Like many other businesses, travel agencies rely on the services of independent contractors, defined by the Internal Revenue Service as "people such as doctors, lawyers [and] accountants ... who are in an independent trade, business or profession in which they offer their services to the general public."
As any agency that has used an independent contractor (IC) arrangement can attest, it provides substantial benefits for both workers and agencies in situations where a traditional employment relationship is either impractical or uneconomical.
Travel agencies that use independent contracting are in good company. In 2010, 10.3 million workers, comprising 7.4% of the U.S. workforce, were classified as independent contractors by the U.S. Department of Labor, and another 4 million work in "alternative work arrangements" in which they may be legally classified as independent contractors.
Alternative workers accounted for approximately $626 billion in personal income, or about one in every eight dollars earned in the U.S. For years, travel agencies across the country have utilized IC arrangements to run their businesses more efficiently.
An estimated 61% of ASTA member agencies use at least one independent contractor, and the average ASTA member used eight ICs in 2012. According to the research firm PhoCusWright, an estimated 9,500 ICs work in the travel agency industry.
What makes these arrangements attractive? For an agency, using ICs allows for flexibility to bring people on to help out during a busy season, to pay for services based on output instead of timesheets and to better manage their capital expenses.
For a contractor, the arrangement provides benefits in terms of building the expertise and client base necessary for entrepreneurship and small-business formation, but perhaps most of all, it fulfills the desire to be their own boss.
A crackdown is threatened
However, there are moves afoot at both the federal and state levels that would make it prohibitively difficult for travel agencies to continue using ICs. Motivated by the belief that there is widespread "misclassification" of employees as independent contractors and that employers and ICs aren't paying their fair share of taxes, the Obama administration, congressional Democrats and some state legislators are threatening to crack down on independent contracting. For example:
• The administration proposes to repeal the "Section 530 safe harbor," which was put in place in 1978 to provide some certainty about the circumstances under which an individual can safely be classified as an IC. In addition, proponents would provide an extra $14 million to the Labor Department to mount a fight against misclassification.
• The Labor Department may require businesses to provide each and every IC they use with a customized written analysis explaining the legal basis for classifying the individual as an independent contractor.
• In March, bills were introduced in Congress ("The Fair Playing Field Act of 2012") to put many of the administration's proposals into effect.
Anti-IC legislators have been active at the state level, as well, with bills moving forward in the past few months in California, Vermont and Rhode Island.
If you were to read the negative news articles on this issue, you might come away with the impression that businesses are forcing their employees to become ICs against their will. The reality is quite the contrary: Workers in IC positions overwhelmingly prefer independent contractor relationships to salary/wage employment.
According to the Labor Department, 82.3% of ICs prefer an independent work arrangement to being an employee, compared with only 9.1% who would prefer a traditional employment arrangement.
In the same vein, a 2009 Pew Research Center survey found that self-employed workers are "significantly more satisfied with their jobs than other workers," and that "they're ... more likely to work because they want to and not because they need a paycheck."
The tax gap myth
Another argument critics present is that independent contractors are more likely to underreport income than employees, leading to reduced tax revenue and thus increasing the so-called "tax gap."
While tax evasion undoubtedly exists throughout the U.S. economy, there is no evidence that IC arrangements contribute disproportionately to the tax gap. In fact, the opposite is true. The Treasury Department examined this concern in great detail several years ago and concluded that, provided income and expenses are properly reported, "independent contractors and their clients tend to pay higher levels of taxes, especially Social Security and Medicare taxes, than employees and employers."
At the end of the day, independent contracting provides a flexible way to conduct business when traditional employment arrangements don't make sense, allows for new entrants to move into the workforce and is a key in nurturing small-business development and new job creation.
While there have been abuses, and the federal and state governments are within their rights to ensure proper worker classification, cracking down too hard on the IC system will result in slower economic growth and lower consumer welfare overall, something no one wants.
Deciding how to properly classify your employees and contractors for tax purposes is, and will remain, a complicated endeavor. ASTA members should consult our most recent white paper on the subject.
ASTA simply believes that IC arrangements have proven their value to travel agencies' business operations and should remain a viable option. The types of proposals discussed above could undo long-standing protections for businesses that rely on the services of legitimate ICs. They would force agencies to fundamentally change the way they do business as well as assume massive new costs in the forms of payroll taxes, benefits and compliance-related expenses.
As such, ASTA will continue to fight any proposals for change in Washington and in the state legislatures, both on our own and as an active participant in the Coalition to Preserve Independent Contractor Status.
Eben Peck is ASTA's vice president for government affairs. Contact him at [email protected].