Q: You have written many columns about problems created by independent contractors in such areas as the risk of reclassification by taxing authorities, financial fraud, transfer of work in progress from one agency to another without the consent of the former, compensation issues arising under poorly drafted independent contractor agreements and, of course, issues of agency liability for contractors' negligence and breach of contract. Do all these problems lead you to recommend that our agency refrain from using ICs altogether? If not, what is the best way for us to protect ourselves against all these problems?
A: I would not counsel any agency against avoiding ICs altogether. After all, many agencies specialize in these relationships, and many of those operate highly successful businesses.
However, you need to be careful. During the last 10 years, the most common legal problems of travel agencies have been those arising from the IC-agency relationship.
To operate an IC program successfully, you need to be aware of a long list of IC-related legal issues and risks that have come to the fore in the last decade, and you need to have an attorney who can advise you about those issues and how to minimize those risks. The following are 20 such issues based on my own experience:
(1) Whether, given the requirements that your ICs must comply with, you have created a risk of reclassification of your ICs to employee status by the IRS and state authorities; (2) whether the agency may or should obtain credit, criminal and reference checks on prospective ICs; (3) whether the contract clearly specifies what the ICs remuneration is based on; (4) whether the agency has a right to deduct any amount owed by ICs for debit memos and other liabilities; and (5) whether ICs should be required to obtain a card imprint and signature on all credit card sales.
Also: (6) whether the ICs may or should use your agency's name on their business cards, letterhead, emails or website; (7) whether the ICs may be required to undergo orientation training; (8) whether the ICs may be required to sell only your preferred suppliers; (9) whether the ICs may be required to follow your agency's invoicing format; and (10) whether the ICs may be required to use your ARC number in all bookings.
Next: (11) whether the ICs must obtain their own Seller of Travel registrations if they sell to residents of the states with such laws; (12) whether the ICs can be required to work exclusively with your agency; (13) whether the agency can terminate the IC's contract on short notice if the agency suspects fraud; (14) whether the ICs should be prohibited from transferring any bookings when they join a new agency; and (15) whether your agency owes remuneration to a former IC when suppliers pay commissions after termination.
Finally: (16) whether your agency is liable for negligent advice given, or negligent work done, by the ICs; (17) whether your agency is liable for theft of client funds by the ICs; (18) whether your insurance company will cover you in cases of ICs' negligence or breach of contract; (19) whether your agency can be liable for sexual harassment by ICs; and (20) whether, considering all of the foregoing, you are better off treating the workers as employees rather than ICs.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].