“A 1099 is happy being a 1099 until the moment they’re not. And the moment they’re not, the burden of proof is on the business owner to prove that they should truly be a 1099.” – Rob Campbell, E-COMP’s vice president of HR compliance, learning, and development in a Mission to Grow interview

While there are times when it makes sense to hire a 1099 contractor, it’s important to go into the relationship with open eyes. If something goes wrong, your business may be on the hook for more costs than you expect. From workers’ compensation claims to I-9 violations, 1099 contractors can lead to trouble if you’re not prepared.

What Are the Risks of Misclassifying Your Workers as 1099 Contractors? 

When it comes to 1099-related workers’ comp claims, “the burden of proof is always on the business owner. I tell business owners all the time, ‘You’re not innocent until proven guilty, you’re guilty until proven innocent,’” says Campbell. If you misclassify your 1099 contractors, it can eventually lead to back taxes, penalties, fines, and even criminal penalties. 

To prevent these issues, it’s important to always classify 1099 contractors correctly. Get contracts on file, and require your 1099 workers to carry their own workers’ compensation policy. Through a few simple measures, you can prevent the following risks from happening.

Workers’ Compensation Claims 

When a 1099 contractor gets injured at work, they can end up with a lot of expensive medical bills. Even if they don’t have any interest in filing a claim against your business, their family members are bound to bring it up as the bills start to stack up. 

If you don’t get workers’ compensation for someone, the penalties you face will vary based on the state you’re in. In addition to a fine, many states even have criminal penalties for workers’ compensation violators.

Unemployment Insurance Issues 

Your contribution rate is based on how many workers you have. If you are misclassifying 1099 workers, then your contribution rate is incorrect. Eventually, you’ll need to make up the shortfall.

I-9 Violations

If you are considered an employer, you are legally required to get completed I-9 forms from all of your workers. The I-9 is designed to show that someone is legally eligible to work in the United States. When these forms aren’t filled out correctly, it can lead to a fine of $698 to $5,579 for just the first offense. Document fraud can cost $575 to $11,524 in penalties.

Fines and Back Taxes

Wage law violations, like violating overtime and minimum wage rules from the Fair Labor Standards Act (FLSA), can lead to fines. If you haven’t been paying state and federal payroll taxes, you will likely be penalized for it. Additionally, you’ll have to pay for the employment taxes you should have paid for.

Criminal Penalties 

If you’re found in violation of FLSA laws, you can end up facing criminal penalties. The same thing is true for I-9 violations. There are many notifications you’re supposed to provide employees, so 1099 misclassifications inherently mean you’re not following these laws and requirements.

Class Action Lawsuits

In severe cases, you can even get hit with class action lawsuits. If there have been multiple examples of worker misclassifications, it can result in multi-million dollar judgments.

How To Protect Your Business From 1099 Contractors and Workers’ Comp Claims 

As a business owner, you are the one responsible for proving that a 1099 contractor is genuinely a 1099 contractor. If you fail to prove that someone is a 1099 contractor, you’ll be in violation of the FLSA, workers’ comp rules, I-9 requirements, and unemployment insurance laws. To avoid criminal and civil penalties, remember to use the following tips.

Use the Economic Realities Test 

To determine if someone is an employee or independent contractor, the Department of Labor’s Wage and Hour Division uses the economic realities test. This test looks at a few key factors. 

• Whether the worker can profit through their managerial skill: Can the worker earn more by being good at their job? For example, could the worker negotiate better pay or create advertisements to bring in more clients? 
• How permanent the work relationship is: This looks at the length of the work relationship. For instance, if the worker makes business decisions at multiple, sporadic jobs for different employers, they may be an independent contractor.
• How much control there is: With this factor, you must consider how much control the employer has over firing, hiring, and supervising the worker.
• Investments made by the employer and the worker: This part of the economic realities test looks at whether the worker invests money and provides capital for the business.
• Skill and initiative: During this part of the economic realities test, you must consider whether the worker uses their own skills and initiative to do the job or if they rely on on-the-job training.
• How integral the work is to the employer’s company: If the work is a critical, necessary part of the employer’s business, they are likely an employee.

If the worker is an employee, then you should add them to your payroll and cover workers’ compensation. Alternatively, you can change your working relationship so that they are a contractor according to the economic realities test.

Require 1099s To Get Workers’ Comp Policies

To protect your company from 1099 risks, there are a few simple measures you can take. When you hire a 1099 worker, you should require them to get their own workers’ compensation. If a worker becomes injured, they can turn to their own workers’ comp instead of trying to use yours.

Get a 1099 Agreement in Place

Good HR practices can protect you from a 1099 dispute. Whenever you hire a 1099 worker, you should always get them to sign a 1099 contract. Then, store this contract and your confirmation of the individual’s workers’ comp policy. 

Classify Employees Correctly 

You might be able to get away with misclassifying employees for a little while. Eventually, you’ll be caught. To avoid monetary fines, civil penalties, and criminal liability, the best option is to start by classifying your workers properly.

Protect Your Business Through Correct Worker Classifications

While there are legitimate uses for 1099 contractors, it’s important to be aware of the risks. If workers are misclassified, it can lead to hefty fines for your business. From workers’ compensation to the FLSA, there are many legal requirements that kick in once someone is considered an employee. 

To learn more about 1099 classifications and workers’ comp, reach out to our small business HR and payroll experts today.