Businesses Everywhere Take Note: NYC Independent Contractor Law Will Have Impact Well Beyond the City

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.

Conclusion

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

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

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.

Posted in IC Compliance

Trump’s Impact on Independent Contractor Misclassification: States will Likely Increase Enforcement After Feds Dial Down Theirs

This article was published in the Class Action, Commercial Contracts, Corporate, Employment, and Public Policy sections of Law360 on November 10, 2016. © Copyright 2016, Portfolio Media, Inc., publisher of Law360. It is republished here with permission.

In the past eight years, the Obama Administration has spearheaded enforcement initiatives on independent contractor misclassification through the U.S. Department of Labor and the IRS. That crackdown, however, seemed to be focused on the low-hanging fruit – companies that often had little or no defense to the claim that they were misclassifying employees as ICs. In contrast, private class action lawyers focused and continue to focus on more challenging cases or larger or more well-known companies, like Uber, FedEx, Amazon, Macy’s, Lowe’s, DirecTV, BMW, Google, Sleepy’s, and Jani-King, to name just a few. During that same period, Congress did not pass a single bill to address the issue of independent contractor classification.

During that time, though, one of the federal government’s initiatives in this area has had significant traction: its program of entering into joint/coordinated enforcement efforts with the states. Since the U.S. Department of Labor announced its “Misclassification Initiative” in September 2011, 35 state labor departments have signed a Memorandum of Understanding (MOU) with the U.S. Department of Labor. Of those 35 states, 18 currently have Republican governors: Alabama, Arkansas, Florida, Idaho, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Nebraska, New Mexico, North Carolina, Oklahoma, South Dakota, Texas, Utah, Wisconsin, and Wyoming.

Thus, it is fair to say that at the state level, IC misclassification is viewed as a non-partisan priority. Why is that? Because while some companies that retain legitimate ICs on a 1099 basis, a fairly sizeable percentage of companies that pay certain workers on a 1099 basis either (a) do not structure or document their IC relationships in a manner that complies with IC laws, or (b) have no bona fide basis for issuing a Form1099 to such workers. In both of those situations, the states are shortchanged on unemployment insurance contributions and workers’ compensation premiums, and lose the benefit of employee income tax withholdings.

In contrast to Congress, which has passed no IC misclassification legislation in the past eight years (or at any time previously), many state legislatures have passed bipartisan legislation designed to curtail IC misclassification. Those new laws increased penalties for IC misclassification, made the test for IC status more stringent, or have established state task forces to combat IC misclassification.

While it is likely that the U.S. Department of Labor may dial down somewhat their enforcement efforts in this area when a Republican administration takes over the White House and appoints a new Secretary of Labor, there is no reason to expect that state labor departments will be any less aggressive in their efforts to crack down on IC misclassification If anything, many state labor departments, especially those in states with Democratic Party governors, are likely to double down on their enforcement efforts if they feel that the U.S. Labor Department is backing away from the joint enforcement initiatives begun under the Obama Administration. Likewise, state legislatures will likely continue on their current path of passing legislation that curbs IC misclassification, particularly affecting those industries where IC misclassification is regarded as prevalent.

Takeaways

Companies using ICs to supplement their workforce or render services to their customers, should not view Donald Trump’s election as an opportunity to misclassify employees as ICs. Rather, such companies should expect the states to continue their crackdown on the misclassification of 1099ers and other types of ICs that legally should be treated as W-2 employees. Such businesses should also anticipate that plaintiffs’ class action lawyers will continue to target companies that fail to structure, document, and implement their IC relationships in a manner that complies with applicable IC laws.

What should companies that use ICs do, especially businesses in the on-demand, gig, and digital economies? As we have stated in other blog posts, businesses that utilize ICs would be wise to focus on enhancing their compliance with applicable IC laws. Businesses interested in enhancing their compliance with IC laws can do so in a variety of ways, as detailed in our White Paper on minimizing IC misclassification risks, including the use of IC Diagnostics™.  This process assesses IC compliance under applicable law, restructures and re-documents the IC relationship in a more compliant manner, and then implements the IC relationship in a customized and sustainable fashion.

Written by Richard Reibstein

 

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

Posted in IC Compliance

October 2016 Independent Contractor Misclassification and Compliance News Update

Our update for this past month is noteworthy for the fact that we report below on IC misclassification lawsuits plaguing some of the largest and most recognizable companies in the U.S. (like Uber, Amazon, and FedEx) as well as a small local business like a New York City yoga studio. IC misclassification claims are present in virtually every industry in the U.S., regardless of the size of the company. The only difference is that the financial viability of larger companies is not typically at risk, whereas that is not the case with smaller companies.

