Employers trying to manipulate the unemployment-insurance system are learning that fraud does not pay.

Last July, the Employment Security Department added a new unit dedicated to finding employers that defraud the system. In its first year, the unit discovered almost $5 million in unpaid taxes. Of that, $4.4 million was from employers that merged or restructured their businesses to gain a better unemployment tax rate. The other $582,000 was from employers that had not registered with the department or had not paid taxes for all of their employees. Those employers have to pay back the tax they owe, plus penalties and interest.

Over the year, the department also enforced unemployment coverage for 1,166 workers. Those workers had been misclassified as independent contractors, jeopardizing their livelihoods if they were laid-off or lost their jobs.

Employers do not pay unemployment taxes on contractors, and the contractors generally are not eligible for unemployment benefits. The employers also gain an unfair business advantage because their costs are lower than businesses that pay taxes for all their employees.

Historically, the department has focused on fraud by people who collect unemployment benefits, but was able to expand its focus to include employers with funding from the 2006 legislature.