You may have wondered where New York’s so-called Freelance Isn’t Free Law went after it was enacted into law in November 2023. Well, it was repealed before it became effective and was replaced earlier this year with a new version of the same law. The 2024 edition becomes effective on August 28, 2024. However, it retains all of the flaws that we pointed out in our December 14, 2023 blog post about the 2023 law. Those defects include a double damages provision that can be imposed against a company even if its failure to pay is due to a good faith belief that the services provided by the independent contractor (IC) did not meet contract specifications. The new law also includes a special damages provision that can have a draconian impact on a company. For businesses using ICs in New York and elsewhere, we suggest you consider some of all of the steps in our “Takeaways” below to counteract the law’s serious flaws. Those steps can also serve businesses well as they face similarly defective freelancer pay protection laws enacted so far in Illinois and a number of municipalities, including Los Angeles and New York City.
The unusual history of the new law.
In 2022, New York Governor Kathy Hochul vetoed a bill amending the New York Labor Law that protected the pay of independent contractors. She stated in her veto message that the law would impose a significant burden on the New York Department of Labor and distract it from its core efforts to protect employees in the state. Nonetheless, in 2023, the New York legislature passed the identical bill yet again. But surprisingly, this time the governor signed the bill, which was to become effective in mid-May 2024. Then it disappeared. What happened? The governor evidently persuaded the legislature to cure her objection that prompted her 2022 veto. On February 26, 2024, the legislature passed a new bill (S. 8039), which the governor promptly signed, repealing the old law and changing responsibility for enforcing the law from the Labor Department to the Attorney General. The 2024 law is now re-codified under the New York General Business Law. Like the 2023 law, it is called the Freelance Isn’t Free Act (FIFA for short). It will become effective in two weeks.
Lack of clarity over who is covered by the new NYS Freelance Isn’t Free Act.
The new FIFA law is unclear as to whom it protects and whom it regulates. It 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 General Business Law Section 1410(3). Thus, the new law aims to protect freelancers operating in the form of a one-person shop.
Many independent contractors, though, 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” 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 sales representatives (covered by Section 191-a of the Labor Law), licensed practicing lawyers, medical professionals, and construction contractors are excluded under the law.
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. For example, does the law apply 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? Does the law apply to a company on the West Coast that does no business in New York, yet engages a freelancer with a New York mailing address? Is an IC with a mailing address outside of New York who is engaged to provide services within New York covered by the new FIFA law?
One of the law’s required contract terms is unclear, and it directly impacts the remedies.
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 1412 (2). 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. Yet, as noted below, one of the remedies for a violation of the law is damages “equal to the value of the underlying contract.”
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 1411.
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? Does the new law treat services as “complete” in any of those instances? If so, payment must be made within 30 days thereafter unless the contract specifies otherwise.
There is 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 amount due under the contract or is not paid such amount in the time period required under the law. See Sections 1414 (2)(a) and 1414 (3). If the freelancer prevails, he/she is also entitled to reasonable attorney’s fees and costs. See Section 1414 (3)(a). 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 1414 (3)(c). 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 2023 FIFA law and the new 2024 FIFA law.
Hopefully, the courts will not construe this pyramiding of penalties and damages provision to be applicable if the “hiring party” pays all fees other than those it determines in good faith are not due because of unsatisfactory or incomplete services.
Companies engaging freelancers in New York (and in other jurisdictions that have this double-damages provision) may wish to include a special clause seeking to override 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 1415 (1) of the new law renders “void as against public policy” any provision in a contract “purporting to waive rights” under the law.
One of the statutory damages 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 1414 (3)(b). 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 a plaintiff prevails on a claim alleging a violation of “one or more claims under provisions of this article.” See Section 1414 (3)(b)(ii). This was a significant change from the 2023 FIFA law, which only imposed this draconian remedy if the plaintiff prevailed on a claim alleging a violation of both the contract terms section and any other section of the FIFA law including a failure to pay. In other words, the “value of the contract” remedy was not available for a partial or full non-payment or a delayed payment under the 2023 version of the law if the “hiring party” had entered into a compliant contract, but now it is.
This change in the 2024 FIFA law may have been overlooked by some of the legislators who voted in favor of the new bill and may have gone unnoticed by the governor before she signed it, but it will not likely be ignored by a freelancer who chooses to sue under this FIFA law.
The penalty provisions for retaliation are also problematic and can create needless litigation.
The new FIFA 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 1413. Statutory damages for retaliation shall be “equal to the value of the underlying contract for each violation arising under this [law].” See Section 1414 (3)(d).
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 other sound business reason, that business may arguably be subject to a lawsuit seeking a sizeable penalty for retaliation if the freelancer had exercised any rights under this law and believes he or she was not offered a follow-up gig for that reason.
The Attorney General can sue companies and seek costly civil penalties.
In lieu of the cumbersome enforcement mechanism set forth in the 2023 FIFA law, the 2024 FIFA law also permits the Attorney General to bring an action against a “hiring party.” The new FIFA law authorizes the Attorney General to seek to enjoin any unlawful acts or practices and to “obtain restitution for one or more freelance workers.” See Section 1414 (1). In addition, the Attorney General may seek penalties of $1,000 for a first violation, $2,000 for a second violation, and $3,000 for a third or subsequent violation – relatively modest amounts. However, the Attorney General may also seek a penalty of up to $25,000 if the “hiring party” has engaged in a pattern or practice of violating FIFA. See Section 1414 (5). This penalty can also be sought by a freelancer, but any penalty obtained must be paid into the general fund of the state.
Takeaways.
The New York FIFA is similar in many respects to the Illinois counterpart signed into law on August 4, 2023, the 2017 New York City municipal FIFA law, and 2023 Los Angeles freelancer ordinance. Other municipalities that have passed such laws 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 by the freelancer pay protection laws in those other jurisdictions as well, as we noted in our September 7, 2023 blog post about the Illinois law shortly after it was enacted.
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 services are not complete until any and all deviations from the contract specifications have been corrected by the freelancer, if raised by the “hiring party.”
- A contract term specifying that fees are not payable until services are complete.
- A clause that fees are only payable after 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.
- An understanding that where there is a dispute over the freelancer’s services, the “hiring party” shall pay the amount due for services that are not in dispute, and any amounts in dispute should be resolved by the parties through an agreed upon mediation and arbitration arrangement.
- 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 term 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 and so informed the worker.
- 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.
A final but even more important consideration.
This new state law focuses attention on independent contractors, which 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, see Section 1412 (4), 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.
New York and other states have statutory penalties resulting from IC misclassification that can be extraordinarily costly, and claims for unpaid overtime and minimum wage violations can create considerable damages. Some states even have expense reimbursement laws that are one of the principal sources of damages by plaintiffs’ class action lawyers. Any review of independent contractor agreements for compliance with FIFA laws should be accompanied by an enhancement of the IC relationship. 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 in part on an “Expert Analysis” by the author published by Law360 on December 12, 2023 about the 2023 FIFA law. It is available from Law360, with subscription. ©Copyright 2023, Portfolio Media, Inc., publisher of Law360. Portions of that article are republished here with permission.