We also report on a New York City bill that is soon likely to become law. It is not an IC misclassification law, but rather IC protection law – an ordinance that seeks to protect independent contractors from non-payment of their fees. Whereas some laws seek to crack down on the misuse of ICs, other laws are intended to protect ICs. This dichotomy mirrors published statements by Thomas Perez, the Secretary of the U.S. Department of Labor, 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 by 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.”

What is the takeaway? Independent contractors are here to stay, but if a company does not structure, document, and implement its IC relationships and pay workers classified as ICs in accordance with their contract terms, there is considerable liability. Those who wish to minimize such liability can see how to do so by reference to our White Paper on the subject.

In the Courts (5 cases)

AMAZON DRIVERS FILE NATIONWIDE IC MISCLASSIFICATION CLASS ACTION. Drivers making deliveries for Amazon that have been classified as independent contractors have sued the giant internet shopping company in a proposed nationwide class action lawsuit brought in a federal district court in Washington state under the federal Fair Labor Standards Act. The drivers are claiming that as a result of their alleged misclassification as independent contractors, they have been denied minimum wage and overtime compensation for hours worked over 40 in a workweek under the FLSA. The plaintiff drivers also claim that Amazon has violated Washington state and local wage/hour laws. According to the complaint, the drivers are employees and not ICs because they receive unpaid training regarding how to interact with customers and how to handle issues they encounter while making deliveries; they must follow Amazon’s instructions regarding where to make deliveries, in what order and which route to take; drivers can be penalized or terminated for missing scheduled shifts; drivers must follow requirements and rules imposed on them by Amazon and are subject to termination at Amazon’s discretion for failure to adhere to these requirements. The drivers allege that their payment for expenses cause the drivers’ hourly wages to fall below the minimum wage. Rittman v. Amazon.com, Inc. and Amazon Logistics, Inc., No. 16-cv-1554-BAT (W.D. Wash. Oct. 4, 2016).

UBER RUSH AND UBER EATS SUED IN IC MISCLASSIFICATION CLASS ACTION BY NYC BIKE COURIERS. Uber Technologies has been sued in a proposed class and collective action in New York federal district court by bike couriers claiming that they were misclassified as ICs by UberEATS and UberRUSH. The plaintiffs seek to represent a class of bike and foot couriers providing services for Uber’s delivery services for alleged violations under the FLSA and New York Labor Law. Unlike the other UBER services involving deliveries by car or limousine, UberRUSH and UberEATS utilize bike and foot messengers to deliver packages, primarily food orders from restaurants to customers who have requested UberEATS or UberRush services through a mobile app. The claims asserted against Uber include Uber’s failure to pay the minimum wage; failure to pay drivers the service fees charged to customers that the drivers claim is a form of gratuities to them; and failure to reimburse the couriers for certain their expenses, such as costs for helmets and bike repairs. According to the complaint, under the New York State Department of Labor Guidelines for Determining Worker Status in the Messenger Courier Industry, it is standard practice that bike and foot messengers are considered to be employees of the messenger company providing delivery services to customers. Burgos v. Uber Technologies Inc., case no. 1:16-cv-08512 (S.D.N.Y. Nov. 1, 2016).

FEDEX GROUND’S RECENT IC MISCLASSIFICATION COSTS NEARING $500 MILLION. An Oregon federal district court approved FedEx Ground’s $15.4 million class action settlement with nearly 400 Ground Division delivery drivers in Oregon, bringing FedEx’s costs due to IC misclassification over the past year to almost $500 million. The drivers had alleged violations for unpaid overtime and unlawful deductions under Oregon wage and hour laws arising from their alleged misclassification as ICs. This settlement followed the 2014 decision by the U.S. Court of Appeals for the Ninth Circuit that the FedEx Ground drivers in Oregon were employees and not ICs as a matter of law. As described in detail in our blog post of October 24, 2016, FedEx’s own IC agreements and other internal documents were found to have created an employment arrangement as a matter of law, without any need for the drivers to have to prove their case to a jury. The FedEx Operating Agreement and its policies and procedures were found by the appellate court to have retained sufficient direction and control over the drivers to turn them into employees. As noted in the blog post, the type of wording within the FedEx IC agreements and policies that the courts found to be non-IC compliant is rather commonplace, but there is no reason why IC relationships like the one between FedEx and the Ground Division drivers cannot be drafted in a manner that complies with applicable IC laws. Slayman v. FedEx Ground Package System, Inc., No. 05-cv-1127-HZ (D. Ore. Oct.  21, 2016).

