In the waning days of 2022, New York Governor Kathy Hochul vetoed the New York State Freelance Isn’t Free Act bill (S 8369) that had been awaiting her action for over six months. In early June 2023, the New York legislature passed the identical bill (S 5026) and once again sent it to the Governor. Earlier today, November 22, 2023, the Governor reversed course and signed the bill. Evidently, the reasons Governor Hochul gave in her veto message in December 2022 were now discounted. As noted below, this new independent contractor pay protection law is plagued with ambiguities and other critical defects. Perhaps one of the most glaring flaws is an unreasonable double damages provision for late payment or nonpayment by a company even if it had a good faith belief the freelancer’s work was unsatisfactory or did not meet contract specifications.
This new law was modeled after the 2017 New York City freelancer pay protection law and is similar to the Los Angeles freelancer ordinance that went into effect in July 2023 and the Illinois counterpart recently signed into law on August 4, 2023. Other jurisdictions that have passed such laws include Minneapolis, Seattle, and Columbus, Ohio. These laws likewise include provisions that create potential perils for businesses using independent contractors.
We summarize below when the New York State law will become effective; coverage issues under the new law; what contract terms the new law requires and its payment requirements; penalties for non-compliance with the new law; and other statutory provisions of note. Perhaps most importantly, we suggest steps businesses can take to maximize compliance with this new law so they can minimize needless exposure to the considerable damages now available to independent contractors under this statute.
Who is covered by the Freelance Isn’t Free Act?
The new law is effective 180 days from enactment and only covers contracts entered into on or after the effective date. But this new law is not particularly clear as to whom it protects and whom it regulates. First, the New York Freelance Isn’t Free Act (to be codified as Labor Law section 191-d) 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 an amount equal to or greater than eight hundred dollars.” See Section 191-d(1)(c). Thus, the new law aims to protect freelancers operating in the form of a one-person shop. (Licensed practicing lawyers, medical professionals, and construction contractors are specifically excluded under the law, as well as “sales representatives,” who are separately covered by Labor Law Section 191-c.) This new law would appear to 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, InstaCart, Postmates, GrubHub, TaskRabbit, and Handy.
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 legislative report accompanying the bill contains a “Justification” for the new law, reciting that it covers all types of freelancers including “writers, editors, graphic designers, videographers, consultants, temps, and those who are otherwise self-employed.” Unfortunately, both the language of the new law and the “Justification” do not make clear if a freelance worker who has one or more employees or helpers, or who subcontracts or delegates any part of the work, is considered a “freelance worker” under the law. If the state 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 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 (perhaps even mundane administrative functions) may well lose protections of the law by the simple act of delegating any task to a helper or subcontractor.
Under the new law, the party retaining the freelance worker is labeled as the “hiring party.” In a somewhat anomalous situation, under this law a freelance worker might also become a “hiring party” if he or she (or his or her LLC or sole proprietorship) retains another “freelance worker” to assist in rendering services.
As noted below, the new law will only require 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 new law only cover contracts where one of the parties lists their mailing address in New York State? The law is also unclear as to whether it regulates “hiring parties” who retain freelance workers with mailing addresses in New York State yet provide services to customers outside the state, such as from a remote location outside of New York. Does a business using a freelance worker become a “hiring party” only if some part of the work for which it contracts is performed in New York State? These concerns may lead prudent businesses to assume the new law will be applicable in each of those circumstances.
What minimum terms must be included in the written contract?
The new law will cover any contract between a freelance worker and a “hiring party” that has a value of $800 or more, either by itself or when aggregated with all contracts between the parties over the prior 120 days. See Section 191-d(1)(c). The law requires the parties’ contract to be “reduced to writing” and the “written contract” to include at least the following 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,
- the date when the “hiring party” must pay the contracted compensation or the “mechanism by which such date will be determined,” and
- the date “by which the freelance worker must submit a list of services rendered under such contract to the hiring party in order to meet any internal processing deadlines of such hiring party for the purposes of compensation being timely rendered by the agreed-upon date.”
