Travel agencies find themselves in wait-and-see mode when
it comes to whether the Department of Labor will enforce the definition of an
independent contractor (IC) that it announced last July. But for now, agencies
that work with ICs are being urged to review their contracts and prepare for
the possibility of enforcement.
Labor’s interpretation addresses the misclassification of
workers as ICs rather than employees under the Fair Labor Standards Act. To
determine which category a worker belongs in, the department applies an
“economic realities test.”
According to the interpretation, an employee is
economically dependent on an employer, while an IC is economically independent
from a single employer. The test takes into consideration several factors.
“In layman’s terms, I think the economic-realities test
boils down to the question, ‘In light of all the circumstances, is the worker
truly in business for him or herself,’” said Peter Lobasso, the general counsel
Before Labor’s interpretation was announced, the
classification of ICs was largely a nonissue. As industry lawyer Mark Pestronk
noted in a recent Travel Weekly column, the IRS can declare what was believed
to be an IC relationship is in fact an employer/employee one. But in the trade,
he said, the IRS was not actively involved in looking at IC relationships.
Now, however, there lingers the possibility that Labor
could start enforcing its definition of an IC. Lobasso estimated that there are
around 40,000 ICs currently working as agents, so strict enforcement could have
a far-reaching impact.
Susan Ferrell, the president of Travel Experts, said ICs
are attractive to agencies because in many cases they provide a revenue stream
by splitting commissions with the agency. While she said her company gives ICs
100% of its commissions, “most agencies add independent contractors because
they see it as a way to generate income for very little expense or very little
As of now, Lobasso said he was not aware of any Labor
enforcement action for the industry.
“It’s kind of a wait-and-see approach that we’re taking
right now,” Lobasso said. “We don’t have anything concrete, other than the fact
that we know the administration is looking to reclassify as many folks as
possible. There’s a variety of reasons for that, but we expect that that will
continue through the last year of the Obama administration as a general
And if the interpretation is enforced, there is no way to
predict how stringent that enforcement will be.
“We have not heard anything that gives us any particular
alarm, but certainly we wanted to make our membership aware of it because ICs
are very, very common in the travel industry,” Lobasso said.
Travel industry lawyer Rose Hache agreed that it is
difficult to predict how stringent enforcement might be, but “time will tell.”
President Obama’s most recent 2017 budget includes $277 million for
misclassification audits, she said.
In the meantime, agencies that work with ICs are urged to
be proactive. ASTA is working with lawyers to give its membership guidance “to
help them ensure that their independent contractor relationships will pass
muster,” Lobasso said.
ASTA recommends that agencies “look carefully at the
totality of the circumstances of their relationship” with ICs and “engage the
worker as an entity, as opposed to as an individual” if they are an IC, Lobasso
said. The Society also recommends agencies direct ICs to provide their own
access to software and booking tools or pay the agency for access. Key, though,
is having a written contract in place with the IC, he said.
Pestronk advised agents to convert ICs to employees or
require them to set up their own corporation or limited liability company, as
well as obtain a business license and seller-of-travel registration where
If an agency is classifying workers as ICs and they are
reclassified as employees by Labor, Lobasso said, agency owners would be
responsible for back payroll taxes that were not deducted. There is also “some
potential liability” for overtime and minimum-wage requirements and possible
penalties and fines, he said.
Andi McClure-Mysza, president of MTravel, Montrose
Travel’s host agency, called Labor’s statement “a wake-up call.”
“The speed bumps will come for travel agencies that truly
misclassify people as ICs instead of employees,” McClure-Mysza said. She said
that Montrose maintains “a very clear contractual line” between employees and
Ferrell said Travel Experts currently has about 380 ICs
under contract, adding that the ICs come to the company with a well-developed
client base, and “they could walk away from us and do business anywhere.”
While they would appear to fall into the IC category
based on the economic realities test, their contracts are being reviewed by an
industry lawyer, Ferrell said, adding that she recommends other agencies
undertake periodic legal review of contracts, as well.
Hache recommended reviewing contracts and
changes in laws annually and consulting private counsel with concerns.