Pitfalls of Working With Independent Contractors
Now that the pandemic is mostly in our rearview mirror, many travel advisors are finding themselves busier than ever. With so many new clients – a high-class problem, to be sure – many advisors are considering bringing on independent contractor sub-agents for the first time. At first blush, it might seem like bringing on additional sales agent could be a simple solution to the problem of being overwhelmed. But is it a fix? Or does it only compound the problem?
If you’re bringing on an independent contractor to sell travel, and that person is new to the industry, consider that you’re going to be spending a lot of time working with a newbie to make sure that they’re not placing your business in jeopardy. They don’t know what they don’t know, and taking the time to figure out what they need to know takes your time away from booking trips for your clients and administering those trips. Bringing on an IC might make you more overwhelmed, not less.
But the bigger issue is that, from a legal perspective, bringing on an independent contractor is loaded with legal risk. There is no one definition for what constitutes a legitimate independent contractor. Federally, the Department of Labor has a different test than the IRS; someone could legitimately be an independent contractor for purposes of tax withholding, but they might be subject to minimum wage and overtime laws. And when you layer on top of that that each state has its own definition – getting it right is complicated.
And getting it wrong is costly. It doesn’t take much to trigger an audit. An agency owner in my network had one of her independent contractors who filed an unemployment claim. That’s all that it took to cause her state’s department of labor to launch an investigation, resulting in tens of thousands of dollars in fines. In certain cases of willful misclassification, there can even be criminal penalties. So, don’t mess around with how you work with independent contractors – you could be in for a world of hurt.
With those caveats, there are some simple things you can do to minimize the risk that comes with working with independent contractors. Here’s my short list of things to keep in the front of your mind:
- Have a solid contract with your contractor. There are templates floating around on the internet and services that provide cookie cutter documents, but everyone works with their independent contractors in different ways, and the standards for classification vary from state-to-state. A one-size-fits all approach is not really going to work, here. Consult a lawyer who understands the unique nature of the industry before you bring on your first contractor.
- Incorporate your business. If you’re a sole proprietor, you and your business are one and the same. Meaning, you are personally responsible for liabilities of your business. So, if your business gets hit with fines and penalties because you’ve misclassified your sub-agent, you have to pay those fines, back-taxes, and penalties yourself. Your house, your car, your savings – all of that is subject to liabilities of your business. My recommendation – look into forming a limited liability company (“LLC”) or corporation to protect your personal assets from liabiliites of your business.
- Don’t turn yourself into a host agency. Especially if you’re with a host agency, yourself, your independent contractors should be selling under your brand, not operating independent businesses under your umbrella. If your independent contractors have their own nameplate and branding, your professional liability insurance (Errors and Ommissions or E&O) will probably not cover them. They’re independent businesses, so they can’t use your terms and conditions document, either. And you give up a lot of control, generally, over how they’re using your (or your host agency’s) booking credentials. By having them sell travel under the name and branding of your business, you can protect your business, without exerting the kind of control over your contractors that might turn them into employees.
- Don’t require exclusivity or impose non-compete clauses. The “independent” part of “independent contractor” means that you cannot require the contractor to work exclusively for your company, under pretty much every test used by government agencies. You can legitimately protect your client list and your book of business with non-solicitation or confidentiality provisions, but requiring exclusivity or imposing a non-compete clause is begging for trouble.
- Avoid complicated commission split structures. If you have a ladder of commission splits that’s triggered by the independent contractor’s productivity, you need to monitor their bookings carefully, to make certain that you’re paying them correctly under the terms of your agreement. What happens if they hit the threshold for a higher split, but then bookings cancel and commission is recalled? How do you calculate the split if some bookings were made before the higher split was triggered, but others were booked afterward, if you have to pay those out in the same period? What if someone hits a booking threshold based largely on personal travel and non-commissionable sales? If you mis-calculate your independent contractor’s compensation, you could be subject to civil and even criminal penalties. It’s much simpler to agree to a flat commission split percentage, and then, if your contractor turns into a selling machine and you want to increase that number – just issue a new contract with a higher split.
The upshot of all of this is: if your business has grown to the point where you’re feeling the need to expand, make sure you’re treating your business like it’s an actual business. Be thoughtful and strategic about how you’re working with your contractors, and make sure that you’ve consulted with your attorney and accountant about your plans to expand. This is not the time to make it up as you go along. The stakes for your business – and for you, personally – are too high.