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California Assembly Bill 5 (AB 5) has made swift progress through the state’s court system in the last few months, and — if it is approved in its current form — may cause a serious headache for travel agencies working with independent contractors (ICs) in the state of California.
The next few months will be critical for California-based host agencies and ICs to make their opinions known regarding this piece of legislation, as it will have far-reaching implications to the industry at large if passed for 2020.
Here’s what affected travel advisors need to know.
The BackstoryIn April 2018, a California Supreme Court case known as “The Dynamex Decision” overhauled a set of criteria — known as “The Borello Test” — that determined whether a worker was classified as an IC or an employee. Although The Borello Test included a longer set of criteria, it did not require each criterion to be met for workers to claim IC status.
Under The Dynamex Decision, however, all industries within California must now comply with “The ABC Test,” a set of three standards that must be met for a worker to claim IC status. If even one component is left unsatisfied, the individual will automatically be classified as an employee, and will legally be entitled to certain employee benefits, such as paid overtime and a duty to earn at least the minimum hourly wage.
If AB 5 is approved, a worker may claim IC status in the state of California if all the following components are met:
A. The worker is free from the engaging party’s control and direction in connection with the performance of the work;B. The worker performs work that is outside the usual course of the hiring entity’s business; andC. The worker is customarily engaged in an independently established business.
The Issue at HandAlthough components A and C are likely to be satisfied by most ICs who work for travel agencies, industry experts predict a problem regarding the second, “B” requirement. Host agencies who have hired ICs for the purpose of selling travel — a core component to the host agency’s business — will likely not satisfy the second requirement and will be found non-compliant to the law.
“Satisfying two out of the three elements is not good enough to pass the test,” said Peter Labasso, general counsel for the American Society of Travel Advisors (ASTA), during an ASTA-produced July 16 webinar on the topic that was attended by 230 listeners. “In a wage claim against an agency, that travel agency would lose, and the IC would be deemed an employee.”
This poses several problems for both ICs and their host agencies. According to ASTA’s research, the majority of ICs in the travel industry — 85% — report being “very satisfied” with their status as a contracted worker, and 41% of them state that they would choose to leave the travel industry or their home state in favor of one that allows them the flexibility and freedom that they currently have.
ICs will lose that which they cherish most — flexibility and autonomy. The ICs would have to fall in line with employer expectations, ranging from performance quotas to usage of sick time. And employers, faced with added employee costs, are not likely to be able to keep all ICs.
On the other hand, many host agencies that contract with ICs depend on them largely for their business; if they are forced to terminate these relationships, the agency would take a massive hit to both their revenue and reach.
“ICs will lose that which they cherish most — flexibility and autonomy,” said Jeffrey Ment, a managing partner for Ment Law Group and a former travel advisor. “The ICs would have to fall in line with employer expectations, ranging from performance quotas to usage of sick time. And employers, faced with added employee costs, are not likely to be able to keep all ICs.”
What Is the Likelihood That AB 5 Will Pass?According to ASTA, there is an 85-90% chance that AB 5 will be enacted. Democrats tend to support AB 5, while Republicans are likely to oppose it. And for a super-blue, left-leaning state such as California, travel advisors should prepare for the legislation to pass in some iteration, according Eben Peck, executive vice president of advocacy for ASTA.
Because of this, ASTA is focusing its efforts on actively fighting for an exemption that would allow travel agencies to continue working with their California-based ICs under The Borello Test.
And if no exemption is made, the aftermath could be disastrous for the travel industry, says Diane Embree.
Embree is an IC for Michael’s Travel Centre and president of the California Coalition of Travel Organizations (CCTO), an organization that is actively working with ASTA to fight for such an exemption.
“If AB 5 becomes law without an amendment that exempts travel-selling ICs, travel agencies will have to hire California-based ICs as employees,” she said. “Based on surveys that we’ve conducted, we know that not all ICs would be hired, and the vast majority of ICs don’t want to be employees.”
Embree notes that this will create “a domino effect.”
“Travel agencies will lose the business that ICs bring to the agencies, which will create lost revenue and then could mean that travel agencies might have to lay off salaried employees or even shut their doors — depending upon how much business their ICs bring,” she said.
