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June 4, 2024

"Hospitality's New Guest: Embracing New York's ‘Freelance Isn't Free' Act," Hotel Business Review

This article was originally published in the June 2024 issue of Hotel Business Review. It has been republished from the Hotel Business Review with permission from www.HotelExecutive.com.

On May 20, freelance workers in New York state experienced a landmark moment when the “Freelance Isn’t Free” Act (FIFA) fully went into effect. Building upon the protections established by New York City’s 2017 Freelance Isn’t Free Act, this new statewide law extends similar safeguards to freelancers across New York by bolstering their rights, ensuring fair compensation, and providing robust legal protections. As the restaurant, hospitality, and cannabis industries heavily rely on freelance labor, understanding the nuances and implications of this law is critical.

Defining Freelancers and Independent Contractors

Freelancers, often referred to as independent contractors, are individuals who provide services to businesses on a flexible or project basis, rather than as permanent employees. They typically operate under their own names or trade names, or through small entities like single-member LLCs. Unlike traditional employees, freelancers control their work process, set their schedules, and work for multiple clients. Their income is reported on IRS Form 1099 instead of W-2. Freelancers are also ineligible to receive employee benefits, such as health insurance, paid leave, and access to retirement plans.

The distinction between freelancers and independent contractors can be nuanced. Both terms often overlap, but “freelancer” generally implies a more casual, project-based relationship, while “independent contractor” may encompass more formal, ongoing business arrangements. Proper classification is essential as misclassifying a traditional W-2 employee as an independent contractor can lead to significant legal and financial repercussions. To be clear, regardless of what term a business uses - freelancer, independent contractor, or anything else - if the employee is paid via an IRS Form 1099, FIFA applies to them. Exceptions are sales representatives, attorneys, licensed medical professionals, and construction contractors, which the act specifically excludes.

Requirements for Freelance Agreements

New York’s “Freelance Isn’t Free” Act specifies that all freelance work agreements valued at $800 or more (or in the aggregate over a period of 120 days) must:

  • Include the names and addresses of both parties involved.
  • Provide an itemization of services to be performed.
  • State the value and method of compensation.
  • Specify the payment due date or the mechanism for determining it.
  • Set a deadline for submitting a list of services rendered.

Additionally, the act dictates pay frequency, requiring that freelance workers be compensated on or before the date when compensation is due according to the written contract but no later than 30 days after the completion of services. These contracts may be in hard copy or electronic form and must be retained by the hiring party for at least six years.

The New York State Department of Labor (NYS DOL) has indicated that it will publish model contracts on its website in the near future, which businesses may use in retaining freelance workers.

Specific Penalties for Noncompliance

FIFA imposes stringent penalties on businesses that fail to comply with its requirements. Freelancers may file complaints with the NYS DOL, and the department can investigate and award relief, including civil and criminal penalties. Businesses found to be in violation may face:

  • Double damages in addition to the amounts owed under the contract.
  • Injunctive relief and reasonable attorney’s fees.
  • Statutory damages of $250 for failing to provide a written contract and up to $25,000 for patterns or practices of violations.

In addition to making a complaint to the NYS DOL, aggrieved freelancers also have a private right of action that allows them to institute a civil lawsuit for damages or retaliation without going to the DOL. (New York City employees also may file a complaint with the city’s Department of Consumer and Worker Protection.) This penalty is even before any assessment is made to determine if the freelancer was correctly classified and properly paid. The potential damages become staggering, especially if these same errors occur across an entire employee population.

Importance of Proper Classification

Aside from FIFA’s requirements to provide written agreements to freelancers, businesses must ensure that their freelancers are, in fact, freelancers. Failing to do so could result in severe penalties, including unpaid wages, back taxes, fines, and legal disputes. A classification analysis begins and ends at the employee’s functional job duties and responsibilities. Their title is practically irrelevant.

