Mark Pestronk
Mark Pestronk

Q: I am developing a new standard agreement for our agency's independent contractors (ICs). In addition to making sure that my ICs don't get reclassified as employees by taxing authorities, I want to avoid the kinds of arguments over commission splits that have plagued me in the past. To accomplish that goal, I need to have a great agreement that spells out each party's rights as clearly as possible. What advice can you give me about what the agreement should cover?

A: Of all the controversies that I deal with in my law practice, those involving hosts and ICs have become more prominent than any others in the past few years. Almost all of these fights could have been avoided if the parties had a clear agreement.

The most prevalent area of controversy is the circumstances where the IC will continue to get compensation after his or her agreement terminates. The IC interprets the agreement in a way that would entitle him or her to more money than the host believes it must pay.

Many agreements state that after termination, the IC will receive commissions earned before termination, but the agreements do not define "earned," so such clauses are nearly useless. Instead of using a vague word like "earned," the agreement needs to be specific.

First, for cruises and tours, specify whether the agency must receive final payment or merely a deposit before termination, or whether the host must receive its commission before termination.

In the case of airline tickets and hotel and car reservations, specify whether the sale must be merely invoiced or the travel must have taken place before termination.

Second, specify whether the kind of termination will make a difference. Some well-written agreements state that the host will not pay anything more if it terminates the agreement for cause or due to the IC's breach. The word "cause" is then defined with precision and can include dishonest or illegal conduct. Further, some hosts cut off compensation if the IC affiliates with a competitor after termination.

Third, many hosts have a problem with the concept of paying ex-ICs months or even years after termination, no matter if they have met all the conditions for payment before they left. In those cases, the agreement could have a cutoff of, for example, 180 days or a year, so that the host doesn't have to track for years compensation due to ex-ICs.

For ICs who sell to groups or arrange meetings, the commissions, fees or markups that would have been due to the IC might come in much longer after termination, in which case it may be fair to specify that the IC will get his or her share no matter how much later the host collects that revenue.

Fourth, some agreements require that at termination, the IC must present a list of bookings for which the IC is or will be entitled to be compensated after termination, so that there won't be disagreements much later about which bookings should be covered.

These are just some examples, and as you can see, these kinds of clauses are all negotiable. The key is to make sure that your agreement covers them.

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