NEW YORK’S HIGHEST COURT UPHOLDS YOGA COMPANY’S CLASSIFICATION OF INSTRUCTORS AS IC’S. New York’s highest court issued an important decision reversing a lower appellate court decision and holding that certain yoga teachers at Yoga Vida NYC are independent contractors and not employees for purposes of the unemployment laws in New York. Yoga Vida operates a yoga studio offering classes taught by staff instructors (who are classified as employees) and non-staff instructors (who are classified as ICs). In its decision, the Court of Appeals found that the non-staff instructors were ICs and not employees because Yoga Vida did not exercise control “over the results produced and the means used to achieve the results.” The Court found the following factors supported a finding of IC status: the non-staff instructors make their own schedules and choose their method of payment (hourly or percentage basis); are paid only if a certain number of students attend their classes (as opposed to staff instructors who are paid regardless of student attendance); are not restricted by Yoga Vida from teaching elsewhere and can inform Yoga Vida students of classes they teach at other studios (whereas staff instructors cannot work for competing studios in certain areas); and are not required to attend meetings or trainings (while staff instructors are). Although the court noted that there were some facts that represented a degree of control by Yoga Vida over the non-staff instructors, the Court regarded each of them as “incidental” and did not affect their IC determination. Those factors were that Yoga Vida  inquired if the non-staff instructors had proper licenses; Yoga Vida published the master schedule on its website; Yoga Vida provided the space for the classes; Yoga Vida determined what fee would be charged to customers and collects the fee directly from students; Yoga Vida provided a substitute instructor if the non-staff instructor was unable to teach a class and could not find a replacement; and Yoga Vida received feedback about the instructors from the students. While the decision may be limited to the particular facts of the case, it should afford businesses operating in New York a level of comfort that New York’s highest court supports the use of legitimate ICs, as we noted in our blog post of October 25, 2016. Yoga Vida NYC, Inc. v. Commissioner of Labor, No. 130 (C.A.N.Y. Oct. 25, 2016).

GAS AND ELECTRIC UTILITY COMPANY SUED FOR PENSION BENEFITS ALLEGEDLY DENIED TO WORKERS MISCLASSIFIED AS IC’S. Pacific Gas & Electric Company’s retirement plan has been sued by three contract workers who claim they have been misclassified by PG&E as independent contractors and therefore denied service credits for purposes of coverage under the PG&E pension plan. The complaint alleges that PG&E maintained its practice after its outside counsel questioned the company’s classification of contract workers. The complaint also alleges that, among other things, two of the plaintiffs had earlier been classified as employees but were later reclassified as independent contractors, yet continued to do the same work they did while classified as employees. The other plaintiff was allegedly treated by PG&E the same as regular employees in terms of controlling and supervising the manner in which he performed his work and providing him with tools, equipment, and training. Cooper v. Pacific Gas & Electric Retirement Plan, No. 16-cv-6355, N.D. Cal., Nov. 1, 2016).

Administrative and Regulatory Initiatives (3 matters)

NEW YORK LABOR DEPARTMENT SIDES WITH UBER DRIVERS THAT THEY ARE EMPLOYEES AND NOT IC’S FOR UNEMPLOYMENT PURPOSES. The New York State Department of Labor has determined that two Uber drivers were employees and not independent contractors, thereby rendering them eligible for unemployment benefits. As reported in the New York Times by Noam Scheiber on October 13, 2016, these determinations were issued in August and September 2016 in connection with jobless benefits claims that the two drivers filed. As discussed in our blog post of October 19, 2016, these two determinations are technically only applicable to the two claimants, although most unemployment determinations (including in New York) also apply to all “similarly situated employees.” Because the determinations themselves were not released to the public, the reasoning used by the Labor Department is unknown at present. We presume that these determinations are already under appeal.

EEOC ISSUES 4-YEAR STRATEGIC PLAN THAT INCLUDES IC MISCLASSIFICATION. In its newly published Strategic Enforcement Plan, the Equal Employment Opportunity Commission included among its “Emerging and Developing Issues” the changing nature of the workplace including ICs and the gig economy. On October 17, 2016, the EEOC released its strategic plan covering Fiscal Years 2017-2021, adding “a new priority to address issues related to complex employment relationships and structures in the 21st century workplace, focusing specifically on temporary workers, staffing agencies, independent contractor relationships and the on-demand economy.” While many federal and state agencies are cracking down on IC misclassification, it is unlikely that the EEOC’s focus will impact many ICs, as few workers classified as ICs make claims of discrimination.

