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

Image by Mark Thompson via Unsplash

 

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.

  1. Guide to Independent Contractors' CARES Act Relief, U.S. Chamber of Commerce, (Oct. 12, 2020) https://www.uschamber.com/security/pandemic/guide-to-independent-contractors-cares-act-relief [https://perma.cc/95S9-ADEQ]; Coronavirus Aid, Relief, and Economic Security Act, PL 116-136, March 27, 2020, 134 Stat 281; Jim Garner, New COVID-19 Unemployment Benefits: Answering Common Questions, U.S. Department of Labor Blog, (Jan. 11, 2021), https://blog.dol.gov/2021/01/11/unemployment-benefits-answering-common-questions [https://perma.cc/9UM9-V8C2].
  2. The New York State Department of Labor Stops Fraudsters from Stealing More Than $5.5 Billion in Unemployment Benefits During Covid-19 Pandemic, New York State Department of Labor, (Feb. 2, 2021), https://dol.ny.gov/news/new-york-state-department-labor-stops-fraudsters-stealing-more-55-billion-unemployment [https://perma.cc/U87D-2XZA].
  3. Id.
  4. About NYSIF, NYSIF, https://ww3.nysif.com/Home/FooterPages/Column1/AboutNYSIF [https://perma.cc/EG4K-BV4N] (New York State Insurance Fund was created by the Workers' Compensation Act of 1914 to provide workers' compensation and disability insurance with the lowest possible cost to New York employers while maintaining a solvent fund. Workers Compensation is required to be obtained by the employer for every “employee.” While they provide lower premiums, NYSIF is known to audit more than private insurers); About Us, New York State Department of Labor, https://dol.ny.gov/about-us [https://perma.cc/5NNA-FLAR] (The New York State Department of Labor serves as the state government agency responsible for enforcing labor laws and administering unemployment benefits in New York. They administered the CARES unemployment provisions and are responsible for auditing organizations to assess compliance with various labor-related matters, such as unemployment insurance, wage and hour laws, and worker classification).
  5. Zoom interview with anonymous performing arts organizations (March 2024) (Information included about specific performing arts organizations are based on direct testimony from four different organizations who will remain anonymous as they are still in legal proceedings).
  6. Tom McKinney, New York Department of Labor Audits – Why They are Happening and What You Can Do, Castronovo & McKinney Employment Attorneys, (Oct. 9, 2013) https://nyplaintiff.com/new-york-department-labor-audits/ [https://perma.cc/H7FF-A9RF].
  7. Id.
  8. McKinney, supra note 6; CARES ACT: List of Required Documents, Mass.gov, https://www.mass.gov/doc/pandemic-unemployment-assistance-list-of-required-documents/download [https://perma.cc/MU39-JC59] (workers when filing for unemployment under the CARES Act were required to submit all earning records for the year prior – such as their 1099, bank statements, and pay stubs).
  9. McKinney, supra note 6.
  10. Employee Misclassification, Woods | Lonergan, https://www.woodslaw.com/practice-areas/employment-law/wage-and-hour-claims/employee-misclassification/#:~:text=When%20an%20employee%20can%20show%20that%20the%20misclassification,100%20percent%20of%20Social%20Security%20and%20Medicare%20contributions [https://perma.cc/AL4S-8XVF].
  11. Estimated Payroll Verifications, NYSIF, https://ww3.nysif.com/en/Employer/WCpolicyholder/AboutAuditing/EstimatedAudits [https://perma.cc/7BQ5-CDXK]; NY Work Comp L § 10 (2022) (“Every employer subject to this chapter shall in accordance with this chapter, except as otherwise provided in section twenty-five-a hereof, secure compensation to his employees and pay or provide compensation for their disability or death from injury arising out of and in the course of the employment without regard to fault as a cause of the injury”); NY Work Comp L § 95 (2022) (“Every employer who is insured in the state insurance fund shall keep a true and accurate record of the number of his employees and the wages paid by him, and shall furnish, upon demand, a sworn statement of the same. Such record shall be open to inspection at any time and as often as may be necessary. . .”).
