Mark Pestronk
Q: Our agency has many independent contractors. Some are just starting out in the business, and others have been advisors for many years. One of my perennial concerns is the risks involved when ICs sign supplier contracts such as hotel group contracts and cruise group contracts. I understand that some hosts flatly prohibit their ICs from signing any contracts before the host reviews them, but I think that this approach is impractical because the ICs would lose too many sales if they had to wait for our review and approval of every contract, no matter how small. Besides, if we retain the right to control how and what our ICs sell, don't we run the risk of having our host-IC relationship reclassified as one of employer and employee by a taxing authority or labor department? What advice do you have for us?
A: There is a middle ground between running risks to your agency and potentially losing sales. As we will see, your hosting contract can allow ICs to sign in some cases but not in others.
First, however, let's cover a threshold matter: whether the group itself should sign the supplier contract versus having either your agency or your IC sign it. As a general matter, if the contract contains penalties for unsold rooms, cabins or seats, you should avoid having to pay those penalties if you have the client sign instead of you or your IC.
On the other hand, there are two circumstances under which my advice would be the opposite: The client cannot sign if it has no authority to sign on behalf of the group, and the client should not sign if you do not want to reveal your commission or markup.
So, let's say that one or both of those cases applies, in which case the choice is whether your agency or the IC should sign. Let's spell out the risks involving when ICs sign supplier contracts.
The first risk is that the IC may create liability for your agency by inadvertently signing as agent for your agency. The IC could do this by naming your agency as a party and signing in a capacity that indicates that the IC has authority to do so, even if the IC does not really have such authority. Your IC contract should prohibit the IC from any such practice.
The second risk is that the IC may sign the contract in the IC's name, have the supplier or client compensation directed to the IC's bank account and not tell you anything about the contract. By diverting the commission or markup without telling you, the IC may be committing fraud or breach of contract because you are being deprived of the host's share.
My advice is to let your trusted, long-time ICs sign in their own names but require everyone else to submit their group contracts to you for review before signing. Once you are satisfied that a newer IC is not creating liability for you or defrauding you, you can waive this requirement for smaller group contracts.
Finally, if you are audited by a government agency, you can explain your requirement as a fraud-prevention measure, which should help mitigate the risk of reclassification.