For many years we have warned that classifying employees as 1099 contractors as a method of avoiding payroll tax obligations is a BAD idea. There ARE legitimate 1099 sub-contractors in our industry. They are the brokers who place business through GA’s and MGA’s and work with a number of agencies with whom they share commissions for the insurance products placed for the producer’s clients. They have their own offices and business entities and they work at their own discretion without an agency’s business cards, office space, vehicles, and without office hours at the agencies with whom they partner.
However, if you expect a producer to be at your office during business hours, assign him a desk and a phone extension (or mobile number) and carry an agency business card, those are definitive symbols of an EMPLOYEE.
Proving the point, the Governor of New Jersey has signed a legislative package furthering the NJ efforts to stop misclassification of employees as independent contractors. Now, the “employer” will have to retro pay the employee to the standards of minimum wage and overtime law if they have been underpaid. There is also a penalty of up to 5% of the gross earnings for the prior 12 months payable to the misclassified worker. Then the penalties to the state – First offense is $250 per worker. Each additional offense, up to $1000 per worker. If there is a violation of NJ wage, benefit or tax law in connection with the misclassified worker there are three other possible consequences: A stop work order, suspension or revocation of any licenses held by the employer that are essential to the employer’s business, and/or additional penalties and fines payable to NJ and where wages are owed to the employee, an additional amount in liquidated damages payable to the employee equal to not more than 200% of the wages owed.
Note that this does not apply to Life Insurance Agents who have special dispensation from the IRS to remain 1099 independent contractors. However, the states will follow New Jersey to make the misclassification of employees as independent contractors more and more expensive once the employer is caught. And all it takes is one disgruntled former employee to make the mistake very costly for an independent P&C insurance agent.