Mark Pestronk
Q: When I speak with fellow owners of host agencies, one of the biggest ongoing problems they tell me they face is losses from fraud and embezzlement by ICs. In your Jan. 26 Legal Briefs column ("Am I liable for my contractor's crimes?"), you listed a few anti-fraud protections that we ought to have in our IC contracts. But are there other clauses that we could add that would protect us even further?
A: Keep in mind that no contract clause is going to stop a determined IC from committing fraud on clients, suppliers or your host agency if the IC is determined to do so. However, a good set of anti-fraud clauses will emphasize the seriousness of your expectations and thereby deter at least some temptation to commit fraud or embezzlement.
Here are 10 such provisions that you can put in your IC agreements. With each, I have added a short explanation for your guidance. The IC may not:
- Deposit client money in the IC's own bank account. All client payments must be made to the host or supplier, as retention of client funds leads too often to embezzlement.
- Use the IC's own credit card to pay for the trip. This is a sign that the IC has kept the client's payment.
- Use the IC's own credit card merchant account to charge a client's credit card. This is another sign that the IC has kept the client's payment.
- Use one client's credit card to pay for another client's trip. This surprisingly frequent Ponzi scheme enables the IC to embezzle the funds of any client who doesn't check their credit card charges.
- Pay a supplier on a net basis without your consent. Such payments deprive the host of revenue and can result in a discount for the IC's clients.
- Ask a supplier to send commission directly to the IC. The IC might never send you your share of the commission.
- Change the host's online profile with any supplier. Such a change could divert commission payments to the IC's own account.
- Violate any airline reservations rules, such as hidden-city and back-to-back bookings. While these practices save money for clients, they could result in debit memos for the host agency.
- Recruit sub-ICs and clients with the promise of travel agent rates, discounted travel and fam trips. The disgruntled sub-ICs and consumers will eventually come after you.
- Fail to follow your credit card authorization policies to ensure proper authorization. Unauthorized credit card charges will result in chargebacks to the host, not the IC.
If you are an IC and have your own sub-ICs, you should consider adding some or all of these prohibitions to your contract with the sub-IC.
Would all these rules cause a government agency to reclassify the host-IC relationship as one of employment, resulting in liability for unpaid taxes and penalties? In my experience, auditors accept the need for anti-fraud controls even in valid IC relationships. Since your state's rules could be less favorable, have a knowledgeable attorney review them.