One of the recurring themes in workplace law in 2016 was the continued crackdown on independent contractor misclassification. Both federal and state agencies, as well as the plaintiffs’ bar, invested significant resources to challenge employers in the “gig economy”—as well as in more traditional businesses—that rely heavily on contractors, freelancers, and other third-party service providers.
In New York, many of these challenges arise in the first instance at the Unemployment Insurance (UI) Division of the State Department of Labor (NYSDOL), where the fact that a worker was paid on a Form 1099 basis—as opposed to a Form W-2 basis—will almost always trigger an investigation into the merits of that “non-employee” classification. Often, these investigations lead to a broader inquiry into the company’s classification practices. Even outside the context of an individual claim for benefits, the NYSDOL has the authority, under Section 575 of the Labor Law, to conduct both “random” and targeted audits of businesses. Any employer that has received a “Section 575” audit letter—often demanding the disclosure of three years’ worth of payroll records, tax returns, and “general ledgers”—is familiar with the disruption and potential exposure associated with such investigations. If the UI investigator or auditor determines that one or more individuals were misclassified as independent contractors, the NYSDOL will likely deem that conclusion to apply to all similarly situated workers performing like services and demand the payment of up to three years’ worth of back taxes and interest. Potentially more troubling, such a determination may embolden the affected workers to pursue employment-related claims outside the unemployment context, such as for minimum wage, overtime, and benefits.
A company seeking to challenge a UI determination must be prepared to defend its classification not only at an evidentiary hearing before an administrative law judge, but potentially on appeals to the UI Appeal Board, the Appellate Division, and the Court of Appeals. Many businesses assume—based on first-hand experience or broader research—that the chances of reversing a UI determination of employment are slim, especially given the historically deferential standard of review in such cases (whether there is “substantial evidence” in the record to support the decision below, even if that evidence could have supported a finding of an independent contractor relationship).
But all hope is not lost for businesses. In an encouraging decision last week, the Appellate Division, Third Department—in Mitchell v. The Nation Co. Ltd. Partners (Dec. 29, 2016)—reversed two decisions of the UI Appeal Board and held that a paid blogger for the respondent media company was indeed an independent contractor and not an employee. In Mitchell, the claimant—an established writer and publisher—entered into a freelance contract with The Nation to write and manage one of its blogs on a daily or near-daily basis. The Nation paid the claimant $46,800 annually, in monthly installments.
The Appellate Division first acknowledged that, under the “substantial evidence” standard, it has not traditionally been the court’s role to review and weigh independently the evidence adduced at the administrative hearings before the NYSDOL. This said, mindful of the Court of Appeals’ recent decision in Matter of Yoga Vida, NYC, Inc.—which relied on a “more detailed, qualitative and arguably less deferential analysis” of the various employment factors to hold that certain yoga instructors were independent contractors and not employees—the Appellate Division examined the record below and concluded that the determination of an employment relationship was not, in fact, supported by substantial evidence.
While there were facts in Mitchell that could have supported a finding of an employment relationship (e.g., the claimant was required to identify himself as a writer for The Nation; was paid an annual salary in monthly installments; was reimbursed for certain business-related expenses; was assigned an intern by The Nation; was required to use the publisher’s content management system; was required to comply with the publisher’s style guidelines; and The Nation had staff writers as well as freelance writers), there were other facts that suggested that the claimant’s classification as an independent contractor was appropriate (e.g., during the period of his services to The Nation, the claimant also blogged for other publications and independently wrote eight books; he was not formally interviewed by The Nation; he worked from home using his personal laptop; he set his own hours and was not penalized for not blogging on a given day; he did not have a supervisor at The Nation; he was not permitted to work from The Nation’s offices; he was not assigned particular topics; and he could post a story prior to it being edited by The Nation’s staff). While The Nation’s editors encouraged the claimant to write on certain general subjects and to avoid others, he had the right to reject particular suggestions as to content and the general freedom to write about subjects of interest to him.
The Appellate Division concluded, on “the record as a whole,” that The Nation did not exercise “control over important aspects of the services performed” by the claimant, and therefore that he and similar situated individuals were not employees of The Nation for unemployment insurance purposes.
The opinion in Mitchell is helpful for businesses in at least two significant respects. First, it confirms that freelance writers and other content providers who are strongly affiliated with a particular publisher and whose contributions are subject to the latter’s style guidelines and editorial input can nonetheless be independent contractors. This should be viewed as a positive development for media companies and other content platforms that operate on a freelance contribution model either exclusively or to supplement their staff writers. Second, when read in conjunction with Matter of Yoga Vida, it signals that the courts are willing to take a more searching and plenary analysis of the facts in the record that support and do not support a finding of an employment relationship—as opposed to viewing the “substantial evidence” standard as requiring a more limited and deferential analysis. And this should be encouraging to all New York businesses, in any industry.