What is Worker misclassification?

Worker misclassification happens when a business labels someone a 1099 contractor even though the nature of the relationship makes them an employee under the law. It is one of the most common and costly compliance mistakes in hiring, because the test is about the actual working relationship, not the label on the contract.

If an audit or a worker's claim finds misclassification, the employer can owe back payroll taxes, the employee's withheld taxes, unpaid overtime and benefits, plus interest and penalties, retroactive to when the work began. States apply different legal tests, and some impose fines of thousands of dollars per misclassified worker.