Q: In our agency's contract with independent contractors, there is a clause that states that the contractor cannot work with any other agencies. Many prospective contractors have told me that we are not allowed to have an exclusivity clause, as it would make our relationship one of employer and employee. I have also seen a few websites that advise contractors and host agencies, and they give the same advice. Is it true that if we require our contractors to work only through us, they become employees?
A: I have heard and read this legal advice many times over the years. It is simply not true, at least as far as the Internal Revenue Service is concerned.
According to my research, the IRS does not consider an exclusivity requirement to be determinative of the nature of the relationship. In fact, it considers exclusivity-related issues to be "factors of less importance" in deciding whether a person is an employee or an independent contractor.
In "Employee or Independent Contractor: Training Materials," the IRS' 160-page manual for auditors, the agency states:
"The fact that a worker performed services on a part-time basis or worked for more than one person or business was once thought to be significant evidence indicating that the worker was an independent contractor. However, in today's economy, whether a worker performs services on a full-time or part-time basis is a neutral fact. ...
"Similarly, working full time for one business is also consistent with either independent contractor or employee status. An independent contractor may work full time for one business either because other contracts are lacking, because the contract by its terms requires a full-time, exclusive effort, or because the independent contractor chooses to devote full time to a particular project."
Because the IRS expressly allows contracts to require a "full-time, exclusive effort," it might make the most sense to use those exact words in your contract, followed by a statement of restrictions. You can probably also prohibit the contractor from bypassing your agency by booking directly with any suppliers, since such bookings would detract from the full time and effort required under the relationship with your agency.
Here is some more advice: Do not listen to so-called experts who claim that this or that single factor will, all by itself, make the relationship one of employer-employee. As far as the IRS is concerned, no single factor or clause is determinative:
"As in any [audit], all relevant information needs to be explored and weighed before answering the legal question of whether the right to direct and control associated with an employer-employee relationship exists."
Of course, my advice covers only the IRS, which means that it is relevant only for federal income taxes, Social Security and Medicare. Some states follow the IRS standards, but others have different legal criteria not only for income taxes but also for unemployment taxes, workers' compensation and questions of legal responsibility for injuries caused by employees.
So I would not be surprised if, in some states, an exclusivity requirement, all by itself, makes the relationship one of employer and employee. If your contractor lives in another state, you need to research the law of both your state and the contractor's state.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].