Freelance May Not Be Free, but Who Pays? Concerns Facing Sureties in Light of New York City Council’s Enactment of “Freelance Isn’t Free” Act

On November 16, 2016, the New York City Council enacted a New York City Local Law known as the “Freelance Isn’t Free” Act (“FIFA”).1 FIFA promises certain freelance workers, among other things, a right to a written contract with their employer, a legal right to receive payment no later than 30 days following the completion of their freelance work, and access to various enforcement mechanisms, civil penalties, and statutory damages. A review of FIFA’s provisions in closer detail reveals potential concerns for sureties that execute payment bonds in connection with public and private improvements located in New York City.

Relevant Provisions of FIFA
FIFA applies to any services contract between a “hiring party”2 and a “freelance worker”3 of a value equal to or exceeding $800, whether that sum reflects the price of a one-time arrangement, or whether it is the sum of all services performed by the freelance worker over a 120-day period.4 Any such contract must be reduced to writing and contain certain information mandated by FIFA.5 FIFA also requires, in relevant part, that the freelance worker be paid on the date required by the contract, if the contract specifies such a date-but in any event, no later than 30 days following the freelance worker’s completion of the services.

A complaint alleging a violation of FIFA’s standards may be filed with the director of the office of labor standards within two years of the alleged conduct, using a form of complaint that will be prescribed by the director.6 Following the receipt of such a complaint, the director will forward notice of the alleged violation to the hiring party within 20 days of receiving it from the freelance worker.7 The hiring party’s failure to respond to the complaint “creates a rebuttable presumption in any civil litigation commenced pursuant to this chapter that the hiring party committed the violations alleged in the complaint.”8

In that vein, FIFA also provides freelance workers with a private cause of action against hiring parties for any violation of FIFA’s terms.9 If a freelance worker prevails with respect to a claim that a hiring party violated the provisions of FIFA requiring prompt payment of the freelance worker’s wages,10 the freelance worker will be entitled to recover double damages, among other things.11

A Concern for Payment Bond Sureties?
FIFA, by its terms, applies to a number of self-employed persons and single-member entities who perform labor and deliver materials in connection with public and private improvements in New York City, and may therefore qualify as potential claimants against payment bonds executed in connection with such projects. One question, therefore, is whether a payment bond surety could be held liable for double damages or other penalties incurred by contractor under FIFA, should the contractor fail to pay them or be unable to pay them after a court awards them to a qualifying freelance worker.

The payment bond surety, of course, should not be exposed to such liability. Labor and material payment bonds are intended to guarantee to the project owner that the contractor will satisfy its obligations under the general contract to pay its subcontractors and suppliers and/or keep the project lien free. The scope of such bonds is therefore generally limited to the value of labor and materials that contribute to the prosecution of the bonded project. Double damages awarded under FIFA are penalties meant to incentivize an employer to pay its freelance employees on a timely basis. These penalties do not contribute to the construction of a project, and ostensibly do not fall within the scope of a standard labor and material payment bond.

Unfortunately, some New York courts have mistakenly held payment bond sureties liable for other statutory penalties incurred by the contractor. For instance, an appellate panel of the First Department of New York’s Appellate Division recently held a surety liable for statutory interest penalties incurred by the contractor under one of New York’s several prompt payment acts12, which imposes mandatory 12% interest on payments due from the contractor to its subcontractors or suppliers if those payments are not made within a week of the contractor’s receipt of payment from the owner.13

While this decision is fundamentally flawed for a number of reasons,14 it serves to demonstrate that absent proactive legal advocacy by the surety industry, a court could reach the incorrect conclusion that a payment bond guarantees payment of penalties assessed against the contractor pursuant to FIFA.

If a court were to decide that a surety is responsible for FIFA penalties incurred by a contractor, a further question arises: could the “rebuttable presumption” created by a contractor’s failure to answer a complaint filed by a freelance worker with the director15 apply to the freelance worker’s claim against the contractor’s surety? Arguably, it should not. Such a rebuttable presumption has a quasi-collateral estoppel effect. Under New York law, a prior decision operates as collateral estoppel against a party if that party has had, among other things, a “full and fair opportunity” to contest the decision alleged to be controlling. It is highly unlikely that the surety would know whether a complaint against its principal had been filed with the director pursuant to FIFA, and therefore, similarly unlikely that the surety would be able to contest the complaint (or at least ensure that the complaint were adequately responded to, in order to avoid the rebuttable presumption from arising).

FIFA is at the very least a reminder that sureties and their counsel must continue to be vigilant regarding potential attempts to hold payment bond sureties responsible for miscellaneous debts of the contractor-including statutory interest and penalties-which fall outside the intended scope of a labor and material payment bond.

1 N.Y.C. Local Law No. 2016/140, File No. Int. 1017-2015 (November 16, 2016). FIFA has been promulgated as Chapter 10 to Title 20 of New York City’s Administrative Code.
2 By definition the “hiring party” will almost always be a private entity or person, as the definition expressly excludes a wide array of federal, state, and city entities. 20 N.Y.C. Admin. Code. § 927.
3 Defined broadly to include “any natural person or any organization composed of no more than one natural person . . . that is hired or retained as an independent contractor by a hiring party to provide services in exchange for compensation.” Id. “Freelance worker” excludes certain sales representatives, legal practitioners, and medical professionals. Id.
4 Id. at § 929.
5 Id.
6 Id. at § 931.
7 Id. at § 931(d).
8 Id. at § 931(d).
9 Id. at § 933.
10 Id. at § 929.
11 Id. at § 933(b)(3).
12 N.Y. State Finance Law § 139-f.
13 See ACS Sys. Assocs., Inc. v. Safeco Ins. Co. of Am., 134 AD3d 413 (N.Y. App. Div. 1st Dept. 2015).
14 In fact, it does not appear that the court even considered whether prompt payment act interest is covered by a labor and material payment bond (indeed, it does not appear that the surety raised the legal issue either at the trial level or on appeal). One issue the court should have considered, for example, is the fact that the prompt payment statute in question provides that such prompt payment interest penalties “shall be the sole responsibility of the contractor”, N.Y. State Fin. Law. § 139-f(2), to the exclusion of all others, including the surety.
15 See 20 N.Y.C. Admin. Code. § 931(d).

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