Payroll fraud, also called worker misclassification, is the illegal practice of designating an employee as a "1099 worker" or an independent contractor. Employers do this in order to avoid paying payroll taxes, health insurance benefits, unemployment tax, and/or workers’ compensation insurance for their employees.  By taking advantage of employees in this way, employers are able to cut costs and submit lower bids for projects, undercutting responsible contractors.


These cost cuts come at the employees’ expense—when classified as an independent contractor, employees become responsible for withholding the appropriate amount of taxes from their paycheck each period.  Even more problematic is the fact that the tax obligation of an independent contractor is higher than that of an employee; so a misclassified employee will pay more taxes at the end of the year.  If a misclassified employee is injured on the job, he is not protected by the employer’s worker’s compensation insurance.  This means that the employee will not receive any pay for time missed from work, he will be responsible for paying his own medical bills, and he will receive not receive any compensation for permanent injury(ies) sustained on the job.


Misclassification is fraud, and there is no excuse for it.  State and Federal employment laws are in place to protect employees. If an employer is found guilty of willful violations, they may be subject to hefty fines and penalties; including exclusion from bidding on government contracts for a period of time, or even the complete loss of their business license.


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If you or someone you know has been the victim of misclassification on the job, we want to help.
Contact our Compliance Office at (240) 695-9463, ext. 4218, for more information.