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July 1, 2024

"From Kitchen to Contract: Ensuring Your Restaurant Complies With New York's New Freelance Law," Modern Restaurant Management

This piece was originally shared on Modern Restaurant Management on June 24, 2024, and is republished here with permission from the publication.

The Freelance Isn’t Free Act (FIFA) represents a significant shift in labor law, providing new protections for freelance workers across New York state. Although initially intended to take effect on May 20, that has been postponed until August 28. This law requires written contracts for freelance engagements worth $800 or more or lasting longer than 120 days. Designed to protect freelancers and independent contractors, FIFA mandates clear terms of engagement and payment. For restaurants, which often hire freelancers such as chefs, event planners and marketing professionals, this means meticulously documenting freelance agreements to avoid disputes and costly legal repercussions.

FIFA’s Key Ingredients: Protections for Freelance Workers

Written contracts. FIFA mandates a written contract for freelance services to ensure clarity and mutual understanding. These agreements must include the names and addresses of both parties, an itemization of services provided, the value of the services, the payment terms, the date on which the hiring party will issue payment to the freelance worker or the mechanism by which that date will be determined, and the date by which the freelance worker must submit to the hiring party a list of services rendered under the contract (for purposes of timely compensation). Excluded from FIFA’s reach are sales representatives, lawyers and medical professionals.

Timely payment. Freelancers must be paid in full by the agreed-upon date or within 30 days of completing their services if no date is specified. Late payment can result in legal action and payment of double damages, or a doubling of the fee owed under the agreement, to the freelancer.

Anti-retaliation protections. The act protects freelancers from retaliation if they exercise their rights under the law, meaning restaurants cannot blacklist or penalize freelancers for asserting their payment rights.

Understanding Freelance Work

A freelance worker is an independent contractor typically hired for compensation to provide services. Unlike traditional employees who receive a W-2, independent contractors typically receive a 1099 and are not entitled to benefits like health insurance or retirement plans. This distinction is crucial for restaurant managers to understand, as misclassifying employees as freelancers or independent contractors can lead to significant penalties.

Freelancers offer specialized services on a project basis, allowing restaurants to access expertise without a long-term commitment. Examples include freelance chefs hired for special events, graphic designers creating promotional materials, or social media consultants managing online presence. Under FIFA—what was once a best practice is now a requirement—each engagement must now be supported by a written contract detailing the scope of work, payment terms, and any other relevant conditions of the engagement.

Traditional employees—regardless of how part-time they are—receive a W-2, may be entitled to benefits, and are subject to payroll taxes. Even though the all too often desire in the hospitality industry to consider employees with very few non-recurring hours as freelancers is tempting and common-sensical, it is improper and costly.  Proper classification is determined by a myriad of factors, including the degree of control the employer has over the worker, the permanency of the relationship, the worker’s investment in equipment or materials, the worker’s opportunity for profit or loss, and the level of skill required for the work. No single factor determines the classification. Think of it this way, just because an employee is terminated (regardless of the reason) after their first day of employment does not automatically convert them to a freelancer or independent contractor. Conversely, a true independent contractor can be engaged on a regular and recurring basis without being classified as a traditional employee.

Cooking Up Compliance: Best Practices for Restaurants

The New York State Department of Labor (NYSDOL) manages the act’s enforcement statewide and has the authority to impose penalties for noncompliance. Additionally, the New York City Department of Consumer and Worker Protection (DCWP) retains enforcement power for matters arising in New York City. Freelancers can file complaints with the NYSDOL (or the DCWP) or pursue a private civil action to recover unpaid wages and damages. The NYSDOL has stated that it will promulgate sample contracts but has not done so yet.

Best Practices for Compliance: STAR Approach

S – Standardize contracts. Develop standard contract templates that comply with the act’s requirements. Ensure all freelance engagements are documented, detailing the scope of work, payment terms and deadlines.

T – Timely payments. Implement a payment tracking system to ensure freelancers are paid on time. Delayed payments not only violate the law but can also damage the restaurant’s reputation and relationships with freelancers.

A – Awareness and training. Educate management and staff about the act’s requirements and the importance of compliance and proper employee classification. Regular training sessions can help prevent misunderstandings and ensure that everyone is aware of their responsibilities.

R – Review. Periodically review contracts and payment practices, both internally and with legal counsel, to ensure ongoing compliance with the act and any other relevant labor laws.

