New State Law Protecting Independent Contractors in Fee Disputes Can Lead To Hefty Damages: August 2023 IC Legal News Update

Independent Contractor Misclassification & Compliance Blog
September 7, 2023

Last month, Illinois became the first state to enact legislation requiring companies using independent contractors to offer contracts to ICs with prescribed terms and to pay such freelance contractors all of their fees within a specified number of days. The legislation follows on the heels of similar laws passed by several cities, including New York City, Los Angeles, and Minneapolis. While all of these laws are a bit different in terms of their coverage and obligations imposed on companies engaging independent contractors, more importantly each provide for substantial damages and penalties if a freelance independent contractor is not paid his or her fees within a relatively short period of time after services are rendered. We describe below many of the features of this new Illinois law including a number of legislative defects. On the one hand, these laws address the need to protect freelancers, yet on the other hand many class action lawyers continue to bring independent contractor misclassification cases such as the two new cases filed last month, which we summarize below. Those lawsuits claim that workers classified as independent contractors are misclassified employees and entitled to minimum wage and overtime compensation available under federal and state wage and hour laws. Businesses that use independent contractors in Illinois and these other jurisdictions can minimize their exposure to contractor pay dispute and misclassification lawsuits by using a process such as IC Diagnostics (TM) to enhance compliance with both types of laws.

Legislative Developments

ILLINOIS ENACTS FREELANCE WORKER PROTECTION ACT, WITH MAJOR FLAWS.  On August 4, 2023, Illinois Governor Pritzker signed into law the first statewide measure in the nation providing freelance independent contractors with protection against non-payment of their fees once services are rendered.  The effective date of the Freelance Worker Protection Act is July 1, 2024. While the New York legislature passed the Freelance Isn’t Free Act earlier this year, its governor has yet to act on the bill, having vetoed an identical measure in 2022. New York City adopted the first such freelance independent contractor law in 2017, Minneapolis passed its version of a freelance protection ordinance effective in 2021, and most recently Los Angeles enacted a freelance pay protection law. Similar to these other municipal enactments, the Illinois freelance protection law has major defects that can expose companies using ICs in that state to costly damages.

The new Illinois law defines a freelance worker as “a natural person who is hired or retained as an independent contractor to provide products or services in Illinois or for a contracting entity located in Illinois….” Unlike the New York City ordinance, the Illinois law covers only individuals acting as sole proprietorships; it does not expand its coverage to single-member limited liability companies or corporations, unless legislative history suggests otherwise. Further, unlike the New York City and Los Angeles measures that cover only freelancers who exclusively provide products or services, the new Illinois law does not specify whether it covers ICs that use other workers to perform any part of the work.

The new Illinois law states that whenever a contracting entity retains a freelance independent contractor, it must offer a contract itemizing the products or services to be provided, the rate and method of compensation, and the contract value of the products or services.  (Note: the contract value may not be feasible to specify where the freelancer is hired on an hourly basis.) The contract must also include the names and contact information of the parties including the mailing address of the business engaging the IC; and the date by which the freelancer will be paid, which, unless otherwise specified in the contract, must be no later than 30 days after the products or services are provided. It also mandates that the agreement includes the date by which the freelancer must provide to the contracting entity “a list of products or services rendered,” if necessary “to meet any internal processing deadlines of the contracting entity” for timely payment of compensation.

This 30-day provision creates an unworkable accounts payable situation for businesses with internal processing systems that only pay invoices 30 or more days following receipt of an invoice, which typically arrives after “the products or services are provided.” To make matters worse for businesses using Illinois independent contractors, payment after the 30-day period results in a civil penalty enforceable in court equal to “double the amount of any such underpayments” as well as payment of the freelancer’s attorneys’ fees – even if the delay is short.

The new law’s double damages feature is particularly perilous for businesses that chose not to pay some or all of an agreed upon fee if they have a bona fide reason to dispute whether the goods or services provided by the freelancer meet any quality or other standards specified in or implied under the contract. There is no defense to the double damages provision for a good faith belief that services or goods provided were unsatisfactory.

