United States: Employers' Use Of Independent Contractors Restricted By New Law And Court Decision

Loren Lee Forrest Jr. is a Partner New York office and Katherine H. Marques is an Associate both in our New York office.

HIGHLIGHTS:

  • Under New York City's new Freelance Isn't Free Act, agreements with independent contractors, for services of more than $800, must be reduced to a writing and specify four items, including services to be performed and date of payment.
  • In Yoga Vida NYC Inc., New York's highest state court found that a yoga studio had properly classified its non-staff yoga instructors as independent contractors, because, among other factors, the contractors made their own class schedule, chose their method of payment, were not restricted from working for competitors and did not attend meetings or training.
  • Together, the new law and the Yoga Vida decision make it clear that: 1) agreements with independent contractors in New York City should be reduced to a writing and 2) employers exercising significant control over independent contractors increase their risk of incurring penalties for worker misclassification.

Employers nationwide and, in particular, those in New York City and New York state, should carefully consider their obligations to formalize policies concerning independent contractors based on New York City's Freelance Isn't Free Act and the recent decision in Yoga Vida NYC Inc.

The Freelance Isn't Free Act

New York City Mayor Bill de Blasio on Nov. 16, 2016, signed into law the Freelance Isn't Free Act (Freelance Act), which formalizes the practices related to hiring freelance workers, also known as independent contractors. The Act will take effect on May 15, 2017. The Freelance Act requires that any agreement to hire an independent contractor to perform services for which they will be compensated at least $800 in a 120-day period must be reduced to a written contract containing:

  1. the name and mailing address of both the hiring party and the independent contractor
  2. an itemization of all services to be performed
  3. the value of services to be provided and the rate and method of compensation
  4. the date on which the hiring party must pay – if no payment due date is specified, payment must be made within 30 days of the completion of services

Independent contractors alleging a failure to comply with the Freelance Act arising from, for example, failure to pay according to the agreed-upon terms may file a complaint with the director of the Office of Labor Policy and Standards, a division of the NYC Department of Consumer Affairs, who will send a demand letter on behalf of the contractor that can be satisfied by making payment or producing proof of payment. If a hiring party fails to provide a sufficient response to the city agency's demand, the contractor may bring a civil action, under which the hiring party will be exposed to potential liability for double damages and attorneys' fees, and will bear the burden of disproving liability. A hiring party that is found to engage in a pattern or practice of violating the Freelance Act may face a civil penalty of up to $25,000.

The director of the Office of Labor Policy and Standards will provide model contracts and other compliance materials on its website.

N.Y. Court of Appeals' Guidance For Classifying Independent Contractors

New York's highest court on Oct. 26, 2016, held that a yoga studio had properly classified its non-staff yoga instructors as independent contractors, reversing the intermediate appellate court decision that had found the contractors to be employees eligible for unemployment insurance benefits. In Yoga Vida NYC Inc., 28 N.Y.3d 1013 (2016), the Court of Appeals provided guidance as to the factors that will support an appropriate independent contractor classification.

Specifically, only yoga staff instructors, not non-staff contractors, were required to attend meetings or receive training. The yoga contractors made their own schedules and could choose their method of payment (an hourly rate or a percentage basis). Unlike staff instructors, who were paid regardless of whether anyone attended a class, non-staff contractors were only paid if a certain number of students attended their classes. Further, yoga staff instructors were restricted from working for nearly competitor studios, whereas yoga independent contractors were not so restricted and, in fact, were actually free to tell their Yoga Vida students where their other classes took place. That the studio inquired into whether the contractors had licenses, published a master schedule of classes, provided the class space, obtained substitutes when needed, and charged and collected class fees from students was considered insufficient evidence that the studio had exercised control over the contractors that would undermine their independent contractor classification.

The Yoga Vida decision provides a valuable example to any employer considering supplementing its workforce with independent contractors, whether in New York state or elsewhere. In particular, the clear distinctions drawn between policies for staff employees and contractors is a roadmap for how to properly classify workers.

Potential Tension Between City Law and Judicial Standard

Employers and entities that engage independent contractors should be aware of certain tensions between the Freelance Act, which is focused on securing payment for independent contractor services, and Yoga Vida decision, in which the court noted approvingly that the contractors were not paid if their classes were not adequately attended. Employers should know that any agreement where a contractor may not be paid for work performed may be subject to heavy scrutiny in New York City.

What Employers Should Do Now

Following the Yoga Vida decision and in anticipation of the May 15, 2017, effective date of the Freelance Act, New York City employers should:

  • consult counsel to analyze and scrutinize the differences between how the employer hires and controls its employees (requiring trainings, attendance of meetings, one method of payment) versus how the employer engages and treats its independent contractors
  • be prepared to draft contracts for independent contractors spelling out the covered work and terms of payment for work to be performed by independent contractors with a value of $800

Lastly, all employers nationwide and particularly those in New York state should understand that exercising significant control over independent contractors greatly increases their risk that those workers will be classified as an employees, which may have costly economic and legal consequences.    

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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