New York City’s First-in-the-Nation Independent Contractor Law Takes Effect Next Week

On May 15, 2017, a first-in-the-nation law regulating the relationship between independent contractors and those who retain their services goes into effect in New York City. Regardless of where a company is headquartered, it will likely enter into contracts with one or more independent contractors who live or work in New York City. The new law, called the Freelance Isn’t Free Act, gives independent contractors a right to sue for double damages if they are not provided with a written contract containing 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. As I commented in our November 16, 2016 blog post after the law was enacted, while the new law has laudable objectives and many positive attributes, it is unclear as to whom it covers and whom it regulates. Further, it may well have unintended yet serious consequences for some New York City-based independent contractors and for businesses that retain them, as described below.

In anticipation of the May 15, 2017 effective date of the Freelance Isn’t Free Act, the New York City Department of Consumer Affairs (which is the agency responsible for enforcing the new law) has created a webpage found at https://www1.nyc.gov/site/dca/about/freelance-isnt-free-act.page. The webpage includes a link to a flyer entitled “Protecting NYC’s Freelance Workers.” The flyer contains useful information for both independent contractors and businesses. The Department promises further information and forms on or after May 15.

Who does the new law cover?

The law is not particularly clear as to whom it covers, whom it protects, and whom it regulates.

First, 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. Thus, this law aims to protect freelancers operating in the form of a one-person operation (other than licensed practicing lawyers and medical professionals as well as “sales representatives,” who are specifically excluded from the new law). The definition of “freelance worker” would include independent contractors operating on their own who provide services to on-demand companies or their customers in the gig economy, such as Uber, Lyft, Via, InstaCart, Postmates, Homejoy, TaskRabbit, Handy, Homepolish, and the like.

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 one-person businesses. Indeed, it is commonplace for single-person shops 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 regulated 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. If the law is ultimately construed not to cover freelance businesses simply because they use one or more other people to help the freelancer to render services in whole or in part, then the application of the new law will protect a far smaller group of independent contractors than originally anticipated. Further, “freelancer workers” who retain others to assist in rendering services may well lose protections of the law by the simple act of delegating any task to a helper.

Second, the party retaining the freelance worker is labeled in the law as the “hiring party.” In a somewhat anomalous situation, under this law a freelance worker may also become a “hiring party” if he or she (or his or her LLC or business) retains another “freelance worker” to assist in rendering services.

Finally, as noted below, the new 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. Does the law only cover contracts where one of the parties lists their mailing address in New York City? The law is also unclear as to whether it regulates “hiring parties” who retain freelance workers with mailing addresses in New York City yet provide services to customers outside the city. Does a business using a freelance worker become a “hiring party” if any part of the work for which it contracts is performed in New York City? These concerns may lead prudent businesses to assume the new law is applicable in each of those circumstances.

What terms must the written contract contain?

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 at least the following five terms:

  • the parties’ names and mailing addresses,
  • an itemization of services to be provided,
  • the “value of services to be provided pursuant to the contract,”
  • 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. Such terms are commonly negotiated these days in a series of emails or other electronic communications. 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.

As mentioned earlier, the Department of Consumer Affairs has created a webpage for the Freelance Isn’t Free Act. The webpage links to a flyer entitled “Protecting NYC’s Freelance Workers,” which provides basic useful information and resources to the public about the law.  The flyer also states that “model [freelance] contracts that comply with the law” will be created.  Although no specific date is given in the flyer as to when such model contracts will be released to the public, the Department of Consumer Affairs has stated to us in a telephone communication that a model contract will be available the week of May 15, 2017.

It will be interesting whether the Department’s model freelance contract will limit itself to the specific requirements set forth in the new law or expand the subject matters of the contract to add key contract terms beyond those five terms mentioned in the freelance law. The new law provides that the Director of the Department’s Office of Labor Standards “may by rule require additional terms to ensure that the freelance worker and the hiring party understand their obligations under the contract.”

I hope the Director adds contract terms that will tend to minimize disputes. As noted in the next section addressing payment obligations, 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. Other terms recommended for “hiring parties” to include in the written agreement are discussed below in the “Takeaways” section.

What are the payment obligations under the new law?

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.

When services are “complete” is by no means a simple inquiry. 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, presentation of such an invoice or demand would likely prompt communications from the service recipient if it had any questions about whether the services were completed or if payment is due.

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. Further, it may prohibit a “hiring party” from negotiating a reduced payment despite a genuine question about the quality of the services provided.

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.

The most problematic aspect of the new law is a provision whereby a freelance worker who prevails on a claim for late payment or non-payment “is entitled to an award of double damages . . . .” See Section 20-933.b.3. While this provision appears to be similar to the New York Labor Law, which protects employees from non-payment of wages, the new law does not offer any defense to double damages, unlike the law covering employees. 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 by a court to pay not only the freelancer’s legal fees, but also twice what the freelancer can prove is owed – no matter how genuine and legitimate a company’s dispute may be regarding whether the services were completed or were satisfactory, whether the freelancer breached his/her duties under the contract, how much money is owed, or when the payment was due. This could conceivably be a very large sum.

A reading of the Committee Report accompanying the bill suggests that this “double-or-nothing” feature in the law may well have resulted from the absence of any testimony from the public other than “from freelance workers and their advocates.” Parties to a freelance contract may therefore wish to include a special clause negating this anomalous double damages provision if the “hiring party” has a legitimate dispute, but it remains to be seen if a court will permit such a provision.

Because of the absence of a good faith defense to the double damages penalty in the law, it may result in an unintended adverse consequence: some companies may choose to only use independent contractors with mailing addresses outside of New York City. In that event, New York City independent contractors will likely lose opportunities for potential work.

Are there penalties for failure to enter into a “written contract”?

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 (emphasis added).

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 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. For that reason, “hiring parties” will be well served by including some of the contractual provisions suggested below.

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 penalty 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.

Are there any other provisions in the new law of note?

The new 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 applicable 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 flyer issued by the Department of Consumer Affairs states that a complaint form will be available from the Office of Labor Policy and Standards by May 15, 2017.

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. The Director has already included on the webpage a great deal of the information required to be made available to the public.

Takeaways

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, prudent companies will clearly specify the five required terms in 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). This basic requirement is critical for any businesses that contract with many independent contractors in New York City, such as on-demand companies in the gig economy; the failure to include any of the required terms could lead to class action lawsuits.

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, in the good faith discretion of the business, 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 first-in-the-nation law focuses attention on the issue of independent contractors, which raises the threshold question: have the “freelance workers” been properly classified as independent contractors, or are they actually employees who have been misclassified under a state or federal law?  Issues of independent contractor compliance and misclassification are prevalent, most recently in the digital, gig and on-demand economies. 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 for years have been targeting companies that allegedly misclassify employees as independent contractors; so, too, have plaintiffs’ class action lawyers.

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/or 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 and customized 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 Department of Consumer Affairs will likely 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.

Written by Richard Reibstein.

Portions of this blog post are reprinted with permission from an article in the Spring 2017 issue of Employee Relations Law Journal entitled “New York City Freelancer Law May Have Nationwide Impact on Independent Contractor Relationships.” 

This entry was posted in IC Compliance. Bookmark the permalink.