Employer of record in Illinois: PEO rules, payroll registration and what the client still owns (2026)

Illinois has no license for employer of record companies or PEOs, as of October 2026. Instead, two statutes reach them. The Employee Leasing Company Act, 215 ILCS 113, requires a company that leases workers to register with the Illinois Department of Insurance, for $1,000 a year, before it can carry or self-insure workers' compensation for them. And the Unemployment Insurance Act, 820 ILCS 405/206.1, makes the leasing company the employer for Illinois unemployment insurance only if it meets five conditions and is not being used to dodge the client's higher rate; otherwise the client stays the employer. Everything about how you recruit and supervise stays with you.

This page is for a company outside Illinois, or a staffing firm, deciding whether to employ someone in Illinois through an employer of record (EOR) or PEO, or to register itself. The general difference between an EOR, a PEO, a staffing agency and payrolling is in what is an employer of record and payrolling services explained. The employment agency license, the day and temporary labor registration and Chicago's own rules are in staffing agency license in Illinois, and the state's hiring rules are in hiring employees in Illinois. This page adds the leasing registration, the unemployment test, workers' compensation and what stays with you.

Illinois employer of record and PEO rules at a glance

Does Illinois license employer of record companies or PEOs?

Not as such. Illinois licenses private employment agencies and registers day and temporary labor service agencies, both covered in our Illinois staffing license guide, but it has no PEO licensing act. What it has is the Employee Leasing Company Act, whose stated purpose is to make sure "an employer that leases some or all of its workers properly obtains workers' compensation insurance coverage for all of its employees" (215 ILCS 113/5).

Its definitions reach most EOR and PEO contracts. An "employee leasing arrangement" is one "whereby a lessor obligates itself to perform specified employer responsibilities as to leased employees including the securing of workers' compensation insurance," and it includes a "long-term temporary arrangement," in which one company leases "all or a majority number of workers from another for a period in excess of 6 months or consecutive periods equal to or greater than one year." A "temporary help arrangement," in which an organization assigns its own employees "for a finite time period" to cover absences, skill shortages, seasonal work or projects, is excluded (§ 113/15).

Under § 113/20, a lessor "shall register with the Department prior to becoming a qualified self-insured for workers' compensation or becoming eligible to be issued a workers' compensation and employers' liability insurance policy," listing every name used in the past five years and its officers and directors, with "a $1,000 fee for the registration and each annual renewal." The department "shall maintain a list of those lessors who are registered." Ask the provider for its registration and confirm it with the Department of Insurance. A lessor keeps leasing records for four years (§ 113/25).

Who pays Illinois unemployment tax on an EOR or PEO worker?

It depends on a test, and the default is the client. Section 206.1 of the Unemployment Insurance Act treats an employee leasing company as one that supplies or takes over personnel management of workers "on an on-going basis rather than under a temporary help arrangement." Services are in the leasing company's employment, "and are not services in 'employment' of the client," only if all of these are true:

1. it pays the individual "directly from its own accounts";
2. it retains the right to direct and control the individual, alone or with the client;
3. it retains the right to hire and terminate the individual, alone or with the client;
4. it reports each client to IDES as the Director requires; and
5. it has any irrevocable indemnification IDES requires by rule, such as a surety bond or standby letter of credit, capped at $1,000,000.

Two further rules protect the system. Under subsection C, the client stays the employer anyway if its own rate is above the year's fund building rate plus the greater of 2.7 percent or 2.7 percent times the adjusted state experience factor, and the leasing company's rate is lower "by more than 1.5% absolute." Under subsection D, in every other case the services are "in 'employment' of the client." So a provider that cannot meet the five conditions leaves you with an IDES account and quarterly reports, even if it runs the payroll.

The client report matters in practice. IDES rule 56 Ill. Adm. Code 2732.306 requires the client's name, a description of its business and locations, its unemployment account number (if any) and the contract date, with a power of attorney or an officer's certification, filed through MyTax Illinois, and a report of any termination within 30 days. A report made late counts only from the period in which it is filed, so the rule's own example has the client owing the earlier quarters, with penalties and interest, although the contributions can later be moved to the client's account under 56 Ill. Adm. Code 2765.64. If you employ people in Illinois directly, register with IDES within 30 days of starting, as the Illinois hiring checklist explains.

Who carries workers' compensation in Illinois?

