Mark Pestronk
Q: Can I require my agency's independent contractors (ICs) to work exclusively with my agency? A few prospective ICs have told me that exclusivity is not allowed by law. Is this correct?
A: Prospective ICs who question exclusivity need to realize that many if not most hosts prefer it because it lessens the risk of fraud and embezzlement by rogue ICs. When all sales go through the host agency's system, the host is in a better position to monitor potential risks than if the host has no idea what the IC might be selling.
Under federal law -- and the laws of most states -- exclusivity is allowed. In other words, a contractual requirement that the IC work only with your agency will not, by itself, result in reclassification of the IC as an employee in those states.
In the Jan. 22 Legal Briefs column on the U.S. Labor Department's new IC rules scheduled to go into effect on March 11, I covered the six criteria that Labor will use to distinguish ICs from employees. None of the six criteria explicitly deals with exclusivity.
The other federal agency with a say in IC/employee classification is the IRS. Its criteria provide that the IC must be free from behavioral and financial control.
As far as the IRS is concerned, requiring exclusivity is not evidence of either behavioral or financial control. According to a manual for auditors, "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."
Turning to state laws, most states follow the ABC test, which requires that (a) the worker be free of control, (b) the services must be outside the company's usual business or must be performed away from the company's location and (c) the worker must be engaged in an independently established trade or profession.
Although you could argue that requiring exclusivity is a form of control, this criterion typically refers to work schedules and methods used to perform the work that the IC is retained to perform. In other words, it focuses on day-to-day control.
However, some states do see exclusivity as a reason for reclassification. For example, under California law, the agent-host relationship must meet six tests to be exempt from the California ABC test, and one of those is that your IC must have the right to sell through any other registered seller of travel.
There are actually hundreds of state laws with legal criteria not only for withholding 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 in addition to California, 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.