violations of the Act by employers.
Failure to Pay Accrued But Unused Vacation Pay at Separation. Some employers have a written or unwritten policy that any employee who resigns or is terminated “for cause” automatically forfeits his or her unused vacation pay. In the employer’s mind, this policy serves as an incentive for continued employee loyalty and good behavior. However, the Act specifically prohibits the forfeiture of earned but unused vacation pay at separation and further requires that the monetary equivalent of any unused vacation time must be promptly paid to the separating employee.1
The Act provides that the “monetary equivalent of earned vacation” is part of the “final compensation” that must be paid to employees no later than the next regularly scheduled payday following his or her separation.2 Furthermore, the Act specifically prohibits any employment contract or policy which provides that earned but unused vacation time will be forfeited at termination.3
Of course, if an employer does not offer paid vacation time to its employees, there is no obligation to pay any amount as final compensation. But if an employer’s policy allows for the accrual of vacation time, and an employee has unused vacation time on the date of his or her separation, the monetary equivalent must be paid out by the next scheduled payday, regardless of the reasons for the employee’s departure.
Independent Contractors May Have Standing Under the Act. Many employers believe they are protected from claims under the Act because they have classified certain individuals as “independent contractors.” Leaving aside the thorny issue of whether this designation is appropriate under the Department of Labor’s regulations, employers should be aware that many individuals who would otherwise be considered independent contractors are classified as “employees” under the Act and are entitled to file suit under its provisions.
Under the Act, an individual is only considered to be an independent contract or if he or she (i) is free from control and direction in the performance of work, both in contract and in fact, (ii) performs work which is outside the usual course of business or is performed outside of all places of business of the employer, and (iii) is in an independently established trade or profession (meaning that the individual has a proprietary interest in his or her own business).4
All three requirements must be met in order for an individual to qualify as an independent contractor, and not an “employee,” under the Act.5 All other persons are considered to be “employees” to whom the Act’s protections apply. Thus, if a medical practice contracts with a nurse practitioner to see patients at its office, the nurse practitioner, who might otherwise qualify as an independent contractor, would be considered an “employee” under the Act because he or she performs work which is within the medical practice’s usual course of business at its place of business.
Individual Owners and Executives May Be Liable Under the Act. When a business is failing, employers may believe they can shut down its operations and walk away from the unpaid wages of their employees. This is a dangerous mistake to make. The Act defines the liable “employer” to include not just the business entity, but also any officer or agent of the employer who “knowingly permits” the employer to violate the Act.6 This can include persons with decision-making power regarding the payment of employee wages, persons with a significant ownership interest in the business, and those who exercise operational control over significant aspects of the business’ day-to-day functions.7 Thus, if the CFO allows the business’ bank accounts to be drawn down to the point that they are insufficient to cover payroll, the CFO may be individually liable to cover any shortfall in the employees’ wages. Indeed, subordinating the wage claims of employees to those of other creditors is considered to be a “willful” violation of the Act which carries the possibility of misdemeanor charges.8
It is also important to remember that, in addition to any unpaid wages, the Act allows successful employees to collect damages equal to 2% of the underpayments for each month in which they are unpaid, as well as attorneys’ fees and costs.9 It is important to counsel clients who are in the process of closing their business to reserve sufficient monies to pay their employees’ wages. Otherwise, an executive or owner may have to cover the shortfall individually.
Reducing an Employee’s Pay Without Signed Consent. Some employers deduct the cost of ruined merchandise or losses resulting from an employee’s mistake from the responsible employee’s paycheck. While it is possible to enforce such a policy, employers must be cautious to only make such deductions when they have the employee’s signed consent to do so.10
There are certain exceptions to this rule. For example, an valid wage assignment or wage deduction order.11 But, in situations where the reduction is not legally required and is not a benefit to the employee, the employer must obtain the employee’s freely written consent at the time the reduction is made.12 This requirement also applies to deductions which are made for advanced vacation pay.13 If an employee is permitted to take vacation pay that has not been earned, the employer cannot deduct the unearned vacation time from the employee’s final paycheck without obtaining his or her contemporaneous written consent.
Thus, general consent forms given to employees at their orientation which purport to authorize to future reductions in employee’s pay are invalid. The employee must agree to the reduction at the time it is made, otherwise the employer is better advised to accept the loss.
Failing to Pay Undisputed Wages. Sometimes an employee demands certain additional final compensation that the employer does not believe he or she is entitled to. For example, a salesperson may argue that he is entitled to a commission on a deal the closed after his separation date. Or an employee may dispute the number of vacation days she had accrued prior to her termination. In such cases, employers are often tempted to hold the employee’s entire final paycheck until the dispute is negotiated and resolved. The Act does not permit this.
Any non-disputed wages must be paid on the next payday following the employee’s separation.14 Only those wages as to which there is a good faith dispute may be retained by the employer until the matter is resolved through negotiation or litigation.15 In this way, the employer cannot hold the employee’s entire final paycheck hostage until he or she capitulates.
Conclusion. Violations of the Act can be costly, especially when monthly damages and attorneys’ fees are considered. Furthermore, individual executives and owners may find themselves personally liable for the business’ mistakes. Therefore, it is important that attorneys get involved at the time of an employee’s separation to ensure that final compensation is promptly and properly paid.
1. 820 ILCS 115/2, 115/5.
2. 820 ILCS 115/2, 115/5.
3. 820 ILCS 115/5; see also Arrez v. Kelly Servs., Inc., 522 F.Supp. 2d 977, 1004-05 (N.D. Ill. 2007).
4. 820 ILCS 115/2; 56 Ill. Adm. Code § 300.460.
5. Soh v. Target Mktg. Sys., 353 Ill.App.3d 126, 131-32, 817 N.E.2d 1105 (`1st Dist. 2004).
6. 820 ILCS 115/13.
7. 56 Ill. Adm. Code § 300.620.
8. 820 ILCS 115/14; 56 Ill. Adm. Code § 300.640; see also In re Faber, 52 B.R. 563, 565 (Bankr. N.D. Ill.1985) (finding that former president and COO f company was individually liable as an “employer” when he used corporate funds to pay one creditor in preference to the claims of his employees).
9. 820 ILCS 115/14(a). 10. 820 ILCS 115/9.
13. 56 Ill. Adm. Code § 300.760.
14. 820 ILCS 115/9.
Lauryn Parks is a Partner with Momkus McCluskey Roberts, LLC, where she concentrates in Employment Law and Commercial Litigation. She received her B.A. from the University of Chicago, majoring in Economics, and her J.D. from the University of Michigan Law School.