"How Ignoring New York's ‘Freelance Isn't Free Act' Could Cost Your Restaurant Big," QSR Magazine

This article was originally published on QSR Magazine on June 28, 2024 and is republished here with permission from the publication.

In the bustling landscape of New York state’s quick-service restaurant industry, compliance with labor laws is paramount. The Freelance Isn’t Free Act (FIFA), effective August 28, 2024, introduces stringent requirements designed to protect freelance workers, necessitating meticulous documentation and timely payment for services rendered.

Strict compliance with FIFA’s rules is crucial, as violations, even innocent ones, can expose any business to financial penalties and fines, which are particularly perilous for the restaurant industry. The narrative below is fictional, but almost certainly based on real-life events—meet “QuickBite” and its owner, Mark, who, unbeknownst to him, could face severe consequences stemming from his noncompliance with FIFA.

QuickBite’s freelance dilemma

Mark, the owner of QuickBite, a popular quick-serve known for its gourmet burgers and efficient service, often hires freelancers for various projects. One summer, he decides to revamp the restaurant’s marketing strategy and hires Emma, a freelance graphic designer, to create a new website and promotional materials for $1,500. Emma and Mark verbally agree on the project details, with Emma expected to complete the work within two months. They do not enter into a written agreement because neither person requests one, both believing that this is okay since that is the way it has always been done.

Unbeknownst to both Emma and Mark, but solely to Mark’s detriment, New York state’s FIFA mandates written contracts for freelance engagements valued at $800 or more or lasting longer than 120 days. For quick-service and fast-casual restaurants, which often hire independent contractors such as chefs, event planners, and marketing professionals, this law necessitates meticulous documentation of freelance agreements to avoid severe legal repercussions.

Key requirements of FIFA

• Written Contracts: FIFA mandates that freelance services performed by independent contractors for more than $800 or lasting longer than 120 days must be documented in a written contract, which includes detailed information about the parties involved, including their address and contact information, the expected services to be provided, payment terms, and deadlines.
• Timely Payment: Freelancers must be paid by the agreed-upon date or within 30 days of completing their services if no date is specified.
• Anti-Retaliation Protections: FIFA safeguards freelancers from retaliation, ensuring they can assert their rights without fear of being blacklisted or penalized.

Potential damages for noncompliance   

Noncompliance with FIFA can lead to significant financial and reputational damages for restaurants:

• Double Damages for Late Payment: Freelancers can claim double the amount owed if not paid on time.
• Penalties for Lack of Written Contracts: Failure to provide a written contract can result in additional fines of $250 per instance.
• Pattern or Practice Violations: In the event of repeated violations of the law, the New York Attorney General or plaintiff in a private civil litigation could seek fines of up to $25,000.

The delay

Now, back to QuickBite. Emma successfully completes the project on time, but Mark, preoccupied with the restaurant’s daily operations, delays her payment. To be clear, Mark does not intentionally refuse to pay Emma; he is just too busy and casually overlooks it because, again, that is the way it has always been done. Although frustrated by the delay and lack of a formal contract, Emma initially accepts the situation; but then one day, while riding her local public transit bus, she learns about FIFA’s new rules from a poster and decides to file a complaint with the New York State Department of Labor.

The audit

The NYSDOL launches an investigation into QuickBite’s employment practices. The audit reveals several violations, including the lack of written contracts for multiple freelancers and delayed payments. Moreover, and significantly, the investigation uncovers that some part-time employees, at their own request, were misclassified as independent contractors to avoid paying taxes and other deductions required by law. Mark, thinking he was doing the right thing at the time by hiring these misclassified workers, had them sign independent contractor agreements that were compliant with the rules of FIFA. Unfortunately for Mark, even a properly drafted independent contractor agreement cannot remedy misclassifying an employee.

The damages

The audit’s findings present a daunting array of financial penalties and legal repercussions for Mark. Each violation, whether due to late payments, lack of contracts, or misclassification of employees, carries significant costs that can quickly accumulate. This section breaks down the immediate and long-term financial impacts Mark faces due to his noncompliance with FIFA and other employment laws.

Emma’s windfall

• Double damages for late payment: Emma is entitled to $3,000, double the original amount of $1,500, due to the delayed payment.
• Penalties for lack of written contract: Mark must pay an additional $250 for failing to provide a written contract.

Additional fines and penalties

• Contract violation penalties: Other freelancers without written contracts receive double their unpaid amounts plus a $250 fine each. For instance, another freelancer who is still owed $800 from a $3,000 engagement would now be entitled to $1,600 plus $250.
• Pattern or practice violations: If the NYSDOL identifies a pattern of violations, the New York Attorney General can seek to impose fines of up to $25,000 for consistent noncompliance.

Misclassification penalties

Now, while not directly related to FIFA, once the NYSDOL starts an audit, they will track down every lead they find. For Mark, the most consequential problem has nothing to do with FIFA. Even though he misclassified employees at their own request and provided them with a legal contract, such actions do not remedy the situation. Consequences for misclassifying employees, whether done intentionally or unintentionally, can be severe. Watch how quickly Mark’s problem could potentially skyrocket out of control.

• Wage penalties: Misclassified employees will be entitled to unpaid wages and overtime. For example, a back-of-house line cook, misclassified as an independent contractor and paid a flat rate of $1,500 per week instead of an hourly rate, could receive significant back pay and damages. If this employee worked 60 hours a week (40 regular hours and 20 overtime hours), the potential damages are calculated as follows:
  • Regular pay: $1,500 ÷ 40 hours = $37.50 per hour
  • Overtime pay: $37.50 × 1.5 = $56.25 per hour
  • Unpaid overtime: 20 hours per week × $56.25 per hour × 52 weeks = $58,500
  • Liquidated damages: $58,500 × 2 = $117,000
  • Additional penalties: Fines of up to $20,000, plus interest, under the Wage Theft Protection Act—another law that requires New York employers’ strict compliance.
• Cumulative damage: The combined penalties and back payments for multiple freelancers and misclassified employees can easily escalate. If QuickBite had five such cases of misclassification over a three-year lookback period, the financial impact could exceed $600,000, potentially crippling the business.  This amount stands in stark contrast to the $3,250 that Emma, the original complainant would receive.

Lessons learned

Mark’s experience highlights the critical importance of compliance with not just FIFA but all employment practices.

Here are the key takeaways for quick-service restaurant owners as it relates to FIFA:

1. Standardize contracts: Develop comprehensive contract templates that meet FIFA’s requirements. Ensure all freelance and independent contractor engagements are documented.
2. Ensure timely payments: Implement a reliable system to track payment deadlines, and ensure freelancers are paid on time.
3. Educate staff: Train management and staff about the importance of compliance with FIFA and proper worker classification.
4. Conduct regular reviews: While consulting with legal advisors, periodically review contracts and payment practices to ensure ongoing compliance with labor laws.

Conclusion

FIFA is a significant development in protecting freelance workers in New York state. For quick-service restaurants, understanding and adhering to FIFA is not only a legal obligation but also a strategy to maintain positive relationships with freelancers and avoid substantial financial penalties. By implementing best practices, restaurant owners like Mark can safeguard their businesses and ensure smooth operations.

Lee Jacobs is a partner in Barclay Damon LLP’s New York City office. 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.