A new proposed rule from the US Department of Labor is taking another look at the status of independent contractors—and making some in the travel agency channel nervous.
It’s the second time in two years the Department of Labor has revisited the way companies define “independent contractor.” Their goal, they say, is to put an end to the misclassification of workers—”a serious issue that denies workers’ rights and protections under federal labor standards, promotes wage theft, allows certain employers to gain an unfair advantage over law-abiding businesses, and hurts the economy at-large. Misclassification denies basic worker protections such as minimum wage and overtime pay and affects a wide range of workers in the home care, janitorial services, trucking, delivery, construction, personal services, and hospitality and restaurant industries, among others.”
While odds are the industry will not see any changes, it’s relatively easy, inexpensive and prudent to take a few steps to prevent issues down the road. To that end, we spoke with travel attorney Mark Pestronk about what the new rules mean and what travel agencies should do about them.
The Details
The new criteria being proposed (US Department of Labor announces proposed rule on classifying employees, independent contractors; seeks to return to longstanding interpretation | U.S. Department of Labor (dol.gov)) are closer to those that many states already have, in that they require that independent contractors (ICs) be in a different business than the main business of the company for which they work. California’s AB 5 rule, for example, already requires that—but the travel industry fought for, and won, an exemption for travel agency ICs.
“I don’t think that will happen this time,” travel industry attorney Mark Pestronk says—but it won’t be necessary, either. “There is enough latitude in this proposal that travel advisors ought to be able to change some practices and still qualify.”
The current proposal offers up six criteria for determining who is an IC, and “again and again throughout the proposed rule, the Labor Department says no single criteria will be most important, so its pretty damn subjective,” Pestronk told TRO. Also, DOL only governs minimum wage and related labor laws, not withholding taxes, which have been the real issue until now. “I think the rule will pass, but I think TAs will be able to make a case that will pass muster under the DOL.”
The six criteria for being an IC, rather than an employee, and ways to ensure you fit the classification, are:
- An opportunity for profit or loss. In other words, ICs are in a position to show a loss if their business is not successful. “You’d want to make sure to pay a monthly fee to your host, even if it’s just $10—but the more fees the better,” Pestronk says. And be sure to carefully track your expenses.
- Investment by the worker. ICs must buy things—supplies, fam trips, magazine subscriptions, courses—for their business. Again, track those expenses.
- Degree of permanence of your work. An IC can move from one agency to another at will, but employees are permanent. “If you hop around, that’s better than if you work for one host agency. But if you have the right to hop around, that’s probably just as good,” Pestronk says.
- Degree of control. The most important criterion of the six, ICs have the right to set their own prices and work schedules, and to work for more than one company. A host cannot mandate that you be in the office from 12 to 5, for example.
- The extent to which your work is an integral part of the employer’s business. This is the tricky one at this point. One thing a host agency can do is split into two companies, one that sells travel to the public and one that only manages ICs. (More on this below.)
- Skill and initiative. By definition, an IC is someone who comes into the relationship with his or own skills, rather than a beginner whom the agency trains. “I don’t know how most agencies who take newbies with no experience will meet that criterion,” Pestronk notes.
Where Do We Go from Here?
Criteria #5 is the most troublesome at this point, Pestronk notes. Will hiring ICs with different niches from the agency meet the definition of being in a different business? “I’m not sure—and I don’t think anybody knows the answer,” he replies. Under the Trump administration rules, “integral” meant the company could not do without you—but “the same word is being used now to mean essentially you can’t be in the same business.”
When it comes to passing muster for the DOL, having two separate companies, one a host and one an agency, is “a much better position than having a bunch of employees and a bunch of ICs who all do the same thing,” Pestronk notes.
But in the end, it may not be necessary to take any steps at all. Pestronk thinks the DOL will consider all six criteria together, so agencies may pass muster if they meet the majority of them, even if not all. And for now, the issue will only come up if ICs complain to the DOL that they are not earning minimum wage or overtime.
The real danger is that once it rears its head again, the question of how to define an IC will spread to other government agencies, like the IRS—as Pestronk believes it eventually will do.
“So yes, I think the Biden administration would like to bring more justice to workers who are exploited as ICs—and that’s a good thing, as I think that’s where their efforts will be concentrated, on construction workers or farm workers. I think the Labor Department would like to take on those cases, not cases where both parties generally agree the IC should remain an IC.”
How worried should the travel agency community be? “That depends on what state you are in,” Pestronk says. “Some states really don’t care about this whole issue, but some, like California, are nuts about it. If you have a large number of ICs who live in California, you must pay attention; in Nevada no one is likely to bother you.”
Interested parties have until Nov. 28, 2022, to submit comments online (see Regulations | U.S. Department of Labor (dol.gov) or in writing to the Division of Regulations, Legislation and Interpretation, Wage and Hour Division, U.S. Department of Labor, Room S-3502, 200 Constitution Ave. NW, Washington, DC 20210.
But one way to solve the problem, once and for all, is for host agencies to require that all ICs have their own corporations or LLCs; then the LLCs, and not the host, would owe their employees any overtime pay due.
“I always advise hosts to strongly encourage ICs to set up their own LLCs; then it’s a real B2B relationship,” Pestronk says. “That avoids a lot of state problems too, because state taxation agencies audit only employment relationships, not B2B relationships.”
Cheryl’s 40-year career in journalism is bookended by roles in the travel industry, including Executive Editor of Business Travel News in the 1990s, and recently, Editor in Chief of Travel Market Report and admin of Cheryl Rosen’s Group for Travel Professionals, a news and support group on Facebook. As an independent contractor since retiring from the 9-to-5 to travel more, she has written regular articles about the life and business of travel agents for Luxury Travel Advisor, Travel Agent, and Insider Travel Report. She also writes and edits for professional publications in the financial services, business, and technology sectors.