Mark Pestronk
Mark Pestronk
Q: In a recent column, you advised that an agency could help prevent its independent contractors (ICs) from being reclassified as employees in two ways: first, require each IC to set up his or her own corporation or limited liability company and second, require each such entity to obtain a business license and, where applicable, a Seller of Travel registration. What other steps can we take to help ensure that our ICs don't get reclassified under the U.S. Department of Labor "really in business for himself or herself" test and other standards?

A: No series of steps will ensure that your relationship will pass every government agency's test. After all, in addition to the IRS and Labor Department criteria, each state has separate standards for withholding taxes, unemployment compensation, workers' compensation and civil liability.

Nevertheless, you can take more steps to move your relationships closer to the IC end of the continuum. Here are some examples:

First, you can require each IC to pay for each service that you provide, either on an a la carte basis or as a bundle. Examples of such services would be GDS access and a telephone with a dedicated number.

Second, in those states where an IC is allowed to work on your premises, you can charge a desk-rental fee each month.

If you institute all of those arrangements, you can raise the IC's commission split to compensate so that the net effect on the IC's earnings is nil. However, the requirement to pay for services and tools of the trade does tend to show that the IC is really in business for himself or herself.

Third, since an IC is expected to be free from having to undergo any training, you can make any training voluntary. Although the IRS has stated that initial orientation training about company procedures is acceptable, other agencies disagree.

Fourth, refrain from requiring ICs to sell your preferred travel suppliers. Instead, offer them an incentive to do so, such as a higher commission split on sales of the higher-commission-paying airlines, cruise lines and tour operators.

Fifth, since many government agencies take the position that a worker who can be terminated at will and without notice is an employee by definition, provide that you can terminate your IC relationship only for cause, such as a breach of your IC agreement. Alternatively or in addition, provide that you may terminate only with a specific number of days' written notice.

Sixth, ensure that the IC always holds himself or herself to clients as "independent"; i.e., require the IC to use that word on business cards, letterheads, email signatures and any other written material. It doesn't matter what comes after "independent"; "agent" or "travel counselor" is fine.

Last, and perhaps most importantly, have a written contract with the IC that incorporates all of the foregoing. Every government agency requires a written contract, yet I am constantly amazed at how many agency owners do not require them.

If you followed my previous advice to require the IC to set up his or her own corporation or limited liability company (LLC), the contract should be in the company's name. Then, require the owner of the corporation or LLC to guarantee its liability to you.

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