If your business relies on independent contractors—whether in New York or elsewhere—you’ve likely heard that misclassification can lead to serious legal trouble. But for companies with individuals physically performing services in New York, the risks have only intensified in recent years. That’s why now is the time to perform a New York independent contractor audit of your existing relationships.
Why This Matters Now
New York State has significantly expanded protections for freelancers and increased its scrutiny of worker classification. With the 2024 enactment of the Freelance Isn’t Free Act and ongoing state and federal enforcement actions, it’s more important than ever to evaluate whether your independent contractor arrangements truly comply with the law.
Misclassifying an employee as an independent contractor can lead to liability for:
-
Unpaid minimum wage and overtime
-
Unpaid unemployment insurance and workers’ compensation contributions
-
Interest and penalties from tax authorities
-
Legal fees and liquidated damages in private lawsuits
-
Liability under New York’s Freelance Isn’t Free Act
In addition, enforcement efforts are increasing:
-
The New York State Department of Labor (NYSDOL) continues to aggressively investigate misclassification claims.
-
The IRS and state/local tax authorities remain interested in employer tax compliance.
-
Private litigation and class actions are becoming more common, particularly where workers are denied benefits or final payment.
Bottom line: if someone is working in New York—physically, even remotely—your business may be subject to New York’s worker classification rules, regardless of where your headquarters or other business locations are located.
Step 1: Know the Legal Standard (It’s Not the Same Everywhere)
In New York, the legal tests for employee vs. contractor status vary depending on the law at issue. That complexity is a common pitfall for employers.
For Wage and Hour Purposes:
New York follows a multi-factor “economic realities” test, similar to the federal DOL standard. The core question: Is the worker economically dependent on the business or truly in business for themselves?
Relevant factors include:
-
The degree of control the business exercises over the work
-
The worker’s opportunity for profit or loss
-
The permanency of the relationship
-
The extent to which the work is integral to the business
-
The skill and initiative required
-
The extent of the worker’s investment in tools or equipment
No one factor is determinative. Control is important, but courts and agencies look at the totality of the relationship.
For Unemployment Insurance:
New York applies a worker-friendly test, meaning it is easier for a worker to be deemed an employee eligible for unemployment insurance. The NYSDOL looks primarily at whether the employer exercises any degree of supervision, direction, or control over the worker’s services. This includes not just direct oversight, but also indirect control, such as setting hours, assigning work, or requiring status reports.
As a result, a worker may be classified as an independent contractor for federal tax purposes under IRS standards, yet still be considered an employee for New York unemployment insurance eligibility.
For Freelance Isn’t Free Act Compliance:
Even if the contractor is properly classified, businesses must comply with New York’s new requirements for freelance contracts. For independent contractors in New York earning $800 or more, a written contract must exist, identifying payment timelines and retaliation protections.
Click here for more on New York’s Freelance Isn’t Free Act.
Step 2: Conduct an Internal Audit
An internal audit is your best defense against future liability. Start by identifying anyone providing services to your business who is not on payroll. Then, for each worker:
1. Document the Relationship
-
Do you have a signed contract?
-
Does the contract describe an independent business relationship, with clear project-based deliverables and no guarantee of ongoing work?
-
Is the contract consistent with how the relationship works in practice?
2. Evaluate Control
-
Who sets the worker’s hours?
-
Where is the work performed?
-
Who provides tools, equipment, and software?
-
Do you require regular check-ins or approval for routine tasks?
3. Assess Economic Independence
-
Does the worker have other clients?
-
Do they advertise their services publicly?
-
Can they subcontract the work or delegate it?
4. Examine Duration and Integration
Red flags may include:
-
Contractors working set hours or reporting to a manager
-
Use of internal email addresses or being listed on the company website
-
Reimbursement of expenses that should be borne by the contractor
-
Prohibitions on working for other clients
In most cases, there are no single factors that are entirely determinative of the proper classification. Multiple criteria must be considered. But the presence of any of the above red flags should generally trigger further analysis.
Step 3: Address the Risks
After identifying questionable arrangements, you have a few options:
Option 1: Reclassify as an Employee
-
This may be the safest course, especially if the worker is full-time, works under close supervision, or performs a core function of your business.
-
It may also open access to benefits, improve morale, and reduce turnover.
Option 2: Restructure the Relationship
-
Limit control and supervision.
-
Update the contract to emphasize the contractor’s independence.
-
Avoid integrating the worker into your business structure (e.g., no internal email, no title).
Option 3: Continue the Relationship with Mitigation Measures
-
Require evidence of the contractor’s separate business (e.g., EIN, business insurance, W-9).
-
Educate your managers on boundaries to maintain independence.
-
Set project-based deliverables with defined scopes and deadlines.
Step 4: Consider the Impact of Remote Work
Employers sometimes overlook that remote workers still “perform services” in a physical location—namely, wherever they are sitting with their laptop. If that’s New York, your business may need to:
-
Register for a New York employer ID
-
Comply with NY wage and hour laws
-
Withhold and remit NY state taxes and unemployment contributions
-
Follow the Freelance Isn’t Free Act if you engage independent contractors based in New York
Step 5: Train and Monitor
The law is clear: labels don’t matter—substance does.
Train your managers and HR personnel not to treat contractors like employees. Common mistakes include:
-
Directing day-to-day work
-
Including contractors in internal Slack or Teams channels unrelated to their assignment
-
Having contractors attend staff meetings or performance reviews
Monitor the relationships over time. What starts as a one-off project can evolve into an employment relationship if not carefully maintained.
Don’t Ignore This Potential Source of Serious Liability
The financial implications of improper classification depend on how many people are involved, the volume of their work, and other considerations. But it can result in fines, penalties, backpay, liquidated damages, and more. All of that adds up quickly and, in some cases, the liability can accrue to individuals, such as business owners, who may not be able to easily escape it even through bankruptcy or other business dissolution.
If you’re unsure whether your contractor relationships would withstand scrutiny from the NYSDOL, the IRS, or a plaintiff’s attorney, now is the time to act. And if you engage any freelancers in New York—whether directly or through third parties—you’ll want to ensure that your contracts and processes are updated to comply with both classification standards and the Freelance Isn’t Free Act.
Given the complexity of the applicable classification standards, consulting with an experienced employment attorney is recommended if there is any uncertainty whether someone is properly treated as an independent contractor.
For more employment law updates, sign up for the Horton Management Law email newsletter and follow us on LinkedIn.
