A change in US Department of Labor (DOL) regulations should have travel agencies taking a second look at their relationships with independent contractors, travel lawyers say. While the new requirements are relatively easy to meet, their details spell trouble for some agencies. TRO reached out to travel attorneys Mark Pestronk and Tom Carpenter to get their take on what it means—and their advice on what to do.
Attorney Mark Pestronk of The Travel Law Office in Washington DC told TRO that the new DOL ruling (see details below) “emphasizes again and again that “no single factor is determinative in the analysis of whether a worker is an employee or an independent contractor, nor is any factor or set of factors necessarily more probative of whether the worker is, in fact, economically dependent on the employer for work as opposed to being in business for themself (DOL’s spelling). That’s good, because most host-IC relationships with established ICs meet at least some of the six criteria.”
It’s also good that DOL would entertain alternate factors, because “there are almost always alternate factors.”
Still though, he sees two areas of potential trouble: “first, ICs who are newbies, trainees, and those that are dependent on referrals from the host really fail all six tests, so I don’t see how their relationships could pass muster. Second, for all ICs that are in the same business as their hosts that have employees selling travel, they tend to fail the fifth factor.”
Background
The DOL this month flip-flopped on a revision it instituted to the Fair Labor Standards Act in 2022 to determine an employee’s status. In what ASTA called “a modest step backward,” the new ruling uses six criteria to decide whether an IC relationship is really an employee entitled to minimum wage and overtime:
- Whether the worker has the opportunity for profit or loss depending on managerial skill.
- Whether the worker has made investments in the job.
- Whether the work relationship is temporary (like an IC) or permanent (like an employee).
- Whether the company controls the performance of the work and the economic aspects of the relationship.
- Whether the work is an integral part of the company’s business.
- Whether the work requires skill and initiative. Labor emphasizes that no single criterion is determinative and that all six must be weighed together. In other words, a given relationship can fail some of the criteria but still be a valid IC relationship, depending on passing muster under the other criteria.
But DOL also can consider any other factors that “in some way indicate whether the worker is in business for themselves, as opposed to being economically dependent on the potential employer for work.”
So, What’s an Agency to Do?
Pestronk offered up the following steps to make sure your ICs are defined correctly:
- Require all ICs to set up their own corporations or limited liability companies, so they, and not you, are responsible for compliance.
- Make trainees employees for the first few months, until they have their own following.
- Require that ICs invest in your agency beyond a monthly fee, by buying subscriptions or equipment, for example.
Travel attorney Tom Carpenter, in New York, notes that it’s not just the DOL you have to worry about; many agencies have the power to assess fines and penalties for misclassifying workers.
“The bottom line is that independent contractor relationships are complicated and the penalties for getting it wrong can be significant,” he notes.
The IRS has a 20-point checklist—and that’s just one federal agency. “The IRS, the Department of Labor, the different state departments of revenue and labor all have their own tests. And in cases of willful misclassification, some of the penalties could even be criminal in nature. So, someone could legitimately be an IC for purposes of tax withholding, but if the DOL looked at it, they might decide that you owed minimum wage and overtime payments. It doesn’t take much to trigger an audit, so what’s in your contract with your ICs makes a big difference.”
In terms of guidelines, Carpenter says, “it’s not just what to put in your contracts, but what you leave out that can be important.”
A few of the big ones:
- Don’t include non-compete or exclusivity requirements in agreements. You can require an employee to work exclusively for your agency, but the “independent” part of “independent contractor” means people should be able to work for and with anyone they choose.
- Don’t include provisions about work rules, procedures, and guidelines—that looks like you’re exercising control over how the ICs do their work, which is a slippery slope where classification is concerned.
- Remove any references to training requirements, because that’s a buzzword for employment.
- Make sure that ICs are paying for their own expenses. If you have to pay a monthly fee to give them an email address or a log-in to your CRM or itinerary app, the agency should be charging that back to the IC, so they’re paying for their own stuff.
- Sales quotas and minimum sales requirements are a no-no. If someone’s not producing, you can end the relationship. But you cannot tell them how much they have to sell.
- It’s good to have ICs working on a commission split, because they can control how much they earn, based on how much they sell. But there’s a lot more risk to classifying administrative assistants or virtual assistants as ICs. You’re probably giving them work direction, and paying them on an hourly basis, which looks a lot more like employment, even when you’re not setting their hours of work.
“It’s complicated; it’s a ‘totality of the circumstances’ analysis, so it’s not like if you check a certain number of boxes, you’re okay,” Carpenter says. “The most important consideration for travel advisors is to have a contract with ICs that puts them clearly in the IC classification, so that if (heaven forbid) you get audited, you’ve got a rock-solid IC agreement that eliminates any question as to whether people are properly classified. The contract is the first thing an auditor will look at—so, the more things in there that make it look like it’s not employment, the better off you are.”
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.