Mark Pestronk
Q: In last week's column about deterring fraud and embezzlement by independent contractors (ICs), you listed 10 prohibitions that hosts should mandate to deter such conduct. If we impose those controls in our contracts with ICs, isn't there a real risk that some state government authority in charge of taxes and employment relations may try to reclassify the host-IC relationship as one of employer and employee? Is it possible to make our ICs "independent" enough to avoid such an outcome while still keeping your 10 prohibitions?
A: There can be no guarantee that every auditor in every state will agree that your ICs should not be reclassified as employees, but here are 10 measures that you can take to make your ICs at least appear to be truly independent businesses. In my experience, these measures have been sufficient to deter almost all efforts at reclassification:
- Require each IC to establish a corporation or LLC and to do business through it. The individual should then personally guarantee the obligations of the corporation or LLC to your host agency.
- Establish and operate a separate host company (a hostco) that contracts with the ICs. In turn, the hostco contracts with your agency for supplier relationships. In this way, the hostco and the IC are in different businesses: The hostco's business is supplying services to the ICs, and the agency's business is to sell travel. So the ICs are not an integral part of agency's business or are not in the same business.
- Require each IC to obtain its own business license and seller of travel registration or exemption in states to which it sells travel.
- Require ICs to pay for booking access and other services, including any equipment provided by the hostco, as well as desk rental if the IC works in your office. You can raise the IC's commission split a bit to compensate. Don't forget to put all such charges in your contract.
- Refrain from requiring any training except initial orientation training on how to use the booking and CRM systems.
- Refrain from requiring the IC to sell your preferred suppliers -- but you can incentivize the IC to do so.
- Refrain from prohibiting the IC from working for other agencies -- but you can incentivize the IC not to do so.
- Require 30 or 60 days' notice to terminate an IC contract, except in cases of suspected fraud or embezzlement.
- Regulate use of your name so that the IC is always identified as "independent." Some hosts prohibit the IC from using the host's name in any context, which is probably an even better solution. Other hosts allow the IC to put "an independent affiliate of ABC travel" in small print below the ICs business name.
- Reverse the relationship: have the IC retain the agency. The contract would provide that the advisor is retaining the agency as an IC for access to services and supplier relationships.
For a strategy that might be more closely tailored to your home state's rules, consult a knowledgeable employment attorney there.