On November 16, 2016, Mayor de Blasio of New York City signed into law the Freelance Isn’t Free Act (the “Act”). The Act is important legislation and has far reaching implications for anyone who uses freelancers in New York City. Freelancers are independent contractors under the Act.
The Act gives freelancers the right to sue for double damages if the hiring party does not give them (i) a written agreement that contains certain required provisions; and (ii) they are not paid by the date stated in the agreement. If no payment date is stated in the agreement, then the freelancer must be paid within thirty (30) days after they complete the services.
If you use freelancers who live or work in New York City, the Act applies to you, even if you are headquartered outside of New York.
Who is covered by the Act?
The Act defines a “freelance worker” asany single person who is hired as an independent contractor to provide services for compensation. A freelancer is only a single person. This is true even if the freelancer does business as a limited liability corporation (“LLC”). The LLC must be a single member LLC. If it has more than one member, it is not a freelancer under the Act.There are three exclusions from the Act: sales representatives, lawyers and medical professionals.
What provisions must the contract include?
The Act covers any contract between a freelancer and a hiring party that has a value of $800 or more. If the Act applies then it requires that the contract must be in writing. The contract must include the following provisions:
1. the names and mailing addresses of the parties;
2 a list of services to be provided;
3. the “value of services to be provided;”
4. the rate and method of compensation; and
5. the date when the “hiring party” must pay the compensation or the “mechanism by which such date will be determined.”
It is common in the freelance community that the understanding betweenthe hiring party and the freelancer is documented by emails or oral statements.
In view of the requirements of the Act, email “agreements” should no longer be used. Formal independent contractor agreements that comply with the Act must be used. The City will be posting free examples of agreements that comply with the Act.
What are the payment obligations under the Act?
The Act provides that compensation shall be paid to the freelancer on the date payment is due under the contract.Payment must be made no later than 30 days after completion of the freelancer’s services under the contract if the contract is silent on a payment date.
Disputes frequently arise as to when the freelancers services are deemed to be complete. The freelancer may think that the services are complete and that the specifications in the agreement have been met. The hiring party may think that the services did not meet the specifications or were delivered late. Sometimes the late delivery will harm the hiring party.
All independent contractor agreements must clearly define when services are deemed to be “complete.” If there are quality specifications and delivery requirements, they should be clearly spelled out in the agreement.
The Act does not include a provison that the hiring party can refuse payment or offer partial payment if the worker has not satisfactorily performed all of the services under the agreement.
No intimidation of freelancers
The Act also provides that, once a freelancer 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.”Put simply, this means that the hiring party cannot intimidate the freelancer into accepting less money to receive any money at all under the agreement. Hiring parties may not harass or discriminate against freelancers.
Freelancers have the right to file complaints under the Act against hiring parties. There are procedural sections in the Act which describe the process to be followed.
What are the penalties for non-payment, partial payment, or late payment by the hiring party?
The Act allows a freelancer to bring a civil action for damages if he or she is not paid the full amount due under the contract or is not paid in the time required under the Act. If the freelancer wins, he or she will be awarded damages and reasonable attorney’s fees and costs.
If the freelancer wins, then he or she is entitled to receive twice what they are owed. This is true even if there is a legitimate dispute as to whether the services where completed on time, in a satisfactory manner or even at all.
What happens ifno written agreement is provided upon request?
If the hiring party fails to enter into a written agreement upon request and that meets the requirements of the Act, the freelancer is entitled to receive statuatory damages in the amount of $250.
Some problems with the Act
Even though the Act was written to protect freelancers from abuse, it hasproblems. The most important is that the contractor may be awarded double damages for failure of the hiring party to pay for services on a timely basis even if there is a good faith belief that the services were not performed in a satisfactory manner or if the agreement is breached by the freelancer. It appears that the hiring party does not have a defense to the double damage penalty even if he can prove a good faith reason that he was not obligated to pay the money in question.
What should you do if you hire freelancers in New York?
Here are the key things that you need to know:
1. You must understand and comply with the Act. The Act was written to protect freelancers and contains penalties that you must pay if you violate the Act.
2. You must have a written independent contractor agreement. It must have the five items required by the Act.
3. You should pay the freelancer the compensation that is due under the agreement when it is due. It is a good practice for the agreement to provide that the freelancer must provide the hiring party with an invoice when it has completed the services. This will clarify when the obligation to pay is triggered. The contract should provide that the hiring party must pay the invoice within a certain number of days, such as 30 or 45 days.
4.To protect the hiring party, the contract should provide that the hiring party is not required to pay the freelancer until he or she has fully performed the services required under the agreement, and the hiring party has actually accepted the services. There should be a procedure whereby the hiring party can reject the services and the freelancer must resubmit the services until they conform to the contract.
5. Hiring parties may be subjected to double damages (as well as statuatory damages, civil penalties and attorney fees) if they violate the Act.
