The Impact of the “Misclassification” of Employees as Independent Contractors on New York City’s Performing Arts Institutions and Gig-Based Performers

During the height of the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) made it possible for independent contractors to access unemployment benefits, or “Pandemic Unemployment Assistance” (“PUA”), for the first time. This created a new awareness for how many gig-based performing artists were considered independent contractors.¹ In the wake of the PUA program expiration in 2021, the DOL identified 425,000 fraudulent unemployment benefit claims filed, totaling $5.5 billion, during the COVID-19 pandemic.² The fraudulent claims were filed using the real identities of individuals who were not employed, which were likely stolen during previous data breaches of banks, insurance companies, and employers.³ The extension of unemployment benefits and the following fraud claims ignited a renewed interest in independent contractor misclassification at the New York State Insurance Fund (“NYSIF”) and the New York State Department of Labor (“DOL”) in independent contractor misclassification.⁴

According to accounts from the field, since the pandemic and the expiration of independent contractor unemployment benefits, NYSIF and the DOL have been more aggressively auditing many performing arts institutions and have been finding that all their 1099 workers have been misclassified and are legally considered to be employees.⁵ A finding of misclassification carries steep penalties – one institution being fined as much as 90,000 dollars. Submissions by 1099 workers filing for unemployment have been known to trigger DOL and NYSIF audits of institutions listed on supporting documents attesting to earning records.⁶ Previously, an audit was usually triggered when an independent contractor improperly filed for unemployment.⁷ Since the CARES Act allowed 1099 workers to file and submit all earning records, the DOL has access to previously untapped information to more closely examine if contractors are being categorized fairly, triggering more audits.⁸

The result of these audits of small performing arts organizations is that in future all workers must be treated as employees, the implication being that an “independent contractor” in the arts industry is not seen as a valid classification by these institutions.⁹ The result of these “misclassifications” are retroactive fines from the DOL, possible back taxes, payroll taxes, back pay, overtime pay, and retirement benefits.¹⁰ Additionally, NYSIF specifically conducts audits of organizations compliance with workers’ compensation requirements.¹¹ Under the New York Workers Compensation Law, “‘Employee’ shall also mean . . . a professional musician or a person otherwise engaged in the performing arts who performs services as such for . . . a theatre. . . or similar establishment unless, by written contract, such musician or person is stipulated to be an employee of another employer covered by this chapter.”¹²  

While many independent contractors are either covered under their own policies or by another covered employer, even when they show proof of these existing policies and regardless of the workers’ tax status, when auditing many small performing arts organizations, NYSIF determined that all workers under an organization’s “direct control” shall be considered the organization’s employees for workers’ compensation purposes.¹³ Based on this reasoning, NYSIF has been holding performing arts institutions liable for all 1099 independent contractors’ workers compensation policies and has been categorizing workers at the highest possible policy rate, or “class code,” with no consideration of the workers actual function or degree of risk incurred while on the job.¹⁴ These actions by NYSIF and the DOL are having the unintended consequence of threatening performing arts organizations under a certain operating budget with financial penalties they are unable to pay which could, and have, resulted in full closure.¹⁵

Under New York state law, there is a strong statutory presumption in favor of finding performing artists as being employees.¹⁶ The presumption can only be rebutted by proving that the worker has a written contract stipulating that they are the employee of another employer covered by the statute or if their labor did not require and “artistic skill.”¹⁷ Only if the statutory presumption is rebutted do the courts look to whether the employer had “direct control” over the worker, which is determined by a multi-factor common law test (“the Bynog factors”), where no one factor is controlling.¹⁸ Both Administrative Law Judges (“ALJ”) and higher courts overwhelmingly find in favor of a worker being an employee rather than an independent contractor when applying these factors due to the strong statutory presumption, regardless of the evidence submitted attesting to the workers status as an independent contractor, including sworn affidavits from the workers themselves.¹⁹ Even organizations that have above-board record keeping, including explicit contractual agreements with the independent contractor, are finding that they are unable to successfully contest these fines.²⁰

Most organizations when faced with a fine or a change in their premium based on an insurance audit just pay, as it is more expensive to retain legal counsel to contest the fines than just paying. Unfortunately, if an organization pays the fines, they are essentially admitting that they misclassified workers, which can be used as evidence if they want to contest misclassification in the future.²¹

It is important to consider that, especially with the rise of the gig economy, the “independent contractor” label shifts risk and cost from organizations to artists themselves and deprives them of core rights and protections such as minimum wage, overtime pay, contributions to Social Security, the right to collective bargaining under the National Labor Relations Act, workers’ compensation, unemployment compensation, and protection from discrimination.²² Additionally, state reports show that 10 to 30 percent of employers (or more) misclassify their employees as independent contractors, which indicates that several million workers nationally may be misclassified. Which in turn causes state and federal governments to lose billions in annual revenue.²³ NYSIF and the DOL must remain vigilant in enforcing these requirements, but there must be a re-assessment of how this enforcement is being conducted on small performing arts institutions, especially considering that the performing arts space in New York City has struggled to recover since the pandemic.²⁴

Small arts organizations faced the sharpest dive in income in fiscal year 2019 – 2020.²⁵  While damage to the arts sector is severe and widespread, organizations led by Black, Indigenous, and/or people of color (BIPOC) are disproportionately impacted.²⁶ Most artists in New York operate as independent contractors on a gig basis and they rely on small independent and non-profit theaters to patronize their work. These smaller theaters serve as incubators for larger productions, contributing greatly to the culture and economy of New York City. If they continue to close due to prohibitive fines, the entire arts ecosystem will be disrupted. These types of fines may be avoided if more educational materials were available from the institutions conducting these audits to increase awareness surrounding these requirements and provide legal aid to potentially contest the results of an erroneous audit. Although, without substantive policy change, such as a change in enforcement posture by NYSIF and the DOL or an explicit legal carve out to account for the many artists who operate as independent contracts to continue to legally work at small indie theaters, these precious cultural institutions will continue to struggle to keep their doors open.

Katie Sigety is a second-year law student at the Benjamin N. Cardozo School of Law and a Staff Editor at the Cardozo Arts & Entertainment Law Journal. Katie is interested in Art and Special Education Law. She is currently interning at the NYC Department of Cultural Affairs (“DCLA”) as part of her participation in the Visual and Performing Arts Law Clinic. At DCLA, Katie is focusing on issues pertaining to cultural preservation in New York City.