Navigating the Messy World of Employee Versus Independent Contractor Relationships

We appear at long last to be on the verge of a renaissance in travel.

Pent-up demand is strong. In fits-and-starts, the government and industry are moving toward workable ways to assure that travelers can be safe while going places. In the ramp-up toward “normal,” whatever that may mean long-term, individual travel advisors may be looking, more than usual, for new “homes” from which to re-engage and travel advisor businesses, will be looking for experienced advisors with, ideally, movable clients. The consortia, franchisors, and host agencies will be seeking new affiliates.

All that movement implies a lot of negotiating about relationships. At the same time advisors are challenged to deal with one of the most complex and also rapidly changing sets of legal principles affecting their business: will the new engagements be treated as employer-employee or host-independent contractor? Much depends on being clear about those questions and fully understanding the implications. The last thing a business wants to do while rebuilding is to walk unwittingly into a legal buzz saw about how working advisors are treated in the business. Many different state and federal agencies have interests in these issues.

While the chance of having this issue erupt in any given business is small, at least in the immediate future, there are already more than enough uncertainties and challenges facing agencies and advisors. This one should be avoided to the extent possible.

The “breaking news” on this front is that the U.S. Department of Labor has finalized its reversal of the Trump administration’s “Rule” that rewrote the law distinguishing employment from independent contracting. That action related only to the Fair Labor Standards Act that governs federal minimum wage and overtime requirements. This is not the place to go into all the details. You can read the DOL final rule and explanation at https://bit.ly/33rAWsU The Trump Rule had little or no practical effect. Thus we have returned to the standard under which “employees are those who as a matter of economic realities are dependent upon the business to which they render service.“

The problem for travel agencies, advisors, and host/consortia firms is in the application of the multi-factor test DOL and the courts use for this purpose:

… some of the factors ‘‘which may be useful in distinguishing employees from independent contractors for purposes of social legislation such as the FLSA’’ are: (1) The degree of the employer’s right to control the manner in which the work
is to be performed; (2) the worker’s opportunity for profit or loss depending upon his or her managerial skill; (3) the worker’s investment in equipment or materials required for his or her task, or employment of helpers; (4) whether the service rendered requires a special skill; (5) the degree of permanence of the working relationship; and (6) whether the service rendered is an integral part of the employer’s business.

The courts have made it clear that “no individual factor is conclusive and that the ultimate determination depends upon the circumstances of the whole activity.” The six elements are often described as “guideposts”  and “not exhaustive.” Not very helpful.

DOL’s written advisory about the standard indicates “it is the total activity or situation which controls,’’ and ‘‘an employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves.’’ It adds a seventh to the list of six used by most courts: “the worker’s ‘‘degree of independent business organization and operation.’’ DOL then eliminates as immaterial consideration of where work is performed, the absence of a formal employment agreement, and whether a State or local government has licensed an alleged independent contractor.

DOL’s advice does not, however, negate the complete value of having a written agreement covering the terms of the independent contractor relationship. Such an agreement can be essential to comply with the other legal tests that apply to work relationships, provided that the actual work and the agreement are the same. An agreement not followed in practice is worse than useless.

As noted, the DOL standard is not the only legal test in place. For employment taxes, the Internal Revenue Service uses a “common law” standard with as many as twenty elements:

Under common-law rules, anyone who performs services for you is your employee if you can control what will be done and how it will be done. This is so even when you give the employee freedom of action. What matters is that you have the right to control the details of how the services are performed. 

The IRS elaborates this rule here lumping the elements into three categories: Behavioral, Financial, and Type of Relationship.

Some states use still other standards for state tax and other legal purposes. You may recall the recent struggle in California to secure an exemption for travel advisors/agencies from the California ABC test. Led by the California Coalition of Travel Organizations,  ASTA, Internova, and others succeeded in getting the exemption there, but since then New Jersey and New York, among others, have begun looking at versions of an ABC test as well. The pandemic interrupted much of this work, but it will not be dormant indefinitely.

The central problem with the ABC approach is that the “B” element requires that the work must be “outside the usual course of the hiring entity’s business.” The ABC test is attractive in part because of its simplicity, but its strict principles interfere with legitimate relationships that don’t fit simple molds.

One potential way to address the B part of the ABC test is to build relationships in which there are two different, though related, businesses, structured so that the individual retailer is in business for himself. This is very complicated, especially when, as is most typical of travel retailing businesses, the agency has in-house advisors selling travel and also advisors who want to be treated as independent contractors. If the business fails the “B” element, the individuals must be treated as employees. Failure to do so can be very expensive.

As stated at the beginning, this is a vexing and complex problem. The solution requires (1) close involvement of legal counsel, (2) precise contract language, and (3) a “real and true” state of independence between the business of the individual and the business of the agency that is “hiring.” Risks will remain. This is a risk reduction approach but not a guarantee that affiliations between retail agencies and individual sellers of travel will survive examination. There are too many tests with too many vague elements to be applied in each case to achieve zero risk. Nevertheless, a properly contracted and operated relationship may have strong defenses against accusations that an employer-employee relationship is present.

The bottom line is that you should take the recent action by DOL as a kind of wake-up call about the relationships between agencies and individual retail sellers. If you want to go down the independent contractor route while also selling through in-house employees, you have the highest risk scenario and should consult counsel promptly.