1099 Law and the Penalty for Employee Misclassification

Independent Contractor Legislation and Liability

When engaging 1099 consultants, it’s important to be aware of independent contractor legislation and which law applies to your staff versus 1099s. Several laws designed to protect employees including federal wage and hour law, workers’ compensation law and intellectual property law, can generate a penalty including fines as punishment if your 1099 is reclassified to employee status.

• Federal Wage and Hour Law: The Fair Labor Standards Act (FLSA) establishes guidelines for pay across the United States for minimum wage and overtime. This is an important law to know concerning worker classification. Even though 1099 contractors are not subject to protection from FLSA law, misclassification of an employee as an independent contractor may make your business liable for paying penalties in overtime to the 1099 for up to several years of service. If there is any suspicion by state or federal agencies about employee misclassification, the workers in question will undergo tests to determine status and if they are eligible for protection under FLSA.
• Workers’ Compensation Law: Workers’ compensation insurance protects employees and employers if a worker is injured while performing a job. Workers’ compensation law does not apply to 1099 relationships, but not having it leaves a company vulnerable if an independent contractor is injured due to neglect on behalf of the company. If that happens, the 1099 could sue the company and if neglect is found, the business may pay a penalty.
• Title VII of the Civil Rights Act of 1964: Title VII prohibits discrimination by employers based on race, color, religion, sex or national origin. Title VII also prohibits discrimination against an individual because of his or her association with another individual of a particular race, color, religion, sex or national origin. If a 1099 professional files a discrimination complaint and is reclassified to employee status under the law, Title VII statutes will apply.
• Intellectual Property Law: Who has the right to works or inventions created by a 1099 contractor for a company? The answer is not a simple one, but there are ways to ensure a business is protected. It’s best to incorporate language in the independent contractor employment agreement that transfers rights of the property to the hiring company if that’s the desired outcome. The same goes for patent and trade secret ownership; having a confidentiality clause in the contract or having what’s called an “assignment” in place for inventions or for trade secrets is important to protect a company’s rights to ownership.

State and Federal Legislation Aimed at Worker Misclassification

In recent years, there has been increased focus on legislative acts regarding employee misclassification. Prevention measures include penalties aimed at collecting revenue needed at the state and federal level; taxing agencies see 1099 professionals as a possible source of revenue. The following is just a sample of recent and proposed independent contractor legislation and initiatives. It’s smart to review current and pending 1099 law in the state(s) your company operates in to avoid liability and ensure proper employee classification.

1099 Law: Federal Initiatives and Legislation

• Committee on Ways and Means hearing, employee misclassification prevention.
• Questionable Tax Practices Memorandum of Understanding Initiative (QETP).
• H.R. 5804: Taxpayer Responsibility, Accountability and Consistency Act of 2009 (pending).

1099 Law: State Initiatives and Legislation

• Colorado, HB 1310: Misclassification of Employees as Independent Contractors for Colorado Employment Security Act.
• Connecticut, SB 931: An act concerning penalties for concealing employment or other information related to workers' compensation premiums.
• Illinois, H.R. 6111: Employee Misclassification Prevention Act.
• Iowa: Misclassification Task Force.
• Maryland, SB 909: Workplace Fraud Act of 2009.
• Michigan: Interagency Task Force on Employee Misclassification.
• Minnesota: Independent Contractor Exemption Certificate (Building Construction Industry).
• New Hampshire: Department of Labor establishes criteria to define independent contractor or employee.
• New Jersey: Construction Industry Independent Contractor Act.
• New York: Joint Enforcement Task Force on Employee Misclassification.

Disclaimer: The content in this Web site is designed to provide educational information and should not be considered legal advice.

Avoid penalties due to employee misclassification liability. Let Secure Talent help your business navigate 1099 law. Contact us online or call 800.778.0197.