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.”

Mark Pestronk
Mark Pestronk

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 for ASTA.

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 support given.”

Susan Ferrell
Susan Ferrell

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 matter.”

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 required.

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 ICs.

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.

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