Regardless of where a company is headquartered, it likely contracts with one or more independent contractors who live or work in New York City. If your company does so, take note. Earlier today, November 16, 2016, Mayor de Blasio signed into law the Freelance Isn’t Free Act (No. 1017-2015). The new law gives independent contractors a right to sue for double damages if they are not provided with a written contract with specified terms and are not paid by the date provided in the agreement or, if not so specified, within 30 days after completion of services under the contract. Although the new law has laudable objectives, it is likely to have unintended but serious consequences for both New York City-based independent contractors and for businesses that retain them.
Perhaps the most striking aspect of the new law is the provision awarding double damages for failure to pay for services on a timely basis even if the service recipient has a good faith belief that the services were not completed or performed in a satisfactory manner or that payment is not due for a host of other legitimate reasons. This penalty provision is all the more striking in view of the provisions in the New York Labor Law, which covers employees but not independent contractors. Although that statute grants double damages for non-payment of wages to an employee (as do many other state wage laws and the federal Fair Labor Standards Act), an employer is at least afforded a defense to the double-damages penalty if it can prove a good faith basis for believing that it did not owe the employee the wages in question. No such defense is available, however, under this new law covering independent contractors.
In an article we authored that was published in the New York Law Journal shortly after the New York City Council passed the bill, we called on the Mayor to send the bill back to the City Council to add a good faith defense to the double damages provision of the new law and fix what we viewed as other defects in the bill. That prompted a response published in the New York Law Journal from the principal sponsor of the bill, but his defense of the measure did not address the absence of a good faith defense. The Mayor signed the bill as passed by the City Council.
The Main Features of the New Law
Who is covered?
The Freelance Isn’t Free Act defines a “freelance worker” as “any natural person or organization composed of no more than one natural person, whether or not incorporated or employing a trade name, that is hired or retained as an independent contractor by a hiring party to provide services in exchange for compensation.” See Section 20-927 of the Administrative Code of the City of New York. There are three exclusions to the definition of “freelance worker”: sales representatives (as defined in section 191-1 of the New York Labor Law); licensed practicing lawyers; and licensed medical professionals.
While some independent contractors hold themselves out as individuals, many individuals operating as limited liability companies (LLCs) or under trade names do not disclose that they are actually only single-individual operations. Presumably, many freelancers are reluctant to disclose they are nothing more than one person providing services. Indeed, it is commonplace for one-person businesses to have websites proclaiming that “we” have done this or that, or that “our” services include this or that. Without disclosure by a freelancer that he or she is a one-person operation, many companies that retain the services of individual freelancers operating as LLCs or under trade names may have no idea they are or may be covered by this new law.
The law also does not make clear if a freelance worker who has one or more employees, helpers, or subcontractors is considered a “freelance worker” under the law, particularly if the independent contractor discloses to the service recipient that he or she “partners” with others. The main City Council sponsor has commented in writing, after passage of the bill, that it does not cover independent contractors who employ other workers, but that post-passage comment does not have the force and effect of law.
The party retaining the services of freelancers of the freelance worker is labeled in the law as the “hiring party.” That term excludes governmental agencies.
The law does not say if it covers freelance workers who reside in New York City but provide services to customers outside the city; whether it covers work performed in New York City in whole or in part by a non-city resident for a company that has an office in New York; or if it only covers contracts where one of the parties lists their mailing address in New York City. The law only requires that the contract set forth each party’s “mailing address,” not where the services are to be performed or where the services will be used.
What must the contract provide?
The law covers any contract between a freelance worker and a “hiring party” that has a value of $800 or more, by itself or when aggregated with all contracts between the parties over the prior 120 days. The law requires the parties’ contract to be “reduced to writing” and the “written contract” to include:
- the parties’ names and mailing addresses,
- an itemization of services to be provided,
- the “value of services to be provided,”
- the rate and method of compensation, and
- the date when the “hiring party” must pay the contracted compensation or the “mechanism by which such date will be determined.”
See Section 20-928. Frequently, such terms are negotiated these days in a series of emails or other electronic communications that can collectively constitute a legally binding contract. The City Council committee report on the bill indicates that such electronic communications may suffice as a “written contract,” but that is not apparent on the face of the new law.
