Protecting The Independent Contractor Status

by Alexander Anolik, Esq.,
November 11, 1998

 Too many agency owners are putting themselves and their independent contractors at legal and economic risk by not providing or demanding the basic requirements for their own protection.

 A precedent-setting California case we recently won reiterates the training you have received and should remind you of the basics.

 You must have a written contract with your outside Independent agents not only to comply with federal and state laws, but to protect you from a misunderstanding or breach of contract over commissions, participation in overrides, responsibility in disputes or when negligence arises, whether you have indemnification clauses and even the jurisdiction of settling the dispute.  You must know how and when payments are to be made to independent contractors and when the independent contractor should reimburse the agency if debit memos arise or partial refunds are requested.

 You need to clarify important issues such as who is to "own" the relationship with leisure customers and for how many years?  Are you to be paid for commercial customers? With commercial accounts handed over normally the outside agent is paid on a 3-4 year declining percentage formula and then transfers all rights to a referred commercial customer to the agency.

 Without a negotiated clear understanding, potential and actual disagreements will only interfere with productivity.

 Deregulation has made the utilization of outside agents more accessible and all of the trade organizations have sought their participation if they are bona fide by seeking education and by making sure they sell to third parties and not just to themselves or their families.

 What many agencies do not realize is that IATAN has courted outside sales reps by allowing 100% of the gross commissions generated by the agent to count towards the minimum productivity requirement.  Most agencies are unaware of this procedure and are missing out on the benefits that could be received without the cost of one cent of agency expenditure.  This article can help you help your agents.

 Agencies giving independent contractors the incentive to achieve IATAN eligibility get increase production, a motivated sales force and increased benefits actually earned as compared to the misrepresentation of certain card mills.

 The "100% accounting formula" is so simple my seminar participants are amazed at what they have been missing.

 All an agency has to do is pay the independent contractors the full 100% of commissions earned and record this on the IRS Form 1099's the independent contractor, IRS and IATAN receive.

 Simultaneously with the agency's payment, the independent contractor pays back to the agency the agreed-upon cost portion for the use of administration, yellow pages, CRS and phone usage, etc.

 A sample provision to be added to the typical owner/independent contractor contract is as follows:

The Independent Contractor shall be paid 100% of the Gross commissions received by the Travel Agency for sales of travel services by the Independent Contractor.  Travel agency shall provide a Form 1099 to the Independent Contractor reflecting 100% of those Gross Commissions paid in the prior year.

  Independent Contractor shall timely reimburse Travel Agency for an estimated amount for administrative fees, ticketing fees, CRS charges, delivery, and accounting services associated with the independent Contractor's sales, in a sum equal to ____ percent of the Gross Commissions.

 The commission was earned by the sales efforts of the outside agent, so why shouldn't he or she get the full credit?  A sample provision to be added to the typical agency independent contractor outside sales contract, to allow for fair compensation to the Independent Contract for commercial accounts is as follows:

  ___________ For commercial accounts referred to the Travel Agency by the Independent Contractor for which the Independent Contractor performs no further travel or sales services (reservations, ticketing, etc.) where such services are performed by travel agency's employees, the Independent Contractor shall in the first full year receive ___ percent of the gross commissions relating to the account.  In the second year, the Independent Contractor shall receive ____ percent of the gross commissions, and in the third through ___ years, the Independent Contractor shall receive ____ percent of the gross commissions.  The Independent Contractor shall not be entitled to receive any commissions from a Commercial Account merely referred into the Travel Agency after ____ years.  All payments shall be due monthly/semi-monthly.

  All Commercial Accounts referred to the Travel Agency hereunder shall become the "property" of the Travel Agency.  The Independent Contractor shall not enter into any rebating agreement or other agreement, on behalf of the Travel Agency without the written consent of the Travel Agency.  The Independent Contractor shall be entitled to his/her commission share regardless whether the Independent Contractor continues to be otherwise formally associated with the Travel Agency.

 Perchance the Commercial Account on its own switches agencies, the agency has nothing to pay and the Independent Contractor loses further commissions.  For this reason, Independent Contractors may be encouraged  to promote and service the public relations for a continued relationship benefiting all of the parties.
 
 Agency owners have to realize that the more control they put over their outside sales persons the more likely the government will interpret this as employee status.

 If Independent Contractors have rights to the customers, and wish to move them to another travel agency, arrangements as to what monies are owed the original agency should be outlined in the contract.

 To try to maintain the Independent Contractor status, the Independent Contractor should supply their own business supplies and be responsible for their own expenses.  They should be allowed to work when they want and where they want, but then again, would have no entitlement of vacation or other possible employee benefits.  They may hire their own assistants, and be responsible for filing their own federal, state and local estimated tax payments on commissions received from the travel agency.

 San Francisco travel attorney Alexander Anolik is the author of The Law and The Travel Industry and Outside Sales Issues and Answers, a 7-Hour tape and Syllabus of Contracts, and co-author of The Official Outside Sales Manual.

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