Case Study: “Gourmet Restaurant”

In the bustling restaurant industry, freelance roles are indispensable. Chefs, for instance, are often brought in for special events or to introduce new culinary concepts. Take the case of “Gourmet Restaurant,” a popular location in Buffalo that frequently hires freelance chefs for its pop-up dinner events. To comply with FIFA, Gourmet Restaurant must draft comprehensive contracts that include:

  • Names and addresses of the restaurant and the freelance chef.
  • An itemized list of the culinary services to be provided, such as menu design, event execution, sourcing ingredients, and staff training sessions.
  • The agreed-upon rate and method of compensation, whether per event or per hour.
  • The payment due date, which could be upon completion of the event or within a specified number of days.
  • A deadline for the chef to submit a list of services rendered to ensure timely payment.

Failure to maintain these documents can result in significant penalties for Gourmet Bites. Imagine an all too true-scenario, (which occurred even prior to FIFA’s enactment), where Gourmet Bites hires a freelance chef for a series of pop-up events. The chef’s contract, however, specifies working hours, direct supervision, and other employee-like conditions. Upon review, it becomes evident that the chef should have been classified as an employee rather than a freelancer. This misclassification exposes Gourmet Bites to severe consequences.

Gourmet Bites could be liable for unpaid wages, overtime, attorney’s fees, fines and other damages. Additionally, the restaurant may face back tax, assessments and other and penalties from state agencies, such as Workers’ Compensation, Unemployment Insurance, and the Department of Financial Services. The financial burdens from these liabilities can be substantial, especially for a business that relies heavily on freelance labor.

In essence, a freelancer agreement will not turn a W-2 employee into a freelancer. Rather, in Gourmet Restaurant’s efforts to comply with this law, it created the documentation that exposes it to even greater penalties and fines. Proper classification and comprehensive contracts are essential to avoid significant legal and financial repercussions and maintain a compliant and fair working environment.

Case Study: Hotel Luxury

Hotels and event planning services are also affected by this law. Consider “Hotel Luxury,” a boutique hotel in the heart of the Adirondack Mountains that frequently employs freelance photographers and event planners. These freelancers play a crucial role in enhancing the hotel’s brand image and guest experience. To comply with the new law, Hotel Luxe must ensure that any contract with a freelancer includes:

  • The names and contact information of both the hotel and the freelancer.
  • Detailed descriptions of the services to be provided, such as planning and coordinating events, setting up and decorating event spaces, capturing high-quality photographs, editing images, and providing digital copies to the hotel.
  • The agreed-upon compensation rate and method of payment, such as a fixed fee per event or an hourly rate for planning and photography services.
  • Clear deadlines for payment - for instance, ensuring that the freelancers is compensated within 15 days of delivering the final edited photographs or within 30 days after the completion of an event planning project.

Hotel Luxury, like Gourmet Bites, must retain these contracts for at least six years. But unlike Gourmet Restaurant, Hotel Luxury’s workers are true freelancers. The hotel provides a contract outlining the project scope, payment terms, and deadlines. However, it fails to meet the strict requirements of the law and does not include the required elements, such as the freelancer’s address and itemized services. This simple administrative error will be costly. Sadly, there is no partial credit under FIFA - it demands strict compliance.

This error will allow the freelancer to file a successful complaint with the NYS DOL or initiate a private lawsuit. The freelancer would most likely recover at least a $250 penalty for each instance of noncompliance plus attorney’s fees. If the investigation reveals that this conduct was part of a broader pattern or practice, Hotel Luxe could face up to $25,000 in additional penalties.

Case Study: Cannabis Startup

The cannabis industry, still in its formative years, relies heavily on freelancers for roles such as marketing specialists and compliance consultants. Consider “Cannabis Startup,” a growing cannabis business in Rochester that frequently hires freelance marketers to create promotional campaigns and others that ensure regulatory compliance. To comply with FIFA, Cannabis Collective must ensure that any contracts with a freelancer includes:

  • The names and contact information of both the business and the freelancer.
  • Detailed descriptions of the services to be provided, such as designing and implementing marketing campaigns, conducting market research, developing promotional materials, ensuring adherence to state and federal regulations, and providing compliance training for staff.
  • The agreed-upon compensation rate and the method of payment, such as a fixed fee per project or an hourly rate for ongoing consulting services.
  • Clear deadlines for payment, ensuring that the freelancer is compensated within 15 days of submitting their final deliverables or within 30 days after the completion of a compliance consulting project.
  • Requirements for freelancers to submit their work or a list of services rendered, aiding in tracking and processing payments accurately.
  • Like the restaurant and hotel, Cannabis Startup must retain these contracts for at least six years.

