This blog post is based on an “Expert Analysis” by the author published by Law360 on December 12, 2023 and is available from Law360, with subscription. ©Copyright 2023, Portfolio Media, Inc., publisher of Law360. It is republished here with permission.
New York Governor Kathy Hochul signed into law on November 22, 2023 the Freelance Isn’t Free Act bill (S 5026), after the Governor had vetoed the exact same bill (S 8369) the year before. This freelancer law, which was modeled after the 2017 New York City freelancer pay protection law of the same name, is plagued with ambiguities and other critical defects, similar to flaws in the City law including a pyramiding damages provision. We highlight below concerns about this new law and how to navigate through the traps it creates for unwary businesses.
LEGISLATIVE UPDATE:
On January 5, 2024, the New York Legislature introduced S.8039 that would repeal the bill signed into law by Governor Hochul and re-codify the Freelance Isn’t Free Act in New York General Business Law Sections 1410-1415, and transfer oversight and enforcement authority to the New York Attorney General. Governor Hochul signed the new bill into law on March 1, 2024. The effective date of the new law, as re-codified, is August 28, 2024.
Lack of clarity over who is covered by the NYS Freelance Isn’t Free Act.
The new law, which is effective 180 days from enactment, covers contracts entered into on or after the effective date. See Legislative Update above. The statute is, however, unclear as to whom it protects and whom it regulates.
The New York Freelance Isn’t Free Act (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.
But many independent contractors may hold themselves out under trade names without disclosing that they are actually single-individual operations. It is commonplace for single-person shops to have websites proclaiming that “we” have done this or that, or that “our” observations, 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.
One of the few things the new law does make clear is that licensed practicing lawyers, medical professionals, and construction contractors are excluded under the law, as are independent “sales representatives.”
While the law requires that the contract set forth each party’s “mailing address,” it does not require a specification of where the services are to be performed. This creates needless uncertainty as to whether, for example, the law applies to an independent contractor with a New York mailing address who is engaged by a company to travel to a neighboring state to perform services there. Or whether the law applies to a company on the West Coast that does no business in New York, yet engages a freelancer with a New York mailing address.
One of the law’s required contract terms is unclear.
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 unclear and virtually impossible to satisfy in many instances. A company cannot 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.
Many of the contract terms specified in the new law are commonly negotiated these days in a series of emails or other electronic communications. It is unclear if such electronic communications themselves will suffice as a “written contract” under this new law.
The payment obligations under the new law create uncertainty.
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” can be ambiguous. What if a customer believes the deliverables are unsatisfactory in whole or in part, or expects the independent contractor to make corrections or revisions to the work, or asks for additional services that the independent contractor agrees to provide at an added price?
No good-faith defense to double damages for non-payment.
The law allows a freelance worker to bring a civil action “for damages” if 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 is also entitled to 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). Under Section 198.1-a. of the Labor Law (which covers employees), 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.
Companies engaging freelancers in New York (and in other jurisdictions that have this double-damages provision) may therefore wish to include a special clause overriding this double-damages provision when the hiring party has a legitimate dispute, although it is unclear 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.
The penalties can be crushing under this new law.
If the “hiring party,” upon request of the freelancer, fails to enter into a “written contract” with the required terms, the law imposes a modest amount of “statutory damages” – a mere $250. See Section 191-d (7)(b)(i) and (v). But the law includes a potentially crushing statutory damages penalty “equal to the value of the underlying contract…in addition to the remedies specified in this article” if the independent contractor requested but did not receive a written contract that complies with the law and was not paid all of the fees on a timely basis. See Section 191-d (7)(b)(ii)(B). It is unclear if this pyramiding of penalties and damages apply even if the freelancer failed to provide an invoice and the hiring party did not pay all fees specified in the contract due to its legitimate, good faith dispute that the services were not rendered satisfactorily.
The penalty provisions for retaliation are also vague.
The new law 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 or for any sound business reason, that business may arguably be subject to a sizeable penalty for retaliation if the freelancer had exercised any rights under this law.
The Commissioner of Labor can sue companies and seek costly civil penalties.
The new law provides an administrative complaint procedure for freelancers who choose to address their complaints about unpaid or late fees to the Commissioner of Labor. See Section 191-d (5)(a). The Commissioner of Labor is authorized to investigate disputes between freelancers and hiring parties and to sue hiring parties for unpaid fees on behalf of freelance workers. See Section 191-d (6)(a) and (b).
The new law also authorizes the Labor Commissioner to file a lawsuit against a business and seek a civil penalty of up to $25,000 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), (b).
Steps companies can take to navigate around these concerns.
The New York State freelancer law is similar to the Illinois counterpart recently signed into law on August 4, 2023 and the Los Angeles freelancer ordinance that went into effect in July 2023. Other municipalities that have passed such laws, besides New York City, include Minneapolis, Seattle, and Columbus, Ohio. Most of the concerns we mention above about the New York State law and many of our suggestions below apply to businesses covered as well by the freelancer laws in those other jurisdictions.
Because of the ambiguous language in the New York statute regarding coverage, companies may have to assume that this new law will apply to them if there is any connection to New York – such as where the company operates, the contractor lives or works, or the independent contractor’s services are rendered in whole or in part.
In addition to addressing all of the law’s required terms in their independent contractor agreements, it would be prudent for businesses retaining freelancers and other types of independent contractors to consider adding some or all of the following provisions in their written contracts.
- 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, meeting all company invoicing requirements.
- 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 receipt, it would be wise to include a clause that payment shall be sent by the company within 45 days thereafter.
- 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.
Conclusion
This new state law focuses attention on independent contractors, but that raises a threshold question: have the “freelance workers” been properly classified as independent contractors, or are they likely to claim they have been misclassified under a state or federal law?
While the new law directs the Commissioner of Labor to issue a model contract, it will likely be short and abbreviated. Use of the model agreement, even with the additional contract provisions noted above, will not serve a company’s interests if it needs to defend against an independent contractor misclassification claim. Rather, to minimize exposure to misclassification liability, companies should document their independent contractor relationships in a manner that enhances compliance with federal and state laws, outlining all of the factors supporting independent contractor status under applicable federal and state laws. Many companies use a process such as IC Diagnostics (TM) to structure, document, and implement their independent contractor relationships in a customized and sustainable manner consistent with their business model.
Written by Richard Reibstein
This blog post is based on an “Expert Analysis” by the author published by Law360 on December 12, 2023 and is available from Law360, with subscription. ©Copyright 2023, Portfolio Media, Inc., publisher of Law360. It is republished here with permission.