Q: On Oct. 13, the U.S. Department of Labor published a proposed rule that seeks to clarify the difference between independent contractors (IC) and employees under the Fair Labor Standards Act (FLSA), which governs minimum wages, hours of work, overtime pay and employer record-keeping requirements. What does the proposed rule provide? What does it mean for travel agencies? And do you think it will be adopted?
A: The proposed rule is consistent with the generally anti-IC policy of the Biden administration, which sees many ICs as exploited workers deprived of their rights.
Although Labor does not focus on the travel agency business, the new rule would not be good news for travel agencies that have ICs. If Labor decided to conduct audits after adopting the rule, many independent contractors would be reclassified as employees for FLSA purposes.
The proposal provides that the Labor Department will consider six factors in deciding whether a given relationship is one of employment or IC status. It is the fifth factor that is the most problematic for travel agencies and their ICs: "Extent to which the work performed is an integral part of the employer's business."
Labor explained that this "integral part" factor "weighs in favor of the worker being an employee when the work they perform is critical, necessary or central to the employer's principal business."
The department clarifies that this factor does not depend on whether the business is dependent on one indispensable person but rather whether the person "performs the same work that an employer is in business to provide." This last phrase is the real meaning of this factor.
For example, if a travel agency has five employee travel advisors and 15 home-based, independent contractor advisors, then the ICs perform the same work that the agency is in business to provide. Therefore, this configuration would not pass muster under the "integral part" factor, and all the ICs could get reclassified as employees.
The Labor Department repeatedly emphasizes that "no one factor or subset of factors is necessarily dispositive, and the weight to give each factor may depend on the facts and circumstances of the particular case. Moreover, these six factors are not exhaustive, [and] additional factors may be considered."
Such statements offer hope that IC-host relationships could still avoid reclassification based on the other five factors, the weight given to each factor and "additional factors" that may be considered. In fact, some IC-host relationships would come out well under a few of the other five factors, but many would not.
The proposed rule will probably be adopted by this time next year, so travel agencies should probably start thinking about ways to change their practices to try to comply with the "integral part" factor.
Note that the rule would apply only to the Department of Labor, not the IRS or other federal agencies; nor would it apply to state governments, some of which have been aggressive in their reclassification efforts.