Article contributed by Jaclyn K. Ruocco, Esq., Ellenoff Grossman & Schole LLP
FedEx: forced to pay $228 million to its drivers. Flowers Foods, a baked goods company: forced to pay $55 million to its bakery distributors.
JanPro Cleaning Company: forced to pay $30 million to its janitors. What is the common denominator that led to these mega-lawsuit settlements? Worker Misclassification.
Those businesses misclassified their workers as “independent contractors” instead of “employees”, depriving workers of minimum and overtime wages, unemployment and workers compensation benefits, and payroll tax contributions.
As these lawsuit settlements show, misclassifying a worker has severe consequences on a business and can be the death knell for smaller, mom and pop shops like restaurants and bars.
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Federal Department of Labor’s Final Rule on Independent Contractors
Recently, the United States Department of Labor (“DOL”) clarified the test that businesses must meet when determining whether a worker should be classified as an independent contractor or an employee under the Fair Labor Standards Act (“FLSA”) (the “Final Rule”).
The Final Rule takes effect March 11, 2024 and is intended to address confusion businesses face due to previous DOL informal guidance and case law that never provided a clear test.
The Final Rule establishes a six-factor test – no one factor is determinative, and courts and government agencies will look to the totality of the circumstances.
The six factors are:
- the worker’s opportunity for profit or loss;
- investments by the worker and potential employer;
- the degree of permanence of the relationship;
- the nature and degree of the potential employer’s control over the work;
- the extent to which the work is “integral” to the potential employer’s business; and
- the worker’s skill or initiative.
If the worker economically depends on the business for continued employment, then the worker should be classified as an employee. If, instead, the worker operates as an independent business, then the worker may be classified as an independent contractor.
Businesses should review these factors, as well as New York State’s own independent contractor test, to ensure that workers are properly classified.
New York State’s “Freelance Isn’t Free” Act
Once a business properly classifies a worker as an independent contractor, it must comply with New York State’s new “Freelance Isn’t Free Act” (the “Act”).
Effective May 20, 2024, employers across the state of New York will be required to comply with the Act, which mirrors New York City’s law of the same name, which took effect in May 2017.
The law was enacted to provide independent contractors, also referred to as “freelancers”, with protections similar to employees, such as protections against wage theft, including delayed payment, less than full payment, and non-payment.
The law applies in instances where an independent contractor performs services in exchange for an amount equal to or greater than $800, which is calculated by looking to all agreements for the contractor’s services for the same business during the immediately preceding 120 days.
The law has three main requirements:
1. Written Agreement Required
Businesses must memorialize the engagement in a written agreement and a copy must be provided to the contractor. The agreement must include the following information:
- the name and mailing address of both the hiring party and the freelance worker;
- an itemization of all services to be provided by the freelancer;
- the value of the services to be
- provided pursuant to the contract;
- the rate and method of compensation;
- the date on which the hiring party must pay the contracted compensation or the mechanism by which such date will be determined; and
- the date by which a 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 payment date.
2. Timely Payments Required
Businesses are required to pay independent contractors by the date specified in the agreement for the full amount that the parties agree upon.
If the agreement does not specify a payment date, a business must pay the independent contractor no later than 30 days after the completion of the contractor’s services under the agreement.
Once an independent contractor commences performance of the services under the agreement, the business cannot require, as a condition of timely payment, that the independent contractor accept less compensation than the amount of the contracted compensation.
3. No Retaliation
A business cannot retaliate or take any other action that penalizes an independent contractor for invoking their rights under the law.
For example, a business cannot refuse to hire, fire, or refuse to pay an independent contractor because the contractor demands payment in accordance with the law or complains that payment was not timely made.
Misclassifying a worker as an independent contractor and failing to timely pay independent contractors can lead to costly litigation, where penalties and attorneys’ fees may be imposed against businesses.
If your business engages workers, especially temporary workers, that may fall within the classification of an independent contractor, legal review should be sought to ensure compliance with this complicated area of law.
Jaclyn K. Ruocco is a partner in the Firm’s Labor and Employment Practice Group. Ms. Ruocco represents hospitality companies in all areas of federal, state and local labor and employment law, including traditional labor relations, employment counseling, and employment litigation defense.
As part of her practice, Ms. Ruocco has broad experience in negotiating and interpreting labor contracts and separation agreements, conducting management and employee trainings, and devising company policies. Ms. Ruocco can be reached at (212) 370-1300 or jruocco@egsllp.com.