What are the payment obligations?
The law provides that the contracted compensation shall be paid to the freelance worker either by the date such payment is due under the terms of the contract, or “if the contract does not specify when the hiring party must pay the contracted compensation or the mechanism by which such date will be determined,” no later than 30 days after completion of the freelance worker’s services under the contract, “[e]xcept as otherwise provided by law.” See Section 20-929.a. Questions often arise, however, as to whether and when a service provider’s services are “complete.” For example, are services “completed” if the services to be provided are unclear or ambiguous to one of the parties? What if a customer believes the deliverable is unsatisfactory, expects the independent contractor to make corrections or revisions, or asks for additional services that the independent contractor agrees to provide at the same or an added price?
Many of these types of common questions could be avoided if the law had mandated a freelance worker to submit a final invoice for work before payment is required to be made, but the law has no such requirement. Many service recipients have internal accounting procedures requiring presentation of an invoice before payment can be processed, but that common requirement (and expectation) is not routinely specified when an independent contractor is retained. If the law required a final invoice or a demand for payment, any questions in the mind of the service recipient about whether the services were completed and payment is due would likely be the subject of further communications between the parties.
The law also includes a provision that once a freelance worker has commenced performance under the contract, “the hiring party shall not require as a condition of timely payment that the freelance worker accept less compensation than the amount of the contracted compensation.” See Section 20-929.b. This section of the law, though, fails to include any reference to the service recipient having a good faith belief that the freelance worker has not fully or satisfactorily performed all of the contracted services.
What are the penalties for non-payment, partial payment, or late payment?
The law allows a freelance worker to bring a civil action “for damages” if he/she is not paid the full amount due under the contract or not paid such amount in the time required under the law. See Section 20-933.a. If the freelancer prevails, he/she shall not only be awarded damages but also reasonable attorney’s fees and costs. See Section 20-933.b.1. Those provisions are similar to laws protecting employees from non-payment of wages.
In addition, under the new law, a freelance worker who prevails on a claim for late payment or non-payment “is entitled to an award of double damages, injunctive relief and other such remedies as may be appropriate.” See Section 20-933.b.3. (emphasis added). This is similar to the New York Labor Law, which protects employees from non-payment of wages, but unlike New York law applicable to employees, it does not provide any defense to double damages. Under Section 198.1-a. of the Labor Law (which does not cover independent contractors), a good faith belief that payment was not due negates any right to double damages.
If a freelance worker prevails in court on a claim for non-payment under this new law, the business retaining the freelancer will be ordered to pay the freelancer twice what the freelancer can prove is owed – no matter how genuine and legitimate a company’s dispute may be over whether the services were completed or were satisfactory, or whether the freelancer breached his/her duties under the contract, or how much money is owed, or when payment is due. This could conceivably be a very large sum. A reading of the Committee Report accompanying the bill suggests that this anomaly in the law may well have resulted from the absence of any testimony from the public other than “from freelance workers and their advocates.” We hope the City Council will amend this law to align it with most state and federal wage laws providing this double damages defense.
What are the penalties for failure to enter into a “written contract” upon request?
If the “hiring party” failed to enter into a “written contract,” the law imposes a modest amount of “statutory damages” – a mere $250. See Section 20-933.b.2(a). A freelance worker can only prevail on that claim, though, if he/she “requested a written contract before the work began.” See Section 20-933.a.5.
The law, however, seems to include a potentially crushing amount of statutory damages if the independent contractor can prove not only that he/she did not receive a written contract upon request, but also that he/she was not paid the fees earned on a timely basis. Under Section 20-933.b.2(b), a freelance worker “shall be awarded statutory damages equal to the value of the underlying contract” for the failure to provide a written contract “in addition to the remedies specified in the [law]” for a late, partial, or non-payment of fees. In other words, an argument may be made in these circumstances that the freelancer is entitled to up to three times the value of the contract if no contract was provided upon request and no fees had been paid, even if the fees were not paid in whole or in part due to a legitimate, good faith dispute over whether payment was due. The language in the new law on this matter is unclear.
