The American Society of Travel Advisors (ASTA) hosted a webinar regarding California Assembly Bill (AB) 5. Last week, the bill—which alters the requirements that makes a worker an independent contractor—passed a state Senate committee without an exemption for travel advisors. During the webinar, ASTA general counsel Peter Lobasso and EVP, advocacy Eben Peck spoke about the status of the bill, the likelihood that the travel industry receives an exemption and what agencies can do to prepare for the bill if it passes as-is.
Of the three requirements (known as the ABC test), the “B” task is most difficult for independent contractors to satisfy. “Travel agencies engaging independent contractors in California to sell travel likely will not satisfy the second (“B”) requirement and will therefore fail the ABC test,” Lobasso says.
ASTA says its “Plan A” is to secure an exemption for travel advisors (by using the Seller of Travel definition in California Seller of Travel Registration law, which mentions the term “independent agents”). Plan B would have ASTA working with the California chamber on altering a B2B amendment that’s currently open to a variety of industries; Plan C is providing members guidance on options available if bill passes.
Given the supermajorities in both houses and a Democratic governor, ASTA says it’s not realistic to expect the bill to die. In fact, ASTA says the likelihood of the bill being enacted is projected between 85 to 95 percent. To help prepare agencies for the bill passing, it offered five potential options:
Option 1 – Take No Action
- Worthy of consideration by host agencies that sell no travel (i.e.: one that only provides commissions/back-end office support); this would satisfy the “B” requirement.
- ASTA does note this could change depending on court definitions of the host agency’s business
Option 2 – Terminate California IC Contracts Now
- Can be implemented quickly/easily and will ensure full compliance as of January 1
- There’s the potential for significant adverse impact on sales revenue in short-term
- Depending on termination provisions of the agency’s IC agreement, the host agency is at potential liability for breach of contract (ASTA suggests speaking with an attorney if considering this option)
Option 3 – Allow California IC Contracts to Expire and Do Not Renew
- Can be implemented gradually and will allow for minimal disruption
- Avoids potential liability for breach of contract if contracts were terminated prior to expiration
- No short-term impact on sales revenue
- Allows time to adopt to new business model by converting ICs into W-2 employees or engaging with out-of-state ICs
- Agency will likely not be fully compliant as of January 1
Option 4 – Convert California ICs to W-2 Status
- ICs who seek employee benefits (health insurance, overtime pay, 401(k), etc.) may be amenable
- May begin exerting more control over these workers (however, ICs who enjoy their current worker status will likely decline this option)
- Significantly higher labor costs (30 percent or more) due to payroll taxes, overtime, mandatory benefit and more
Option 5 – Create a Separate Entity to Engage California ICs
- Will allow agency to assert that engaging party is in a different business (satisfying the “B” element)
- Existing company can continue engaging W-2s
- Relatively easy/inexpensive to form an LLC (which, ASTA also recommends to all ICs, just as a solid business practice)
- Need to amend existing California IC contracts to substitute new entity as a party
- Courts/auditors may view this as a “form over substance” subterfuge
Good to know: This bill would affect independent contractors who are based in California, but the host agency isn’t. Unfortunately, if you are an IC, Lobasso says you’re at the mercy of your host agency, as to how it’s willing to change its existing business model given the likely change in the law. ASTA has previously reported that 41 percent of ICs could leave the industry or state due to the new law. It is good to note, however, that any future business on the books for ICs (for 2020 or beyond) should not be affected by the new law. Any companies an IC booked commissionable travel would not be relieved of paying out the commission.
Lobasso also says that licensing for travel advisors is an unrealistic possibility (currently all of the exempted industries are licensed fields). ASTA says it has no idea what potential licensing would look like, but the travel industry is a relatively self-regulated industry and that licensing would be intrusive. Lobaso also warns of this style bill potentially spreading to other “blue” states; however, he isn’t quite sure how likely this is.
Through August 12, California legislature is on “recess,” meaning state Senators are working from their district offices. ASTA is developing a plan to give members the opportunity to visit their Senators at these offices. It also recommends calling their representatives as they’re more effective (read: annoying) than emails. September 13 is the deadline to vote before the full Senate. Governor Gavin Newsom has until October 13 to sign or veto the bill. The law would go into effect January 1, 2020.