PENNSYLVANIA LABOR DEPARTMENT COMMENCES IC MISCLASSIFICATION AWARENESS CAMPAIGN. The Pennsylvania Department of Labor and Industry kicked off a statewide public awareness campaign about worker misclassification according to a department news release dated October 19, 2016. Funded by a nearly half million dollar grant from the U.S. Department of Labor, the Pennsylvania agency has developed a new website that includes links to the federal website about misclassification myths and a worker misclassification inquiry form for workers questioning their IC classification. In announcing the awareness campaign, the Pennsylvania Labor Secretary, Kathy Manderino, stated: “Incorrectly classifying a worker as an independent contractor causes harm to the worker by withholding rights that belong to legitimate employees. Our goal for this campaign is to educate workers and employers about the important differences between an employee and a contractor.”

On the Legislative Front (1 matter)

NEW YORK CITY COUNCIL PASSES FREELANCER PAYMENT PROTECTION BILL. On October 27, 2016, the New York City Council passed a bill, commonly referred to as the Freelance Isn’t Free Act (No. 1017-2015), which is likely to be signed by the Mayor shortly. The bill seeks to ensure that freelancers  and other ICs providing services as individuals are offered a written contract and are paid by the date specified in the agreement or, if not so specified, within 30 days after the completion of services under the contract. The bill covers any contract between freelance workers and a non-governmental “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. Additionally, under the bill, 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.” As noted in our article published in the November 3, 2016 edition of the New York Law Journal entitled “Defects in NYC’s Freelance Bill,” we noted that the most serious defect was the failure to include a good faith defense to double damages – a defense commonly found in wage protection laws across the country including in the New York Labor Law. We warned that the bill may lead to adverse consequences for freelancers and companies, predicting that some businesses would choose not to retain ICs with New York City mailing addresses out of concern that an IC would seek a windfall recovery whenever a company chooses not to pay a freelancer in whole or in part based on a bona fide, legitimate belief that the IC did not complete the work or did not do so satisfactorily.

Written by Richard Reibstein.

Compiled by Janet Barsky, Managing Editor. 

 

Published by Richard ReibsteinLisa Petkun and Andrew Rudolph.

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Posted in IC Compliance

Freelancers to Enjoy Fee Payment Protections in New York City, But Bill Passed by City Council Has Major Defects

Reprinted with permission from the November 3, 2016 edition of the New York Law Journal, article entitled “Defects in NYC’s Freelance Bill.” ©2016 ALM Media Properties, LLC.  All rights reserved. Further duplication without permission is prohibited. For information, contact ALMReprints.com, 877.257.3382 or reprints@alm.com.

On October 27, 2016, the New York City Council passed a bill, commonly referred to as the Freelance Isn’t Free Act (No. 1017-2015), which is likely to be signed by the Mayor shortly. It seeks to ensure that independent contractors providing services as individuals are offered a written contract and are paid on a timely basis. While there are laudable purposes for the bill, it regrettably has serious defects. The Mayor should send it back to the City Council to cure its flaws, which would otherwise lead to adverse consequences to both independent contractors and those companies to whom they provide services.

The Main Features of the Bill and Its Principal Defects

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.

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. Without a requirement that the freelancer disclose that he/she is a one-person operation, many companies that retain the services of such individual freelancers operating as LLCs or under trade names may have no idea they are or may be covered by this bill, should it become law. The bill should have required that an individual is only a “freelance worker” under this law if he/she makes this disclosure.

Another defect is that the bill does not make clear if a freelance worker who has one or more employees or helpers, or uses subcontractors, is considered an “organization of no more than one natural person.”

There is no language in the bill as to whether it covers freelance workers who reside in New York City but provide or deliver services to a service recipient outside the City; whether it covers work performed in New York City by a contractor using a business or mailing address outside of the City; or if it covers contracts where the only connection to the City is that the services are used or deployed in New York City in whole or in part.

What must the contract provide?

The bill covers any contract between freelance workers and a non-governmental “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 bill 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. Another defect is that there is no clarity in the bill whether a collection of such electronic communications will suffice as a “written contract.”

What are the payment obligations?

The bill 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. It is not uncommon, however, that questions arise as to when a service provider’s services are “complete.”