In addition to automatic double damages for any payments over 30 days following the completion of work even if there is a legitimate dispute over the quality of the work, the new law includes an additional damages provision that is even more extreme. As drafted, if a contracting entity fails to provide the freelancer upon request with a written contract that contains all of the required information, the freelancer is entitled to an award of “statutory damages equal to the value of the underlying contract or $500, whichever is greater, in addition to the other remedies provided.”  Thus, even in the event payment is delayed briefly or is not paid due to a bona fide dispute over the quality of the services or goods provided, the freelancer may be entitled to the full value of the contract plus double damages.

The Illinois law also includes non-discrimination and non-retaliation provisions, permits complaints to be filed with the Illinois Department of Labor or in an Illinois circuit court, and allows for court actions to be initiated by one or more freelancers on a class action basis. Each violation of the non-discrimination and non-retaliation provisions also entitles the freelancer to damages “equal to the value of the underlying contract,” as well as costs and attorneys’ fees.  Exposure to these types of cascading damages in the Illinois law could well lead companies to avoid engaging independent contractors in Illinois.

Artful drafting of independent contractor agreements can minimize exposure to a number of the damages provisions in this new law.  Many of the suggestions we offered in a blog post to businesses seeking to comply with the New York City freelancer ordinance are equally applicable to companies seeking to comply with the new Illinois law.

In the Courts (2 cases)

MEDIA WEBSITE OWNER SUED BY SITE EDITOR FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION. A former site editor for a website covering a professional sports team has filed a proposed class action alleging independent contractor misclassification against the website owner, a multi-platform news and information media company and its corporate owner.  Filed in a Pennsylvania federal district court, the lawsuit asserts violations under the Fair Labor Standards Act and the Pennsylvania Minimum Wage Act. It alleges that site editors are employees, not independent contractors, that they work over 40 hours in a workweek without overtime compensation, and that their flat monthly payments and bonuses are paid at a rate less than the applicable minimum wage.  The lawsuit also claims, among other things, that the companies exercised control over the site editors and determined their pay rates and method of pay, and that editors allegedly have minimal opportunities for profit and loss, do not invest in their own businesses, and do not need any special skill to perform their services. It is anticipated that the companies will deny those allegations and, if the site editors are bound by an arbitration agreement, make a motion to compel individual arbitration of the plaintiff’s lawsuit.  Stevens v. USA Today Sports Media Group LLC, No. 23-cv-01367 (M.D. Pa. Aug. 17, 2023).

ONLINE DATING COMPANY SUED FOR IC MISCLASSIFICATION BY “MATCHMAKER.”  A plaintiff “matchmaker” has filed a proposed collective action against a nationwide online dating company, Tawkify, Inc. The lawsuit, filed in a Florida federal district court, asserts minimum wage and overtime compensation violations under the Fair Labor Standards Act, allegedly due to the misclassification of matchmakers as independent contractors and not employees. According to the complaint, which cites to the company’s agreement with matchmakers, Tawkify engages matchmakers as part of the company’s network to screen and find matches for clients, plan and schedule dates, follow through to ensure dates meet client expectations, and obtain feedback from both clients. In exchange for completed work, the matchmaker alleges that she receives a commission regardless of how many hours of services she provided. The matchmaker claims that the company controlled work schedules; utilized a central management team to monitor and control matchmakers; required them to follow company policies, procedures, and practices; provided training, without pay, through an online platform; failed to reimburse business expenses, such as internet, laptops, and smartphones; and had sole control over the matchmakers’ opportunity for profit.  Larue v. Tawkify, Inc., No. 23-cv-61686 (S.D. Fla. Aug. 30, 2023).

Other Noteworthy Items

STATE ABC TESTS EVOLVING, ACCORDING TO LAW360. Application of state ABC tests for determining independent contractor or employee status in the wage and hour context continues to evolve as courts, legislatures, and voters weigh in.  In an August 8, 2023 article by Max Kutner published in Law360’s Employment Authority and entitled, “State ABC Wage Tests Face Fights, High Court Reviews,” the reporter discussed how the three-prong ABC test was initially applied in the unemployment context, but how more states are now using that test with regard to wage laws, thereby creating uncertainty for stakeholders.  The reporter quoted the publisher of this blog in the article: “Many of these laws are still being tested in the courts and are being subject to voter initiatives. What companies are not doing [however] is reclassifying otherwise legitimate independent contractors.”

By Richard Reibstein

The post New State Law Protecting Independent Contractors in Fee Disputes Can Lead To Hefty Damages: August 2023 IC Legal News Update appeared first on Independent Contractor Compliance.

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