Is legal to classify an employee as an independent contractor?.

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Filing a 1099 form is generally for those who are self-employed, so your local unemployment was justified in denying those benefits. To collect unemployment, you must have previously been employed as an employee of someone else or a business not owned by you, not self-employed.

It sounds as though your fiance's boss had him classified as self-employed, even if your fiance thought that he was a regular employee. Check to see if taxes were withheld from his wages. If they weren't, then he was likely classified as being self-employed.

If your fiance is not an independent contractor, then he is eligiblefor unemployment.  To categorize him otherwise is violation.

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor.  Here is a link to an IRS site that will explain further: http://www.irs.gov/businesses/small/article/0,,id=98846,00.html