Mark Pestronk
Q: I understand that the Obama administration takes the position that too many workers have been misclassified as independent contractors when they should be employees. Has the government's new position on independent contractors affected the travel agency business, where so many agents are classified as independent contractors? If not, do you think there will be a crackdown in the near future? How should we prepare for it?
A: I have not seen any signs that the federal government has stepped up audits or reclassifications of independent contractor (IC) relationships in the agency business. However, a fairly recent change in government policy may lead to big changes in the industry.
Until now, business owners have been concerned mainly about the IRS, which has the power to declare that an ostensible IC relationship is really one of employer and employee. The IRS can require businesses to pay various taxes, penalties and interest on what should have been withheld.
However, in my experience, the IRS has not been very active in examining IC relationships in the agency business. For whatever reason, it has been a paper tiger.
Instead, it looks like the administration has decided to channel its reclassification efforts through the Department of Labor, which enforces the overtime and minimum wage rules, both of which are contained in the Fair Labor Standards Act of 1934 (FLSA).
In July 2015, Labor issued a new policy statement setting forth its definition of what an IC is for FLSA purposes. That definition is quite different from the one that the IRS has used for decades, and it is so narrow that many or even most IC relationships in the agency business could not pass muster.
Labor's new test is called the "economic dependence" test, and it will look at "whether the worker is economically dependent on the employer (and thus its employee) or is really in business for him or herself (and thus its independent contractor)."
Labor puts it a bit more clearly: "The ultimate inquiry under the FLSA is whether the worker is economically dependent on the employer or truly in business for him or herself. If the worker is economically dependent on the employer, then the worker is an employee. If the worker is in business for him or herself (i.e., economically independent from the employer), then the worker is an independent contractor."
Labor lists six factors that will aid it in making the determination, but these factors are not exclusive, and it may consider any evidence that goes to the question of whether the ostensible IC is or is not dependent.
In the agency business, Labor's test can be expressed as follows: If your agency closed down tomorrow, would the IC have a following large enough to support himself or herself through a new host agency? If not, then Labor's position would be that the IC should be reclassified as an employee.
Since so many ostensible IC relationships could not pass this test, the new policy has the potential for serious disruption of the business by requiring agencies to pay minimum wages, overtime pay for work over 40 hours per week and employee benefits.
In a future column, I will cover some ideas for ways in which your agency can prepare for the potential disruption.