Managing independent contractors

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Rose HacheIt is common knowledge that host agencies have to correctly identify outside salespeople as independent contractors or employees. It is well-known that keeping tax authorities satisfied is vital, but other issues require attention, too.

In the case of an independent contractor, a contract is essential. In Publication 15, the Internal Revenue Service says it uses the fact of a properly drawn contract to show the type of relationship created. Also, state and federal labor departments look closely for additional dollars to balance budgets.

Misclassification of an employee as an independent contractor means an agency would be liable for payments such as back overtime pay, unemployment insurance, stock options (if granted to other employees) and taxes for wages.

Written contracts also help manage risk, such as when selling the agency. Even when there are no independent contractors, the owner is wise, when about to sell, to enter into a brief contract whereby staffers agree they cannot solicit the agencys customers within a specified time period.

In a recent acquisition, a new owner inherited an employee who, several months after the acquisition, asked to be an independent contractor. She continued to serve the clients of her old employer but without a contract to protect the agencys client list. The following year, she left the buyer agency and warned, Do not interfere with my clients, or I will sue you for tortious interference with contractual relations.

Without a written contract, buyer and seller lose. The sellers payout is negatively impacted, and the buyer does not derive the anticipated benefit of the purchase.

In the situation above, the buyer implemented good independent-contractor agreements and, in the absence of a sellers covenant with employees, renegotiated the terms of payment to the seller.

On another front, some errors-and-omissions (E&O) insurers changed their rules last year for coverage of independent contractors. If you want coverage of independent contractors as additional insureds, the policy extends only to individuals, not corporations or other legal entities.

The coverage afforded by the endorsement for contractors amends the term insured to include only those contractors who are individuals under contract with the host agency and authorized to sell travel services on behalf of the host.

This undermines the independent contractors claim to be independent. It also means the additional insureds coverage for the contractor does not apply to travel agency operations performed by the contractor for another host or without a host, nor does it apply to company names used by the contractor and individuals the contractor may employ.

Independent contractors need to obtain their own E&O policies, and the host needs to require them as a condition of doing business in a written contract.

Rose Hache is a travel attorney based in Houston. E-mail her at [email protected].

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