That type of question can be averted if the bill provided that there is no violation of the law unless and until the freelance worker (a) notifies the “hiring party” that the contracted services have been completed, and (b) submits a final invoice for work. If these commercially common requirements were in the bill, there would likely be far fewer questions about whether and when payment is due.

What are the penalties for non-payment, partial payment, or late payment?

The bill affords a freelance worker the right to bring a civil action in court “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, if enacted. 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.

In addition, under the bill, 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 bill does not provide any defense to double damages, in contrast to the New York Labor Law that covers employees (but not freelance workers). Under Section 198.1-a. of the Labor Law, a good faith belief that payment was not due negates any right to double damages for employees under the Labor Law. The failure to include a good faith defense to double damages in this bill is a serious oversight.

What are the penalties for failure to enter into a “written contract” upon request?

If the “hiring party” fails to enter into a “written contract,” the bill 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 bill, however, seems to include a potentially crushing amount of statutory damages if the independent contractor can prove that he/she did not receive a written contract upon request and 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. Thus, as drafted, an argument might be made in such 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 there was a good faith dispute over whether payment was due.  The drafting of the bill is, regrettably, less than clear on this point and, as a result, needless litigation will likely ensue.

Are there any other penalties in the bill? 

The bill also includes a provision prohibiting retaliation against a freelance worker exercising his/her rights under this law including denying a freelancer “a work opportunity” or “future work.” See Section 20-930.  Statutory damages for such 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 another time because of a legitimate dispute over whether the services were satisfactorily performed, that business may arguably be subject to a sizeable award against it. The bill should have included a  good faith defense to a retaliation claim as well.

Conclusion – An Opportunity for the Mayor to Cure the Defects

The defects in this bill noted above can be cured if Mayor Bill de Blasio sends the bill back to the City Council for needed repairs, especially the inclusion of a good faith defense, a requirement for a freelance worker to present an invoice or demand to the “hiring party” before commencing a lawsuit, and a clarification of the jurisdictional scope of the law and the definition of a “freelance worker.”

If instead the Mayor signs the bill in the form passed by the City Council on October 27, at least three undesirable consequences will result: (1) independent contractors will have fewer work opportunities because many companies will be understandably reluctant to retain freelancers with New York City mailing addresses; (2) businesses, especially those operating in New York, that use independent contractors will be plagued by lawsuits from freelancers seeking a windfall from double damage awards, even where there is a legitimate dispute as to whether the work met the contract specifications; and (3) courts, already over-burdened, will become inundated with lawsuits, many of which would never be brought if the bill was carefully drafted to promote payment protections for freelancers without prompting needless lawsuits.

Written by Richard Reibstein

 

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

 

Posted in IC Compliance

New York’s Highest Court Issues IC-Friendly Ruling, Holding That Certain Yoga Teachers Are Valid Independent Contractors

Earlier today, October 25, 2016, the New York Court of Appeals issued an important decision on the issue of independent contractor status.  The Court held that a group of yoga instructors working at a New York City yoga studio were not employees covered by the New York Unemployment Insurance Law but rather ICs exempt from that law. In the Matter of Yoga Vida NYC, Inc. v. Commissioner of Labor. No. 130 (N.Y. Oct. 25, 2016).  As discussed below, this decision should afford businesses operating in New York a level of comfort that New York’s highest court supports the use of legitimate ICs. We also address in this post what steps businesses can take to enhance their IC compliance, both before and after they are faced with a legal challenge to their classification of certain workers as ICs.

The Facts in Yoga Vida NYC

Yoga Vida NYC utilizes two types of yoga instructors: staff instructors, who are employees, and non-staff instructors, who are ICs. The Court of Appeals found that the non-staff instructors were ICs and not employees because Yoga Vida NYC did not exercise control “over the results produced and the means used to achieve the results.” In reaching its conclusion, the Court found that the non-staff yoga instructors:

  • make their own schedules and choose how they are paid (either hourly or on a percentage basis);
  • are paid only if a certain number of students attend their classes (in contrast to staff instructors, who are paid regardless of whether anyone attends a class);
  • are not restricted by Yoga Vida NYC as to where they can teach and can inform Yoga Vida students of classes they will teach at other studios (whereas staff instructors cannot work for competitor yoga studios within certain geographical areas); and
  • are not required to attend any meetings or trainings (while staff instructors are).