Imagine a scenario where a freelance compliance consultant at Cannabis Startup requests a written contract in accordance with FIFA. The business initially resists, but the consultant insists, knowing their rights under the law. After much deliberation, the business decides to terminate its relationship with the consultant. This action exposes Cannabis Startup to significant legal risks.

This termination can be seen as retaliation against the consultant for asserting their legal rights—a clear violation of FIFA. The consultant was engaging in protected activity by demanding an agreement that the law entitles them to, and terminating them for this reason is illegal. This could lead to significant penalties for wrongful termination and retaliation.

The business could face an investigation by the NYS DOL or a private lawsuit for wrongful termination and retaliation. Under FIFA, damages could include double the unpaid wages, reasonable attorney’s fees, and statutory damages of $250 per instance. If this conduct is found to be part of a broader pattern or practice, the business could face additional penalties up to $25,000. Moreover, if it turns out the consultant was wrongfully classified as a freelancer when they should have been a W2 employee, the business could be liable for unpaid minimum wages, overtime, and other employee benefits. The business would also face back premiums, taxes, and penalties from state agencies such as Workers’ Compensation, Unemployment Insurance, Paid Family Leave, Disability, and the Department of Financial Services.

The combined financial impact from these fines and damages could be devastating for any business, not just a cannabis startup. The penalties for wrongful classification, termination, and retaliation, alongside the fines under FIFA, could potentially spell the end for the business if not addressed proactively and comprehensively. This scenario underscores the importance of providing compliant freelance agreements and ensuring that freelancers are correctly classified. Proper documentation and adherence to the law are crucial to avoiding severe legal and financial repercussions and maintaining a fair and compliant working environment.

Conclusion

Ensuring that freelancers are compensated fairly and promptly encourages more professionals to consider freelance work as a viable and secure career option. This shift could lead to a more vibrant and diverse workforce, driving innovation and creativity across various industries. In the meantime, FIFA requires all New York businesses to treat their employees and freelancers legally and to pay them properly. Now included among that already complex, byzantine structure is the requirement that all freelancers receive a written contract outlining their jobs and payment structures consistent with the FIFA.

No business should be caught in the same pitfalls as Gourmet Restaurant, Hotel Luxury or Cannabis Startup. Understanding and adhering to the "Freelance Isn’t Free" Act is not merely about compliance - it’s about safeguarding a business from the significant financial and legal risks discussed. The only effective defense against the stringent penalties associated with this law is to prevent problems before they arise.

By knowing the rules, properly classifying workers, and ensuring that all freelance agreements meet the law’s requirements, costly mistakes can be avoided. Investing time in understanding FIFA’s mandates and implementing thorough, compliant contracts will not only help avoid fines and lawsuits, but it will also foster a trustworthy and reliable relationship with all employees, not just freelancers. This proactive approach ensures mutual growth and success, positioning any business as a fair and compliant player in New York’s dynamic market.

With the right guidance and help, especially in the hospitality, cannabis, and hotel sectors, any business can navigate these regulations confidently, treat and pay its employees properly, and secure a stable future for all.

Lee Jacobs has over 16 years of legal experience and focuses his practice on representing a diverse range of individual and corporate clients in complex matters in both state and federal courts. With a niche in the restaurant, hospitality, and cannabis industries, Mr. Jacobs provides invaluable counsel to clients within these sectors. A significant part of his practice is devoted to assisting clients in day-to-day employment practices counseling, ensuring they stay compliant with ever-changing labor laws and regulations. Mr. Jacobs also conducts in-person training sessions on a variety of critical topics, such as sexual harassment prevention; diversity, equity, and inclusion (DEI); and effective management techniques. As an adjunct professor of law at Brooklyn Law School, Mr. Jacobs teaches an advanced course focused on trial advocacy, evidence, and procedure. He also serves as a faculty advisor to the school's Moot Court Honor Society's Trial Advocacy Division, where he passionately coaches students and teams, guiding them to local, regional, and national championships.
 

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