Are there any other penalties in the law?
The law also prohibits retaliation against a freelance worker for exercising his/her rights under this law, including denying a freelancer “a work opportunity” or “future work.” See Section 20-930. Statutory damages for retaliation shall be “equal to the value of the underlying contract for each violation arising under this [law].” See Section 20-933.b.4. If a “hiring party” chooses not to engage a particular independent contractor again because of a legitimate belief that the services were not satisfactorily performed, that business may arguably be subject to a sizeable award if that type of common business decision is deemed to be retaliation under the language of this law. This places an enormous burden on a company to justify its reasons for no longer doing business with an independent contractor if the contractor has exercised some right under this new law.
The law also authorizes the Corporation Counsel of the City of New York to file a lawsuit against a business where “reasonable cause exists to believe that a hiring party is engaged in a pattern or practice of violations of this [law].” See Section 20-934.a. A “hiring party” may be subject in such an action to a civil penalty of up to $25,000. See Section 20-934.b.
Other Provisions of the New Law
The law provides a statute of limitations for claims: two years for claims alleging a failure of a “hiring party” to offer an independent contractor a “written contract” and six years for claims alleging non-payment of fees or retaliation. See Section 20-933.a.2. & a.3.
The law states that it has no effect on other laws; parties may still resort to common law breach of contract claims or claims under any federal or state statute. See Section 20-935.b. It also provides that no provision of the law should be construed as providing a determination about the legal classification of any individual “as an employee or independent contractor.” See Section 20-935.d.
The law provides an administrative complaint procedure for freelancers who choose to address their complaints about unpaid or late fees to the director of the New York City Office of Labor Standards instead of or before filing a lawsuit. See Section 20-931.a. The complaint procedure is only available to freelance workers if they have not commenced a lawsuit against the “hiring party” under the law, or filed a claim or complaint with another administrative agency such as the New York State or the U.S. Department of Labor. See Section 20-931.c.1. The director is not, however, empowered to issue any determinations, citations, fines, or penalties. The law enables the director to facilitate an exchange of legal positions between the parties. See Section 20-931.a. That exchange of views may serve to resolve complaints. If, however, a “hiring party” fails to respond to the director’s communication seeking that party’s response to the complaint within 20 days after receiving notice from the director, the new law provides that such failure “creates a rebuttable presumption in any civil action pursuant to this [law] that the hiring party committed the violations alleged in the complaint.” See Section 20-931.d.
The director is also required under the law to establish a “navigation program” providing assistance and information to the public about the law. See Section 20-932.a. Under the navigation program, the director is required to make available to the general public “model contracts” on the website of the Office of Labor Standards. See Section 20-932.b.
The law only requires that a written contract contain the five terms listed in the bullets above. The law, however, authorizes the director to issue a rule to “require additional terms to ensure that the freelance worker and the hiring party understand their obligations under the contract.” We hope the director adds contract terms that will tend to minimize disputes. One such term should include a contract provision requiring presentation of an invoice upon completion of all or any part of the services that activates the “hiring party’s” obligation to pay the amount(s) specified in the parties’ contract.
The law takes effect 180 days after the mayor’s signature and applies only to contracts entered into on or after the effective date of the law – although the director has the authority before then to issue rules contemplated by the new law.
How Should Companies Prepare for the Freelancer Law While Minimizing Independent Contractor Misclassification Claims?
Freelancers and other 1099ers are often retained by a multitude of managers throughout a company without any involvement by the human resources department or legal counsel’s office. The law unrealistically expects all managers who have authority to engage an independent contractor to know that they may be required by law to include certain specific terms in a “written contract” with any independent contractors they retain, if there is some connection to New York City. Unfortunately, until the courts issue decisions regarding the jurisdictional coverage of the freelancer payment law or unless the City Council clarifies the issue of coverage through some legislative amendment, companies may have to assume that the new law will apply to them if there is any connection to New York City – such as where the contractor lives or works, where the company operates, or where an independent contractor’s services are deployed in whole or in part.