  12. NY Work Comp L § 2.
  13. What business owners must know about workers’ compensation, New York State Workers Compensation Board, https://www.wcb.ny.gov/content/main/TheBoard/BusinessOwners.pdf#:~:text=Businesses%20pay%20a%20penalty%20of%20up%20to%20%242%2C000,for%20five%20or%20fewer%20employees%20is%20a%20misdemeanor [https://perma.cc/5PNC-5PZN].
  14. Id.
  15. Zoom interview with anonymous performing arts organization, supra note 5.
  16. N.Y. Lab. Law § 511 (McKinney).
  17. Id.
  18. Bynog v. Cipriani Grp., Inc., 1 N.Y.3d 193, 802 N.E.2d 1090 (2003) (TEST: “(1) whether the worker worked at his/her own convenience (2) whether the worker was free to engage in other employment (3) whether the worker received fringe benefits (4) whether the worker was on the employer’s payroll and (5) whether the worker was on a fixed schedule.”).
  19. Bynog, supra note 18; see e.g. Columbia Artists Management v. Commissioner of Labor (Supreme Court, Appellate Division, Third Department, New York) (2013) (Since defendant retained the right to insist that a performance be changed if it found it to be inappropriate and that they could dismiss any musician for drug or alcohol abuse that they had “broad overall control” and the court found the musicians to be employees).
  20. Anne A. Idalski, Defending Your Independent Contractor Classifications, SHRM, (April 1, 2015) https://www.shrm.org/topics-tools/news/hr-magazine/defending-independent-contractor-classifications [https://perma.cc/A6WP-7LY5]; see e.g. Womens Project and Productions INC v. Commissioner of Labor (Supreme Court, Appellate Division, Third Department, New York) (2020) (Written agreements between theater company and workers it hired did not rebut presumption that the workers were employees).
  21. Interview with Lawyer of one of the impacted performing arts organizations (March 2024).
  22. INDEPENDENT CONTRACTOR MISCLASSIFICATION IMPOSES HUGE COSTS ON WORKERS AND FEDERAL AND STATE TREASURIES, National Employment Law Project, (Oct. 26, 2020),https://www.nelp.org/publication/independent-contractor-misclassification-imposes-huge-costs-workers-federal-state-treasuries-update-october-2020/ [https://perma.cc/9WDB-E7ZZ]; Gig Economy: Definition, Factors Behind It, Critique & Gig Work, Investopedia (Updated March 27, 2024) https://www.investopedia.com/terms/g/gig-economy.asp [https://perma.cc/22PL-EM8N] (“A gig economy is a labor market that relies heavily on temporary and part-time positions filled by independent contractors and freelancers rather than full-time permanent employees. Gig workers gain flexibility and independence but little or no job security.”).
  23. Id.
  24. Comptroller Stringer Spotlights Creative Sector’s Critical Contributions to NYC Economy in Expansive New Report, New York City Comptroller Brad Lander, (Oct. 25, 2019)

    https://comptroller.nyc.gov/newsroom/comptroller-stringer-spotlights-creative-sectors-critical-contributions-to-nyc-economy-in-expansive-new-report/ [https://perma.cc/69BW-TQKN] (Prior to the pandemic, NYC’s creative sectors employed nearly 300,000 New Yorkers and spurred $110 billion in economic activity, accounting for nearly 10% of NYC’s gross domestic product. As of June 2023, employment in the arts and entertainment industry remained 10% below 2019 levels).

  25. Eli Dvorkin, Charles Shaviro, and Sarah Amandolare with Sara Bellan, CREATIVE COMEBACK: SURVEYING NYC’S CULTURAL ECOSYSTEM IN THE WAKE OF COVID-19, Center for an Urban Future, (July 2021) https://nycfuture.org/research/surveying-nycs-arts-after-covid [https://perma.cc/S3FB-VW6E].
  26. Id.

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