New Gig Law Gotchas: How to Avoid Penalties Under NY’s Independent Contractor RulesPost

The freelance economy is booming—but for New York businesses, especially in hospitality and creative services, the legal boundaries around using independent contractors are tighter than ever. Misclassify a worker and you could face audits, wage claims, or tax penalties.

Under New York State law, just calling someone a freelancer isn’t enough. The Department of Labor applies strict tests to determine whether a worker is truly an independent contractor—or actually an employee in disguise.

And while New York City’s and New York State’s Freelance Isn’t Free Acts (FIFA) add additional requirements around contracts and payment, the bigger compliance risk comes from getting the classification itself wrong.

Classifying someone as an independent contractor may feel convenient, but under New York law, labels don’t matter—the reality of the working relationship does. New York’s control and direction test, while similar to the federal “economic realities” test, evaluates how much independence the worker actually has in practice.

Independent contractors:

Employees, on the other hand, often:

New York’s Freelance Isn’t Free Act (FIFA) applies statewide. Businesses hiring freelance workers for $800 or more in services (either in a single project or cumulatively over 120 days) must:

Payment must be made by the contract’s due date—or no later than 30 days after completion of services, if no due date is listed. Contracts must be in writing (paper or electronic) and retained by the hiring party for at least six years.

The NYS DOL has published model contracts on its website.

Penalties for Noncompliance in NY State:

Under NYC’s Freelance Isn’t Free Act:

These are enforceable via private lawsuits or actions by the Corporation Counsel, and can stack with state-level liabilities.

It’s easy to think a misclassification issue will only come up if you’re audited. But more often, it begins with something mundane: a former worker applies for unemployment insurance, files a workers’ comp claim, or requests disability or paid family leave.

Suddenly, that everyday claim lands on a state agency’s desk—and if that agency believes the worker may have been misclassified, it doesn’t stop there. They often share their findings with other enforcement bodies. A claim for UI can lead to an audit by the Department of Labor. A comp claim may alert the Workers’ Compensation Board. Soon, multiple agencies—from disability insurers to tax authorities—are assessing penalties, back premiums, and interest.

This cascade of enforcement is a key reason we treat classification issues seriously. If you’ve read our earlier breakdown on the misclassification domino effect, you know how quickly it snowballs.

Let’s say a restaurant hires a “freelance line cook” for weekends. He wears the company uniform, uses the restaurant's tools, takes direction from the chef, and is paid hourly via Venmo. When the cook is let go, he files for Unemployment Insurance (UI) benefits, prompting the Department of Labor (DOL) to review the situation. Despite being labeled a freelancer, the line cook’s role clearly aligns with an employee classification under New York law. He works under the restaurant's supervision, follows a set schedule, uses company tools, and has no flexibility in his work hours or the ability to take on other clients—all of which point to employee status. Freelancers typically have control over their schedule, tools, and the number of clients they serve, but the line cook’s daily routine mirrors an employee's obligations.

This misclassification opens the door to significant liabilities. The DOL may assess back wages, including unpaid overtime, and impose penalties for failing to properly classify the worker. The restaurant could face fines for misclassification, back taxes, unpaid workers' compensation premiums, and benefit contributions. Additionally, the cook could be entitled to damages, including liquidated damages, which could further increase the financial burden on the business. What seemed like a simple freelance arrangement can quickly escalate into an expensive and time-consuming legal issue, affecting the restaurant’s bottom line and reputation.Damages Example: Line Cook Scenario

A consulting firm hires a freelance admin to manage scheduling. She works 30 hours a week using the firm’s systems, under daily direction, with no outside clients. Despite being labeled as a freelancer, her daily responsibilities and the lack of flexibility she has in completing the work point to an employee classification under New York law. Freelancers typically have control over their schedules, tools, and the way they perform their tasks. They can take on multiple clients and set their own terms for how, when, and where the work is done. This admin, on the other hand, is working exclusively for the consulting firm, following their internal procedures, and using company resources—traits that more closely align with an employee than an independent contractor.

Misclassification is rarely deliberate. It usually happens because a role evolves or a manager overreaches. But the consequences are real. Here's how to stay protected:

Revisit freelancer roles: Emphasized regular assessment of freelancer duties to prevent misclassification.

Use detailed written contracts: Defined the importance of contracts that clearly outline responsibilities and compensation.

Avoid setting strict schedules: Clarified that freelancers should have flexibility, unlike employees.

Train managers: Explained the need for managers to understand the distinction between freelancers and employees.

Ensure contracts comply with NYS and NYC requirements: Stressed the importance of keeping contracts updated with legal standards, including local regulations.

At Jacobs & Associates, we help New York businesses navigate contractor relationships the right way—whether you’re onboarding a short-term gig worker or structuring long-term freelance partnerships. With the right approach, you can stay flexible and compliant.

Keep Fighting the Good fight.