Court ruling on ICs in California could force major changes at travel agencies

These are anxious times for travel agencies that use independent contractors (ICs) from California.

The definition of which workers qualify as ICs, versus employees, in the Golden State changed significantly and abruptly with an April ruling by the state's Supreme Court, forcing agencies that use ICs to consider changes to their business models.

But exactly what those changes will be remains uncertain for now.

In April, the court ruled in the case of Dynamex Operations West Inc. v. Superior Court of Los Angeles County that when evaluating wage claims, courts in California may no longer apply a common-law test that takes a variety of factors into consideration when determining whether a worker is an employee or an IC. 

Instead, California courts will henceforth apply an "ABC Test," which takes a three-pronged approach to define a worker's status.

Peter Lobasso, general counsel for ASTA, said the common-law test, which is employed by the IRS and a majority of states, entails looking at a number of elements to differentiate an employee from an IC, primarily what degree of control an employer has over a worker. 

"Obviously, the greater the degree of control, the more likely it is that that particular worker would properly be classified as an employee," Lobasso said.

The ABC Test, though, is "much more difficult to satisfy" when trying to classify a worker as an IC, Lobasso said. For travel agencies, the second of the three prongs is the most problematic. It requires "that the worker performs work that is outside the usual course of the hiring entity's business."

The first prong, "that the worker is free from the control and direction of the hirer in connection with the performance of the work," is essentially a restatement of the common-law approach, Lobasso said.

The third prong, "that the worker is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed," is also not particularly problematic, he said. It merely states that a worker is in business for himself or herself.

But the second prong of the test, ASTA said, means that if an agency is employing a worker as an IC to sell travel, it would likely fail the ABC Test if a wage claim is made against the agency. In that case, the agency would be liable for any unpaid minimum wages or overtime, in addition to interest and penalties. Other ICs (e.g., bookkeepers or IT support) would not be affected.

Lobasso said the Society is aware of a number of affected member agencies that are concerned about the ruling. He recommended that they ensure IC relationships "pass muster to the greatest extent possible" and that agencies employ best practices when engaging ICs. Further court cases will determine the decision's scope.

"This has gotten a whole lot of attention -- and frankly, rightfully so -- but I think it's one of these situations where we need to kind of take a step back and see what's really going on, knowing that at this early stage, we're not going to have all of the answers," he said.

Industry lawyer Mark Pestronk, who writes Travel Weekly's Legal Briefs column, said the state's Employment Development Department has not yet adopted the Dynamex ruling. Instead, it is still using a common-law test. The department audits agencies and hits noncompliant ones for withholding taxes owed. If the department adopts the Dynamex ruling, it would be more harmful to noncompliant agencies.

He recommended that agencies set up a separate company dedicated to hosting ICs. He also said agencies should require ICs to have their own corporations or limited liability companies to further set them apart.

Though the ruling is relatively new, it does appear that host agencies that do not sell travel and only offer hosting services will not be affected, as their core business is not selling travel.

Lobasso said, "Admittedly, at this early stage, that is a little bit of speculation on my part." However, he added, "I think that if a host were to find themselves before the California court system, I think they could make a pretty strong argument that as a host, the functions that they're performing are not per se the sale of travel."

Pestronk agreed that appears to be the case.

Betsy Geiser, vice president of host Uniglobe Travel Center in Irvine, Calif., said that after the ruling came out, Uniglobe reviewed its contracts and believes it is in the clear but will continue to monitor the situation.

On the other hand, Jay Johnson, president of Coastline Travel in Garden Grove, Calif., believes his agency -- which has employees and ICs selling travel -- is affected.

"We are somewhat in the wait-and-see mode, and we are also working closely with ASTA to plot the best course of action," Johnson said. "We do know our business model will need to change, and we are working with both our attorney and ASTA to come up with a solution that satisfies the requirements of the new law."

Johnson said Coastline will likely create a hosting company under its larger umbrella.

He called the ruling "unsettling," but said it could present opportunities in the future. And while Coastline intends to abide by the new ruling, Johnson said, "We will be working closely with ASTA to help lobby for possible exclusions to the law for our industry as well as help better define independent contractors."

ASTA has not begun lobbying on its own, Lobasso said, but it is participating via its membership in the California Coalition of Travel Organizations (CCTO). 

The coalition is meeting with legislators and has also signed a letter from the state Chamber of Commerce and a number of other organizations asking Gov. Jerry Brown and the legislature to suspend or postpone the court's decision so all parties involved can determine a new test for determining which workers are ICs.

"The economic impact of this ruling has far-reaching, negative implications for nearly all sectors of the economy," the chamber and other organizations wrote. "Companies in a wide range of industries throughout California will be exposed to costly litigation and will have limited resources to maintain their business. Innovation and investment in California's economy will be limited or reduced. And individuals who intentionally rely upon contracting opportunities for income will have limited options."

Diane Embree is the president of the CCTO and owner of Bali Barong Tours in Westlake Village, Calif., an IC with Michael's Travel Centre. She has been in the industry for more than 40 years.

"From my perspective, I think that this is arguably the most potentially harmful and biggest issue in the travel industry since I've been involved in the industry," she said.

Embree said the coalition immediately opposed the Supreme Court's ruling and is lobbying for a legislative fix. 

Jerry Desmond Jr., a legislative advocate for the CCTO, said, "It's an uphill battle, but we're obligated to do it for the travel community and for the business model that many of our member organizations have."