California Independent Contractor Status Still In Jeopardy as State Senate Debates Bill

by Richard D'Ambrosio
California Independent Contractor Status Still In Jeopardy as State Senate Debates Bill

A.B. 5 could eliminate the ability for travel advisors to be engaged as ICs in California. Photo:  

A bill that could eliminate the ability for travel advisors to act as independent contractors (ICs) in California was discussed before a state Senate committee on Monday, reigniting the debate about why travel agents are being swept up in a bill designed to make it more difficult for gig economy companies to avoid hiring full-time employees.

Some 14 members of the American Society of Travel Advisors (ASTA), along with other allied groups like the California Coalition of Travel Organizations (CCTO), met with legislators and testified at the hearing on Monday, in an attempt to keep the A.B. 5 bill from moving forward without an exemption for travel advisors.

The deadline for the bill to pass this committee is Aug. 30. CCTO and ASTA project that A.B. 5 will pass to a full vote on the Senate floor.

A.B. 5 is based on the California Supreme Court’s “Dynamex” decision, which held that to engage a worker as an IC, a business must prove that the worker: a) is free from the engaging company’s control; b) performs work outside of the company’s usual course of business;  and c) is customarily engaged in an independently established business. All three of these conditions must be met to classify the worker as an IC. These rules are commonly referred to as the “ABC test.”

The law could impact agencies anywhere in the U.S. that sell travel themselves and engage ICs to do so in California. The deadline for a full Senate vote is Sept. 13. Governor Gavin Newsom would be expected to sign the bill into law by Oct. 13, and the law would go into effect Jan. 1, 2020.

Last week, some 164 CCTO constituents met with officials in 24 senate district offices, in an effort to educate them about why travel advisor ICs prefer their flexible, independent status. According to a recent ASTA survey, if required by law to become agency employees, 41% of independent advisors report they would choose to leave the industry or leave the state for one that allows them the flexibility they currently have.

“Overall the feedback was quite good,” said Diane Embree, president of CCTO, and an independent contractor for Michael's Travel Centre, “with some offices saying that they were supportive of the efforts to exempt the travel industry from A.B. 5. Others were noncommittal, but promised to look further at our requests.”

CCTO had a contingent of board members and ICs in Sacramento on Monday to testify at the Senate Appropriations Committee hearing. It appeared no vote was taken on A.B. 5 on Monday.

CCTO and ASTA also continue to be in contact with the California Labor Federation, which is A.B. 5’s sponsor, along with the bill’s author, Assembly Member Lorena Gonzalez. And, there are follow-ups with a number of the senators who were lobbied last week. As Gonzalez previously stated, amendments to A.B. 5 are ongoing.

Adapting your business model to comply with A. B. 5
In the event that the bill is passed without an exemption for travel agents, ASTA has been educating members about their alternatives to fall into compliance. Most of that focus is on agencies and their owners, versus ICs, because “the bill is aimed at the engaging parties, not the ICs themselves,” said ASTA General Counsel Peter Lobasso.

”The bill’s proponents claim that workers [predominantly individuals in roles like Uber drivers] are being victimized when misclassified as ICs, ” he added.

Agency owners should consider their legal and financial exposure as they think through ways to respond. “If you have had one IC in California for a long time, your non-compliance exposure or risk is somewhat lower as compared with an agency that recently added 50 new California ICs,” Lobasso said. Explaining, he added, “It’s no secret that although there are random audits, it is more common for reclassification audits to originate with a complaint filed with the state enforcement agency by a current or former IC.”

“What we don’t know is how aggressive California will be in enforcing A. B. 5, and how the new law might be interpreted by a court if a lawsuit is brought,” he said.

During a recent webinar, ASTA sketched out five possible options that agency owners may wish to consider in the event the bill becomes law with no travel advisor exemption. They are: Take no action; terminate California IC contracts now; allow California IC contracts to expire; convert California ICs to employees; and create a separate legal entity to engage California ICs.