The Court of Appeals found the following facts that had been relied upon by the Appeal Board were merely forms of “incidental control” that did not impact their status as ICs: Yoga Vida inquired if the non-staff instructors had proper licenses; Yoga Vida published the master schedule on its website; Yoga Vida provided the space for the classes; Yoga Vida determined what fee would be charged to customers and collects the fee directly from students; Yoga Vida provided a substitute instructor if the non-staff instructor was unable to teach a class and could not find a replacement; and Yoga Vida received feedback about the instructors from the students.

The Court also found that the requirement that the work be done properly by the non-staff instructors is a condition just as readily required of an IC as of an employee and does not favor either status.

The Significance of the Yoga Vida NYC Decision

New York has become one of the hardest states for companies to establish independent contractor status, especially in the area of unemployment law. This was primarily because the New York State Unemployment Insurance Appeal Board almost universally has been finding workers to be employees and not ICs, even when the facts supporting IC status overwhelm the facts favoring employee status. All appeals from decisions by the Unemployment Insurance Appeal Board are heard by the Appellate Division, Third Department, in Albany, and there are literally hundreds of these cases each year on the court’s docket.

In a vast number of cases, the Third Department has affirmed the Appeal Board’s decision on the basis that despite evidence in the record that may lead that court to a contrary result, the record contains “substantial evidence” to support the Appeal Board’s decision. To practitioners, this meant if there was even a smidgeon of evidence favoring employee status, the Third Department was likely to affirm the Appeal Board’s determination, despite an abundance of evidence favoring IC status. The legal landscape for IC determinations may now have changed, in view of the decision today issued by the New York Court of Appeals.

The decision in Yoga Vida NYC is not a roadmap for how to create IC positions that are compliant with the law; few other companies will operate precisely the same way and many other factors could tip the scales toward IC or employee status.  Nonetheless, it does provide further guidance as to what the courts in New York will be examining when making determinations of IC status. Hopefully, the New York State Department of Labor’s Unemployment Insurance Division and the New York Unemployment Insurance Appeal Board will look to the Yoga Vida NYC decision when making IC determinations.

Many employers had traditionally disregarded Unemployment proceedings, but when the issue involves IC status, an Unemployment determination can have costly consequences. When a business has not paid unemployment contributions to a state fund on behalf of a worker found to be an employee and not an IC, the initial determination can have the same effect as an adverse audit, if an administrative law judge upholds the determination that the worker has been misclassified as an IC. Once a single worker is found to have been misclassified, the business is then normally charged for unpaid contributions for “all similarly situated” workers, along with costly penalties and fines. Thus, prudent employers treat even a simple claim for unemployment benefits as having the potential for resulting in a regulatory “mini-class action.” Further, some businesses that have become the objects of class action lawsuits can trace the genesis of their litigations to a successful claim for unemployment benefits by a single employee found to be misclassified as an independent contractor

What Should Businesses Do to Enhance their IC Compliance?

For businesses operating with ICs in New York or other states, it is vital that their IC relationships be structured, documented, and implemented in an IC-compliant manner. That seems like a simple task, but corporate giants like FedEx, Macy’s, the NFL, Sleepy’s, Penthouse, Lowe’s, Jani-King, DirecTV, BMW and SuperShuttle have been the targets of legal challenges alleging that they have engaged in IC misclassification – leading to large settlements and judgments against many of those companies. An increasing number of these legal challenges have been brought against companies in the on-demand, sharing or “gig” economy, such as Uber, Lyft, Handy, Google, Homejoy, Instacart, TaskRabbit, CrowdFlower, Postmates and Caviar. Small and medium sized companies have also been swept up in a regulatory and class action crackdown on IC misclassification. Enhancing IC compliance, though, is not a daunting undertaking, but it does take initiative and commitment on the part of a business. There are no quick and dirty ways to properly structure, document, and implement a legitimate IC relationship.

One methodology used by an increasing number of businesses is IC Diagnostics™, which facilitates the enhancement of IC compliance in a manner that minimizes IC misclassification liability. That proprietary process has also been used by companies that have already been subjected to governmental orders to pay unpaid unemployment contributions, workers’ compensation premiums, or back payroll taxes.  While the kneejerk reaction by such businesses is that they have to or should reclassify workers found to have been misclassified, there is an alternative: keep the independent contractor model.  How can that be done?  After paying the back charges, many businesses can start fresh through a process of restructuring, re-documenting, and re-implementing their IC relationships using proprietary tools designed to enhance and maintain IC compliance.

Written by Richard Reibstein

Published by Richard Reibstein, Lisa Petkun and Andrew Rudolph.

 

 

 

 

Posted in IC Compliance