Rarely Discussed Tax Law Provides Recourse For Misclassified Employees

The misclassification of employees as independent contractors is a persistent problem in America. Misclassified employees do not receive overtime. Because the employer never paid unemployment taxes, misclassified employees often do not receive unemployment compensation. To add insult to injury, misclassified employees must pay the employer’s share of federal employment taxes.

Misclassified employees have some recourse by filing federal wage and hour claims. However, the wage and hour laws may not compensate employees for all damages caused by the misclassification. A rarely discussed tax law might make up the difference.

That law is 26 U.S.C. § 7434 It provides a civil cause of action to the victim of “any person [who] willfully files a fraudulent information return [i.e., a 1099] with respect to payments purported to be made to [the victim].” 26 U.S.C. 7434(a). To prevail on this civil claim, the worker must prove that: (1) the employer issued an information return, and (2) that the information return was fraudulent. See, e.g., Seijo v. Casa Salsa, Inc., 2013 WL 6184969 (S.D. Fla. 2013). In the Seijo case. a dance instructor brought a misclassification lawsuit against the studio where she taught dance lessons. The court ultimately determined that the instructor had assembled sufficient evidence of misclassification for a jury to infer that the dance studio fraudulently issued 1099’s instead of W2’s to her.

Damages for the issuance of a fraudulent information return are set at a minimum of $5,000.00, plus court costs, and attorneys fees in the discretion of the court. 26 U.S.C. § 7434(b). Thus, the fraudulent information return statute provides real ammunition to workers who are the victims of willful or fraudulent misclassification