Someone must, from the first employee. The Workers' Compensation Commission says "If you have one employee, even a part-time employee, you must obtain workers' compensation insurance," and an employer that knowingly fails to insure "may be fined up to $500 for every day of noncompliance, with a minimum fine of $10,000" and loses the act's protections. Under the Employee Leasing Company Act:

• Either party may buy it. "Either a lessor or lessee may provide workers' compensation insurance coverage for leased employees." If the policy is issued to the lessor, the client is identified by endorsement and the leased employees' experience is "separately maintained" (§ 113/30(a)). If the client provides coverage, the lessor must notify the Department of Insurance (§ 113/30(f)).
• Proof of coverage. The insurer sends proof of coverage to the lessor and each client within 30 days of coverage starting or changing (§ 113/30(d)). You can also check a policy through the coverage search linked from the Commission's insurance page.
• Your experience follows you. A client with more than $200,000 of payroll can get its experience modification factor within 30 days of a written request; smaller clients get their loss information. If your factor is more than 50 percent above the lessor's when the contract starts, your premium is calculated on yours for two years (§ 113/25).
• Exclusive remedy. Unless the contract says otherwise, the leasing company shares the client's exclusive remedy under any workers' compensation policy "that either party has secured" (§ 113/45).

Which Illinois registrations, reports and notices still apply?

• Income tax withholding. An Illinois Department of Revenue withholding account and Form IL-W-4; without one, the employer withholds on all compensation with no exemptions.
• New-hire reporting. To IDES within 20 days, including independent contractors, under 820 ILCS 405/1801.1.
• Pay notice. Rate of pay and the time and place of payment at hire, in writing, under 820 ILCS 115/10.
• Paid leave. An employee who works in Illinois earns at least 40 hours of paid leave a year at one hour per 40 worked, or gets it up front, under the Paid Leave for All Workers Act (820 ILCS 192/15), with records kept for three years (§ 192/20). Agree whose policy applies; Chicago and Cook County have their own ordinances.
• E-Verify. No state mandate; see E-Verify requirements in Illinois.

What does the client company still own in Illinois?

The Employee Leasing Company Act says a leasing company "is not liable for the acts, errors, or omissions of a client or of any leased employee acting under the sole and exclusive direction and control of a client," and leased employees count as the client's for its general liability, auto, bond and liquor liability policies (§ 113/45). Illinois also regulates the hiring process heavily, and that process is usually yours:

• Postings and pay. Employers with 15 or more employees include the pay scale and benefits in job postings, and nobody may ask about pay history; see Illinois pay transparency law and the Illinois salary history ban.
• Records and credit. Criminal history questions wait until an interview, conviction-based rejections need an assessment and notices, and credit checks are limited; see ban the box in Illinois and Illinois background check laws.
• AI, recording and testing. Notice of AI use under the Human Rights Act, consent before AI analysis of video interviews, no secret recording of private conversations (see Illinois recording consent law for interviews), and drug testing under Illinois drug testing laws.
• Restrictive covenants and joint liability. Illinois sets earnings floors for non-competes and non-solicits; see Illinois non-compete law and joint employer liability for staffing agencies.
• Changes ahead. See new Illinois hiring laws for 2027.
• Federal payroll taxes. The IRS says the client "generally remains responsible" for employment taxes unless the PEO is IRS-certified; see the CPEO public listings.

When is registering your own company in Illinois the better route?

• The provider cannot meet section 206.1. You are the unemployment employer anyway, so you need the IDES account and quarterly reports.
• Your own rate is high. The rate-shopping test may keep the wages on your account whatever the contract says.
• You will employ several people in Illinois. Your own setup is an IDES account, a Department of Revenue withholding account, IL-W-4, workers' compensation from the first employee, 20-day new-hire reports and a paid leave policy.
• The work is short-term. A registered day and temporary labor service agency, or a temporary help arrangement, may fit better than leasing.

Questions to ask an employer of record or PEO before signing for Illinois

1. Are you registered with the Illinois Department of Insurance as an employee leasing company, and since when?
2. Do you meet all five conditions of 820 ILCS 405/206.1(B), and have you reported us to IDES under 56 Ill. Adm. Code 2732.306?
3. Given our current IDES rate, could subsection C make us the employer anyway?
4. Who carries workers' compensation, are we named by endorsement, and will you notify the Department of Insurance if we buy it?
5. Will you give us our experience modification factor or loss information when we ask?
6. Who opens the withholding account, collects IL-W-4 and reports the hire within 20 days?
7. Whose paid leave policy covers the worker, and who keeps the three years of records?
8. Who writes the job posting, and will it carry the pay scale and benefits?
9. Are you an IRS-certified PEO, and who is liable for federal employment taxes if you miss a payment?
10. What happens to the worker and our records if we end the contract?

Employer of record rules in other states: Alabama, Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Mississippi, Nebraska, New Hampshire, New York, North Carolina, Ohio, Rhode Island, South Carolina and Texas.