In early July, members of ASTA’s staff and its board members, in addition to Embree and other members of the CCTO, headed to Sacramento — with their research and personalized constituent letters in hand — to visit California Senate offices and secure meetings with members of the Senate Labor Committee. Shortly after, on July 10, AB 5 passed during a Senate Labor Committee meeting, where Embree and Betsy Geiser, vice president of Uniglobe Travel Center and a CCTO board member, testified.
Although a travel industry-specific amendment has not yet been passed on the bill, it has not been rejected, either.
“We were hoping that our exemption would be included, but we also wanted to be there to testify why we needed the exemption,” Geiser said. “We still have time to work on getting an exemption, and it is a possibility that we will get an exemption after the bill passes as well, but the damage will have been done.”
So far, exemptions have been made for several professions that are licensed under state law, such as realtors, lawyers, accountants and hair stylists, to name a few. Although California-based travel advisors must acquire a California Seller of Travel registration with the Attorney General’s office, the profession does not require a license. Both Labasso and Peck of ASTA agreed that creating a licensing system for advisors wouldn’t necessarily do anything to counter the effects of AB 5.
“We have no idea what [a travel agent licensing system] would look like,” Labasso said. “The registration requirement in California is burdensome enough. We’re largely a self-regulated industry, and very few complaints are lodged against travel advisors. I would say a license is overly intrusive and not necessary and there are other workarounds that are less draconian than that.”
Next-Step Planning and Recommendations From ASTAThe California legislature is currently on recess, but ASTA has constructed a strategy for the coming months, which includes securing the exemption for travel agencies. Plan B would be to alter a “B2B amendment” that is not specific to travel agencies, as well as providing its members guidance on the options available if the bill does pass.
The association is encouraging California-based members to call or email their senators’ offices through ASTA’s Grassroots Portal to make their voices heard. (So far, approximately 2,400 emails have been sent out — the largest response from the travel agent community for a singular cause in ASTA’s history.) The latest addition to the portal is a link that automatically connects an advisor with their local newspaper with a pre-written, editable letter to the editor. This can be found in the Grassroots Portal, as well.
The Grassroots Portal also houses a phone script, and a new Client Portal offers a revised script that clients can use to speak on behalf of their agents. It is also likely that the association will continue to hold educational webinars on the topic and communicate with members through its member alerts and daily emails.
In addition to lobbying efforts, ASTA is encouraging members to begin to consider some scenario-planning options.
1. Take No Action: If a host agency does not sell travel and does not have any entities with W-2s that sell travel, they will satisfy the “B” element of The ABC test and do not need to take action if AB 5 passes.2. Terminate California-Based IC Contracts: Host agencies that terminate their contracts with California-based ICs will be compliant of the law as of Jan. 1, 2020, although they may suffer from an adverse impact on sales and revenue. They should also be familiar with the agency’s IC agreement, as there is potential for a breach of contract.3. Allow California IC Contracts to Expire Without Renewal: This option avoids short-term impact on sales revenue and gives the host agency additional time to change its business model. It also avoids liability for a breach of contract. However, if an IC’s contract is still in effect past Jan. 1, 2020, the host agency will not be fully compliant with the law.4. Convert ICs to W-2 Status, Thus Classifying Them as Employees: This option will significantly increase labor costs by 30% or more due to payroll taxes, overtime changes and mandatory benefits, but it will be favorable for ICs who seek employee benefits and host agencies wishing to exert more control over their employees. Note: ICs cannot be forced to classify as employees.5. Establish a Separate Entity for California-based ICs That Does Not Sell Travel: This option, which includes creating a limited partnership or a limited corporation (LLC), will satisfy the “B” requirement of The ABC Test. This option requires host agencies to amend their existing contracts. However, although it is relatively inexpensive to establish an LLC, this option could be seen as “subterfuge” (a form of deceit) by the court system and auditors.
Will your business be affected by AB 5? Comment below or email [email protected] to let us know.
The DetailsAmerican Society of Travel Advisors www.asta.org