Failing at the Pass

Imagine a bustling New York restaurant that frequently hires freelance chefs and marketing consultants. The restaurant owner, Alex, neglects to draft written contracts for these freelancers, believing verbal agreements suffice—because that is the way it has always been done. Additionally, Alex misclassifies some part-time employees as freelancers and pays them a flat weekly amount rather than an hourly wage because they asked him to do so to help them avoid taxes and child support payments.

Alex hires Jamie as a freelancer to redesign the restaurant’s website for $1,200. Jamie completes the work, but payment is delayed for 45 days despite multiple reminders. Frustrated, Jamie files a complaint with the NYSDOL. Upon investigation, the NYSDOL finds that not only did Jamie not have a contract and that she remained unpaid but that there were also no written contracts for several other freelancers. Additionally, during the NYSDOL’s audit and investigation, the agency discovers the misclassified employees who were not paid appropriate minimum wage and overtime.

Potential Penalties

Contract violation penalties: Jamie would be eligible for $2,400 (double the unpaid amount) for her delayed payment, plus an additional $250 for not having a written contract, totaling $2,650.

Additional fines: The other freelancers who did not have a written contract would receive a doubling of any payments not made or a doubling of any amount paid without a contract, plus a $250 fine.

If addition, if Jamie complains to the New York Attorney General (AG) and the AG chooses to bring an action on Jamie’s behalf, or if Jamie files a private action, both the AG and Jamie could seek additional fines of up to $25,000 for finding that the Alex “engaged in a pattern or practice” of violating the FIFA.

Misclassification penalties: Payment of all unpaid minimum wage, overtime, liquidated damages, and other fines and penalties to the misclassified employees. Here’s how Alex’s potential damages snowball out of control.  Consider just one of his employees misclassified as a freelancer who worked 10 hours of unpaid overtime per week at $22.50 an hour. If they worked 50 weeks a year, and the audit covers a three-year period, the potential damages, payable to that misclassified employee, break down as follows:

  • Unpaid overtime: 10 hours/week × $22.50/hour × 50 weeks/year × 3 years = $33,750
  • Liquidated damages (double the unpaid overtime): $33,750 × 2 = $67,500
  • Other penalties and interest could be assessed, potentially exceeding $10,000 per employee.

Now this shocking number is just for one intentionally misclassified employee. Now multiply it across Alex’s workforce—the potential damages could be catastrophic. These intentional misclassifications would have most likely never come to light if not for Jamie’s complaint of Alex’s violations of FIFA. Jamie’s initial engagement for just $1,200 has now exposed Alex to so much more.

How Alex Should Ensure Compliance

To avoid the worst-case scenario, Alex should take proactive steps to ensure compliance with the FIFA by utilizing a customized version of the STAR system outlined above.

S – Standardize contracts. Generate a freelancer agreement template that complies with the law’s requirements, outlining the scope of work, payment terms and deadlines. Ensure that the template is correctly and fully filled out for each engagement.

T – Timely payments. Specify the payment terms in the contract, including the due date for payment upon completion of the work, and confirm the freelancer’s understanding. Use reminders to ensure timely payments.

A – Awareness of accurate classification. Train and educate staff and ownership about properly classifying workers. Providing a correct and valid freelancer contract to a worker who is actually a traditional W-2 employee does not cure an illegal misclassification. Misclassified employees can still claim back wages, overtime and other benefits.

R – Regular review. Plan to review these practices regularly to ensure consistency and minimize errors. Seek advice from employment counsel to review contracts and ensure compliance with the act.

In addition, Alex should keep detailed records of all communications with freelancers and employees, including emails and written notices regarding payment terms and due dates. These records serve as evidence in the event disputes over payments arise.

Embracing the Change

The Freelance Isn’t Free Act marks a significant development for New York’s restaurant industry that emphasizes fair treatment and protection of freelance workers. By understanding the law’s requirements and implementing best practices, restaurant owners and managers can comply with the law and foster positive and productive relationships with their freelance workforce. As the hospitality industry evolves, staying informed and proactive about legal changes is essential for sustained success and growth.

Lee Nolan Jacobs

Lee Nolan Jacobs is a partner with Barclay Damon in New York. He counsels clients in the restaurant, hospitality and cannabis industries on day-to-day employment practices to ensure compliance with ever-changing labor laws and regulations. He may be reached at ljacobs@barclaydamon.com
 

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