Mark Pestronk
Q: Most of our agency's travel advisors are independent contractors, as are most advisors nationwide. We are always mindful of the potential for an audit by a government agency such as the U.S. Department of Labor that might result in reclassification of our ICs as employees and the large penalties that could result from that. Under the current administration, which is supposed to be more pro-business, has there been any change in the rules at the federal level?
A: At the end of February, the Labor Department published a proposed rule that is widely seen as more pro-employer, and thus more pro-host agency, than the currently effective rule. Let's examine the new proposal and see how it could help protect the host-IC relationship from the threat of reclassification.
In 2024, under the Biden administration, the Labor Department adopted a six-factor test of the IC relationship that was somewhat subjective and required a judgment call about which of the six factors was the most important in each case. Even if the relationship failed to pass muster under one or more factors, the other factors could outweigh the failures, and vice-versa.
In a nutshell, the six factors were: 1) opportunity for profit or loss, 2) investments made by the worker, 3) degree of permanence of the relationship, 4) nature and degree of control, 5) whether the IC was an integral part of the business and 6) the degree of skill and initiative required of the worker.
Many travel companies did not like the six-factor test because it was not objective enough and because many IC relationships were potentially in jeopardy. They especially did not like the fifth factor: if the IC's work was necessary or central to the employer's principal business, then the work was an "integral" part of the business.
Although the six factor test is technically still in effect because the new rule has not yet been adopted, the Labor Department has instructed its staff to desist from enforcing the six-factor test.
Under the proposed rule, which will probably be adopted by the end of the year, two "core factors" are the most important ones:
First, the Nature and Degree of Control: This factor looks at how much control the company actually exercises over the worker's schedule, performance and ability to work for others.
Second, the Opportunity for Profit or Loss: This factor looks at whether the worker can increase their earnings through business initiative, specialized skill or investment.
If the IC relationship passes muster under these two tests, then, "there is a substantial likelihood that it is the correct classification, often making further analysis unnecessary." That's good news for most host-IC relationships.
However, if the department finds that further analysis is needed, it can look at three other factors, if it wishes, but these are less important: a) whether the worker uses specialized skills, b) whether the relationship is indefinite or project-based and c) whether the work is part of an "integrated unit" of the business.
To ascertain whether your relationships will pass muster under the new test, you should consult an employment attorney.