On October 25, 2016, the Court of Appeals of New York delivered its opinion on In the Matter of Yoga Vida NYC, Inc. v. Commissioner of Labor. The Court overruled the Unemployment Insurance Appeal Board (the “Board”) that had affirmed the Commissioner of Labor’s decision that Yoga Vida’s teachers were employees. The Board had decided that Yoga Vida exercised enough control over the teachers’ work to justify a finding of an employment relationship.
The Court found that the Board’s decision that the teachers were employees was not based upon “substantial evidence.”The Court held that Yoga Vida’s teachers are not employees within the meaning of New York’s Unemployment Insurance Law.
Four reasons why this opinion is important
The Court’s opinion is important for several reasons. First, this is the first opinion of an appellate court I have seen that has considered the classification of teachers by a yoga studio. It is rare for a classification case to reach the appellate courts and even more rare for the case to involve a yoga studio. Most of these cases are resolved at the administrative level.
Second, the yoga studio won. Most studios lose their tax audits at the administrative level and pay the taxes and fines rather than appeal the decision to the court system.
Third, we have guidance from a New York appellate court on facts that support a finding of an independent contractor relationship. If a New York studio structures its relationship with its teachers the same way that Yoga Vida did, it can rely upon the Court’s opinion to argue that its teachers are independent contractors.
Fourth, the New YorkDepartment of Labor has been very hostile toward yoga studios classifying teachers as independent contractors. If we are fortunate, this opinion may cause a sea change in New York. The Department may decide to reduce its audits of yoga studios because it may feel that its chances of winning an audit have decreased.
It’s precedent for New York only
Stare decisis is the doctrine of legal precedent. Courts rely upon stare decisis when the same case before them has been decided by another court. Courts will use the prior ruling as a guide on how they should rule. Generally, courts will respect the previous ruling and rule the same way. This is not always true because the facts between two cases are rarely the same.
This opinion is precedent only in New York. It will have little value outside of New York. If you are audited in another state and you cite the Yoga Vida case as precedent to support your position, a court will give it little, if any, weight.
However, if you are a New York yoga studio and you are audited, courts in New York will give this opinion a lot of weight.
How did Yoga Vida win?
Yoga Vida has two classes of teachers: “staff instructors” and “non-staff instructors.”The staff instructors are employees and the non-staff instructors are independent contractors. The Court found that Yoga Vida did not exercise control over the non-staff instructors and therefore, they were not employees.
Although the determination of whether a worker is an employee or an independent contractor is complicated, the basic test is whether the business exercises “control” over the worker. There are many federal and state tests to determine whether practices that regulate worker behavior constitute control. The more control the business has over the worker, the more likely the worker will be an employee. The less control it has over the worker, the more likely it will be an independent contractor.
In reaching its decision the Court found that Yoga Vida did not control the non-staff instructors because they:
1. made their own teaching schedules;
2. chose how they wished to be paid (i.e., hourly or on a percentage basis);
3. could teach anywhere they wished and market their classes at other studios to Yoga Vida students; and
4. were not required to attend any staff meetings or trainings.
The staff instructors, on the other hand, were subject to non-compete restrictions and were required to attend staff meetings and trainings. They were paid for teaching even if no students attended their classes.
The Court rejected the Board’s finding that Yoga Vida controlled the non-staff instructors. The Court called these factors “incidental control” that did not show enough control to establish an employment relationship. These factors were that Yoga Vida:
1. inquired if the instructors had proper licenses to teach;
2. published the master schedule on its web site;
3. provided the studio space for the classes;
4. determined the fee to be charged and collected the fee directly from the students;
5. provided a substitute instructor if the non-staff instructor could not find a substitute; and
6. received feedback from the students.
The Court rejected these incidental factors as insufficient to constitute control and said the requirement that the work be done properly is required equally of an independent contractor and an employee.
Guidance foryoga studios in New York
If you are a yoga studio within New York and structure your relationships with your teachers the same way that Yoga Vidya did and are audited, you now have legal precedent to strengthen your case.However, this case is not a silver bullet. If the facts of your case are materially different from those in the Yoga Vida case or if you are otherwise found to have exerted “control” over your teachers, you can still lose an audit.
Guidance for yoga studios outside of New York
The Yoga Vida case is not precedent if you are located outside New York and are audited. However, the federal and the state tests to determine control are similar. If you use the same structure as Yoga Vida, it will strengthen your case in general. I think it is a good practice to classify your teachers separately and to treat them differently the way Yoga Vida did. For those teachers whom you are classifying as independent contractors, you should exert as little control as possible over the way they perform their jobs. You want to build your best case so that, if you are audited, you are in a strong position to settle on favorable terms or to win.
Light on Law: A Guide to Independent Contractors and Employees for Yoga Studios and Wellness Businesses (Second Edition)