Worker misclassification, or 1099 Fraud, negatively impacts both workers and businesses. Worker misclassification is when a business misclassifies an employee as an independent contractor to avoid paying certain taxes.
Misclassified workers may not be able to receive health insurance or pension plans and could be denied unemployment benefits, workers’ compensation insurance and other benefits.
Worker misclassification also generates substantial losses to the Treasury and Social Security Medicaid Funds, as well as the state unemployment insurance and workers’ compensation funds. The reduction in funds increases the employers’ financial liability.
Some forms of misclassification occur when workers are not reported to the state or federal government but, rather, are working “off the books” or being paid “under the table” in cash. If a business intentionally or accidently misclassifies their workers, they are still in violation of the law.
In determining the existence of the independent contractor relationship, the Division of Employment Security reviews if the employer retains the right to control how the results are accomplished or only has input or the results desired. It is not necessary that the business actually direct or control the manner in which their services are performed, so long as the business retains the right do to so.
To find out if you are properly classifying your workers, take the department’s Worker Misclassification Assessment by visiting Labor's Off the Books page.