See Section 191-d(3)(b). One of the required contract terms, however, is virtually impossible to satisfy in many instances. How can a company determine the “value of services to be provided” where the independent contractor is to be paid on an hourly, weekly, or monthly basis until the project is completed? In that scenario, has the law been violated?
Many of these terms are commonly negotiated these days in a series of emails or other electronic communications. It is unclear if such electronic communications will suffice as a “written contract.” As noted in the Takeaways, however, all terms should be included in a comprehensive agreement that promotes independent contractor compliance.
The law provides that the New York State Commissioner of Labor may by rule require additional terms to ensure the freelancer and hiring party understand their obligations under the contract. It also provides that the Commissioner shall make available “model contracts” online.
What payment obligations does the new law require?
The new 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 thirty days after the completion of the freelance worker’s services under the contract.” See Section 191-d (2).
When services are “complete” is by no means a simple inquiry. For example, are services “complete” if all of 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 an added price? And what if a company typically pays 30 days after an invoice is presented, but the freelancer does not present an invoice until a few days or weeks after the services are completed?
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 191-d (2)(b). This section of the law, though, fails to include any reference to the hiring party having a good faith belief that the freelance worker has not fully or satisfactorily performed all of the contracted services. Further, as drafted, the new law may prohibit a “hiring party” from negotiating a reduced payment where there is a genuine question about the quality of the services provided.
What are the penalties for partial payment, late payment, and non-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 is not paid such amount in the time period required under the law. See Section 191-d (7)(a). If the freelancer prevails, he/she shall not only be awarded damages, but also reasonable attorney’s fees and costs. See Section 191-d (7)(b)(i). Those provisions are similar to laws in New York and elsewhere 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 191-d (b)(iii). While this provision appears to be similar to the New York Labor Law that protects employees from non-payment of wages, the new law does not offer any defense to double damages in the case of freelancers. 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 an employee’s right to double damages. But that defense was inexplicably omitted from the new freelancer law.
Thus, 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 have been regarding whether the services were completed or were performed satisfactorily. Worse, the law could be construed as requiring a double damages penalty even if payment is delayed by only a short period of time after services are complete – even if paid within 30 days after an invoice has been presented when the invoice was sent days or weeks after the services were completed. This could conceivably be a very large unjustified exposure for hiring parties if the law is applied in this fashion.
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. Section 191-d (9)(a) of the new law renders “void as against public policy” any provision in a contract “purporting to waive rights” under the law.
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 State. In that event, New York independent contractors will likely lose opportunities for potential work.
What are the penalties for failure to enter into a “written contract”?
If the “hiring party” merely fails to enter into a “written contract” upon request of the freelancer, the law imposes a modest amount of “statutory damages” – a mere $250. See Section 191-d (7)(b)(i) and (v).
The law, 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 and was not paid all of the fees earned on a timely basis. Under Section 191-d (7)(b)(ii)(B), a freelance worker also “shall be awarded statutory damages equal to the value of the underlying contract…in addition to the remedies specified in this article” for a violation of “this section and on one or more claims under other provisions of this article.” Does that mean that the freelancer is entitled to up to three times the value of the contract if no contract was provided and no fees were paid within 30 days after completion of the services, even if the fees were not paid in whole or in part due to a legitimate, good faith dispute over whether services were rendered satisfactorily or when 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.
What other penalties are included in the law?
The law also prohibits retaliation against a freelance worker for exercising his/her rights under the law, including denying a freelancer “a work opportunity” or “future work.” See Section 191-d (4). Statutory damages for retaliation shall be “equal to the value of the underlying contract for each violation arising under this [law].” See Section 191-d (7)(b)(iv).
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 a New York independent contractor if the contractor has exercised any right under this new law. Businesses should be careful how they couch their communications to independent contractors who fail to meet the company’s quality or performance expectations.