As one agency’s situation will likely be different from that of another, options that make sense for one business may not for another, Lobasso said. “No one is in a position to speculate on a specific situation,” he told Travel Market Report, advising agents to seek out professional legal advice.

ASTA believes that taking no action is “worthy of consideration by host agencies that themselves sell no travel (i.e., those that only provide commission/back-end office support). That might satisfy the ABC test’s requirement that an IC not be engaged to perform work within the company’s usual course of business. Obviously, this approach would not work for a host agency that also has W-2 employees selling travel.   

However, Lobasso was quick to add that audits or lawsuits decided after the law goes into effect could well impact the feasibility of that option. Specifically, he noted that a broad interpretation of the engaging party’s usual course of business could result in engagement of ICs by bona fide host agencies being disallowed under the ABC test.

In the second option, immediately terminating IC contracts would ensure an agency’s compliance with A.B. 5, but could have a significant adverse business impact. “If you have just one or two California ICs, those contracts can be terminated and you can, if necessary, engage the services of advisors outside the state to take on their bookings,” Lobasso noted. Agency owners would also, however, need to review the termination provisions of their IC agreements to ascertain their potential exposure to legal action by their ICs.

Letting existing California IC contracts expire could serve to minimize the abrupt business disruption of immediately terminating IC contracts, as well as mitigate the risk of potential legal action from the affected ICs for breach of contract. In this scenario, the agency would have to decide if it wanted to forego altogether the travel sales and clients of their ICs, or find a way to have their ICs continue to serve those travelers in some form with the agency.

For example, could the agency find an economically viable way to convert their California ICs to W-2 employees? Would some of the ICs move out of state, or could the agency owner find new ICs living outside California to engage in their place? Additionally, if the existing contracts expire after Jan. 1, 2020, this could place the agency out of compliance for a period of time.

Unfortunately, in many cases, converting an IC to employee status will be cost-prohibitive, as doing so would make the agency responsible for payroll taxes as well as mandatory benefits, overtime pay, and the like. The resulting labor costs could be 30% higher, or more, experts estimate.

Potentially the most complicated decision would be creating a separate legal entity – like an LLC – that engages ICs but doesn’t sell travel itself. Doing so would allow the agency to assert that it is in a different business than the worker being engaged. The new entity could be little more than a holding company existing only to enter into contracts with California ICs in place of the agency. This too, however, is not necessarily guaranteed to pass muster, as Lobasso notes that a court asked to decide the question could determine that “the action was taken only to circumvent the ABC test.”

Congress beginning to address worker classification issue at federal level
Meanwhile, on July 26, just before Congress left for its August recess, Congresswoman Elise Stefanik (NY-21st) introduced the Modern Worker Empowerment Act (H.R. 4069), which would update the Fair Labor Standards Act (FLSA) to adopt the Internal Revenue Service’s 20-factor common law test to determine a worker’s status as an employee or an independent contractor. 

Doing so would bring consistency to the regulations across federal government agencies, eliminating the possibility of inconsistent determinations that now exists at the federal level.

ASTA strongly supports the legislation, which is co-sponsored by Reps. Bradley Bryne (AL-1st), Phil Roe (TN-1st) and Ron Wright (TX-6th).

“Technology has changed not only the nature of work but also what people value in their careers, as younger workers increasingly seek flexibility and fulfillment,” said Congresswoman Stefanik. “Our laws have not kept pace, creating a patchwork of regulations that limit opportunities for individuals to achieve economic success. This legislation harmonizes the federal standard for independent work in order to capture the realities of the modern workforce, empowering workers to take greater control of their future.”

“The modern workplace has changed dramatically, and it is critical we don’t allow outdated laws and regulations to hold back economic progress or limit job opportunities,” said Congressman Byrne.

Stefanik and other members of Congress were lobbied about the issue during ASTA’s 2019 Legislative Day 2019.

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