These are anxious times for travel agencies that use
independent contractors (ICs) from California.
The definition of which workers qualify as ICs, versus
employees, in the Golden State changed significantly and abruptly with an April
ruling by the state's Supreme Court, forcing agencies that use ICs to consider
changes to their business models.
But exactly what those changes will be remains uncertain for
In April, the court ruled in the case of Dynamex Operations
West Inc. v. Superior Court of Los Angeles County that when evaluating wage
claims, courts in California may no longer apply a common-law test that takes a
variety of factors into consideration when determining whether a worker is an
employee or an IC.
Instead, California courts will henceforth apply an "ABC
Test," which takes a three-pronged approach to define a worker's status.
Peter Lobasso, general counsel for ASTA, said the common-law
test, which is employed by the IRS and a majority of states, entails looking at
a number of elements to differentiate an employee from an IC, primarily what
degree of control an employer has over a worker.
"Obviously, the greater the degree of control, the more
likely it is that that particular worker would properly be classified as an
employee," Lobasso said.
The ABC Test, though, is "much more difficult to
satisfy" when trying to classify a worker as an IC, Lobasso said. For
travel agencies, the second of the three prongs is the most problematic. It
requires "that the worker performs work that is outside the usual course
of the hiring entity's business."
The first prong, "that the worker is free from the
control and direction of the hirer in connection with the performance of the
work," is essentially a restatement of the common-law approach, Lobasso
The third prong, "that the worker is customarily
engaged in an independently established trade, occupation or business of the
same nature as that involved in the work performed," is also not
particularly problematic, he said. It merely states that a worker is in
business for himself or herself.
But the second prong of the test, ASTA said, means that if
an agency is employing a worker as an IC to sell travel, it would likely fail
the ABC Test if a wage claim is made against the agency. In that case, the
agency would be liable for any unpaid minimum wages or overtime, in addition to
interest and penalties. Other ICs (e.g., bookkeepers or IT support) would not
Lobasso said the Society is aware of a number of affected
member agencies that are concerned about the ruling. He recommended that they
ensure IC relationships "pass muster to the greatest extent possible"
and that agencies employ best practices when engaging ICs. Further court cases
will determine the decision's scope.
"This has gotten a whole lot of attention -- and
frankly, rightfully so -- but I think it's one of these situations where we
need to kind of take a step back and see what's really going on, knowing that
at this early stage, we're not going to have all of the answers," he said.
Industry lawyer Mark Pestronk, who writes Travel Weekly's
Legal Briefs column, said the state's Employment Development Department has not
yet adopted the Dynamex ruling. Instead, it is still using a common-law test.
The department audits agencies and hits noncompliant ones for withholding taxes
owed. If the department adopts the Dynamex ruling, it would be more harmful to
He recommended that agencies set up a separate company
dedicated to hosting ICs. He also said agencies should require ICs to have
their own corporations or limited liability companies to further set them
Though the ruling is relatively new, it does appear that
host agencies that do not sell travel and only offer hosting services will not
be affected, as their core business is not selling travel.
Lobasso said, "Admittedly, at this early stage, that is
a little bit of speculation on my part." However, he added, "I think
that if a host were to find themselves before the California court system, I
think they could make a pretty strong argument that as a host, the functions
that they're performing are not per se the sale of travel."
Pestronk agreed that appears to be the case.
Betsy Geiser, vice president of host Uniglobe Travel Center
in Irvine, Calif., said that after the ruling came out, Uniglobe reviewed its
contracts and believes it is in the clear but will continue to monitor the
On the other hand, Jay Johnson, president of Coastline
Travel in Garden Grove, Calif., believes his agency -- which has employees and
ICs selling travel -- is affected.
"We are somewhat in the wait-and-see mode, and we are
also working closely with ASTA to plot the best course of action," Johnson
said. "We do know our business model will need to change, and we are
working with both our attorney and ASTA to come up with a solution that
satisfies the requirements of the new law."
Johnson said Coastline will likely create a hosting company
under its larger umbrella.
He called the ruling "unsettling," but said it
could present opportunities in the future. And while Coastline intends to abide
by the new ruling, Johnson said, "We will be working closely with ASTA to
help lobby for possible exclusions to the law for our industry as well as help
better define independent contractors."
Though the ruling is relatively new, it does appear that host agencies that do not sell travel and only offer hosting services will not be affected.
ASTA has not begun lobbying on its own, Lobasso said, but it
is participating via its membership in the California Coalition of Travel
The coalition is meeting with legislators and has also
signed a letter from the state Chamber of Commerce and a number of other
organizations asking Gov. Jerry Brown and the legislature to suspend or
postpone the court's decision so all parties involved can determine a new test
for determining which workers are ICs.
"The economic impact of this ruling has far-reaching,
negative implications for nearly all sectors of the economy," the chamber
and other organizations wrote. "Companies in a wide range of industries
throughout California will be exposed to costly litigation and will have
limited resources to maintain their business. Innovation and investment in
California's economy will be limited or reduced. And individuals who
intentionally rely upon contracting opportunities for income will have limited
Diane Embree is the president of the CCTO and owner of Bali
Barong Tours in Westlake Village, Calif., an IC with Michael's Travel Centre.
She has been in the industry for more than 40 years.
"From my perspective, I think that this is arguably the
most potentially harmful and biggest issue in the travel industry since I've
been involved in the industry," she said.
Embree said the coalition immediately opposed the Supreme
Court's ruling and is lobbying for a legislative fix.
Jerry Desmond Jr., a legislative advocate for the CCTO,
said, "It's an uphill battle, but we're obligated to do it for the travel
community and for the business model that many of our member organizations