I had an employee on a contract basis who was given $3000 as salary and $1400 as per diem. Since the contract ended, he had to leave. Now he has claimed overtime mis-calculation and has reported his Salary as $4400. He had to work and live 100+ miles away from home and I wrote off his rent of $600 as bonus. My question is:
A) if he adds per diem in salary and divides it in 40 hours week, it increased the wages / hour. I know he us doing something illegal but will it hold as fraud if I sue him?

B) can I send him a 1099 for his accommodation?

If he was on "salary" there is no hourly pay and no overtime.
So not sure what you mean by over time mistake ?

And no the per diem is not part of the pay, and used to pay only for time away from home and on the job. And it is not part of the hourly pay.

The way I understand it, per diem is usually an amount for meals and out of pocket expenses, over and above salary.

Perhaps he just didn't understand per diem and did not intend to commit fraud.

Reported his salary to whom? Was there a written contract showing what his compensation would be? Do you have time sheets and receipts for what you paid for him?

Oh and tickle is right about what a per diem is.