The law will authorize the Commissioner of Labor to investigate disputes between freelancers and hiring parties and, in the Commissioner’s discretion, to sue hiring parties for unpaid fees on behalf of freelance workers. See Section 191-d (6)(a) and (b). The Labor Commissioner is also authorized to sue on behalf of other states having reciprocal legislation. See Section 191-d (6)(c). This new subsection (6)(c) suggests that other states may enact similar legislation and that the New York law can be enforced in those states whose laws include reciprocity.
The law will also authorize the Labor Commissioner 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 191-b (8)(a). A “hiring party” may be subject in such an action to a civil penalty of up to $25,000. See Section 191-b (8)(b).
Are there any other provisions of note in the new law?
The new law provides a statute of limitations for claims: two years for claims alleging a failure of a “hiring party” to provide an independent contractor with a “written contract” at his/her request, and six years for claims alleging non-payment of fees or retaliation. See Section 191-b (7)(a)(ii), (iii), and (v).
The statute states that it has no effect on other laws. Thus, parties may apparently still resort to common law breach of contract claims or claims under any applicable federal or state statute. See Section 191-b(9)(b).
Like the New York City law, the state law provides that no provision of Section 191-b should be construed as providing a determination about the legal classification of any individual “as an employee or independent contractor.” See Section 191-d(9)(d).
The law provides an administrative complaint procedure for freelancers who choose to address their complaints about unpaid or late fees to the Commissioner of Labor instead of or before filing a lawsuit. See Section 191-d (5)(a). The Commissioner is empowered to “attempt to adjust equitably” any such complaint, but is not apparently empowered to issue any determinations, citations, fines, or penalties. As noted above, though, the Commissioner can bring a lawsuit against a hiring party.
Takeaways and Suggestions
Until the courts issue decisions regarding the jurisdictional coverage of the freelancer payment protection law or unless the state legislature clarifies the issue of coverage through some legislative amendment, companies may have to assume that this New York law will apply to them if there is any connection to New York – such as where the contractor lives or works, where the company operates, or where an independent contractor’s services are rendered in whole or in part.
To comply with the New York State Freelance Isn’t Free Act as well as the other state and local freelance pay protection laws, prudent companies will need to specify all of the required terms in their independent contractor agreements as noted above. This basic requirement is critical for any business that contracts with any independent contractors having a connection to New York or one of the jurisdictions with these new freelancer laws, including on-demand companies in the gig economy. The failure to include any of the required terms may even lead to class action lawsuits.
It would be wise 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:
- A representation as to whether the independent contractor is a business that (a) is operated by a person or organization composed of no more than one natural person, whether or not incorporated or employing a trade name, and (b) expects to use on the project any employees or helpers or expects to partner with or subcontract any of the deliverables to another other freelancer or separate business.
- An understanding that fees are not payable until services are complete and the contractor has submitted, and the company has received, a formal invoice for payment, addressed to a specified person or persons within the company.
- A provision that payment is due only after a specified number of days following receipt of the invoice. If a business typically pays invoices within 30 days after presentation, it would be wise to include a clause that payment shall be sent by the company within 45 days after receipt of the invoice from the contractor.
- A clause that no interim or final payment is due if, in the good faith belief of the business, the freelance worker has not fully or satisfactorily performed all of the contracted services.
- If the “value of services to be provided pursuant to the contract” cannot be quantified, a statement that such value is “not applicable.”
- An understanding that neither party has any obligation to continue the parties’ relationship after completion of the engagement or to consider the other party for future services.
The model contract to be issued by the Commissioner of Labor will likely be, by its very nature, a short and abbreviated independent contractor agreement. In contrast, state and federal tests for independent contractor status oftentimes 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.
This state 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 likely to claim they are employees who have been misclassified under a state or federal law?
Issues of independent contractor compliance and misclassification are prevalent, not only in the digital, gig and on-demand economies, but in hundreds of other industries. On the one hand, the State of New York 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 or its 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 independent contractors, whether called freelancers, 1099ers, outside consultants, 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 restructuring, re-documenting, and re-implementing the independent contractor relationship in a thorough, practical, and sustainable manner, articulated in a comprehensive agreement containing state-of-the-art provisions that maintain the key components of the company’s business model.
Written by Richard Reibstein