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. I 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 a process such as IC Diagnostics™, which facilitates the enhancement of IC compliance in a manner that minimizes IC misclassification liability. That 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 tools designed to enhance and maintain IC compliance.

Written by Richard Reibstein.