To comply with the Freelance Isn’t Free Act, we suggest that companies clearly specify the key terms of their independent contractor agreements, including the parties’ proper names and mailing addresses, a detailed scope of services or deliverables, amount(s) payable under the agreement including any interim payments (and how payment is to be determined if not a fixed fee), and interim and final completion and payment dates (or how such dates are to be determined).
In addition, it would be prudent for businesses retaining freelancers and other types of independent contractors to consider including some or all of the following provisions in the parties’ written contract:
- No payment is due until the contractor has submitted a formal invoice for payment to a specified person or persons within the company, sent in a manner likely to get the attention of the recipient (such as by mail or overnight courier service).
- Payment is due within a specified number of days within which invoices are typically paid by the company. If a business typically pays invoices within 45 days after presentation, it would be wise to include a clause that payment shall be sent by the company within 60 days after receipt of the invoice from the contractor.
- A representation as to whether the independent contractor has any employees, helpers, or partners and, if operating under a trade name, whether the contractor is an individual or an enterprise with more than one employee or helper.
- No interim or final payment(s) is (are) due if the freelance worker has not fully or satisfactorily performed all of the contracted services.
- Neither party has any obligation to continue the relationship after completion of the engagement or consider the other party in connection with future services.
This ordinance also focuses attention on the issue of independent contractor compliance and misclassification, especially in the digital, gig or on-demand economy. On the one hand, the New York City Council is seeking to promote legitimate independent contractor relationships and require businesses that engage freelancers to pay them on a full and timely basis. On the other hand, state and federal agencies are targeting companies that misclassify employees as independent contractors and are seeking to dissuade businesses from using independent contractors. This dichotomy is reflected in published statements by two leading federal regulators: U.S. Labor Secretary Thomas Perez, who has stated that “there’s an important place for independent contractors [in our economy], but I also believe that there’s ample evidence that that’s been abused,” and Dr. David Weil, the Administrator of the Wage and Hour Division of the U.S. Labor Department, who has stated that “the use of independent contractors [is] not inherently illegal, . . . [and] legitimate independent contractors are an important part of our economy.”
So where does that leave companies who use independent contractors to supplement their workforce, provide specialty services, or render services to the company’s customers? Such businesses would be wise not only to meet the minimum requirements of the Freelance Isn’t Free Act, but also to structure, document and implement their independent contractor relationships in a manner that enhances compliance with federal, state and city independent contractor laws.
Some companies have chosen to use methodologies such as IC Diagnostics™, which examines whether workers being treated as freelancers, 1099ers, and on-demand gig workers would pass the applicable tests for independent contractor status under an array of applicable laws, and then offers a number of practical, alternative solutions to enhance compliance with those laws. For companies already using independent contractors, the process includes re-structuring and re-documenting the independent contractor relationship in a thorough, practical, and sustainable manner, articulated within an agreement containing state-of-the-art provisions that maintain the key components of the company’s business model.
The model contract to be issued by the director of the New York City Office of Labor Standards will be, by its very nature, a short and abbreviated independent contractor agreement. In contrast, state and federal tests for independent contractor status may implicate several dozen factors to determine whether a group of workers are employees or independent contractors. Form or template agreements are typically ill-fitting, oftentimes contain inapplicable provisions, and only address a fraction of the many factors that support a legitimate independent contractor relationship.
Because of the absence of a good faith defense to the double damages penalty in the law, unintended adverse consequences are likely once the new law goes into effect. Some companies will undoubtedly choose to only use independent contractors with mailing addresses outside of New York City. As a result, independent contractors with New York City mailing addresses would lose potential work. Meanwhile, businesses that continue to use independent contractors associated with New York City, especially companies operating there, will be at risk for lawsuits from freelancers seeking double damage awards, even where there is a legitimate dispute as to whether the work met the contract specifications. Finally, the courts, already over-burdened, are likely to see a wave of lawsuits, many of which would never be brought if the bill promoted payment protections for freelancers without providing an inducement to file lawsuits where windfall recoveries are available.
Written by Richard Reibstein.
This blog post was originally published by Pepper Hamilton LLP as a Client Alert on November 16, 2016 by Richard Reibstein, Janet Barsky, and Jessica Rothenberg.