Exploring the ins and outs of sub-ICs

Mark Pestronk

Q: In last week’s Legal Briefs column, you wrote about the verticalization of the retail travel industry. I have noticed that not only are most advisors working as independent contractors (ICs) of host agencies, but also many other advisors appear to be ICs of those ICs. Is it legal to be an IC of an IC, or what I call a sub-IC? Does the host have to approve the sub-IC? Can that person be exempt from registration under the various seller of travel laws? Can a sub-IC be in a different state from the IC? If the sub-IC advises clients negligently, who besides that worker can be held responsible?

A: The sub-IC is a fairly new phenomenon and has arisen because some ICs have become so successful that they attract their friends and acquaintances into the industry.

First, the relationship is legal, in that there is no law that prohibits an IC from having a sub-IC. However, like all IC relationships, the sub-IC must be free of control over how, when or where they work.

If the IC needs to exercise such control, then the worker should be an employee. Otherwise, a taxing authority could reclassify the relationship as one of employment, and the IC would have to pay withholding taxes and penalties.

For example, if the IC is so successful that they cannot handle all the business that comes in, the IC may recruit someone to serve the clients or handle back-office matters. If the IC assigns tasks that need to be done right away, then the IC is controlling how and when the worker works, so the worker should be an employee.

On the other hand, if the worker develops their own clientele and uses the IC just to process bookings using the host’s ARC number, they can be truly independent as a sub-IC, in which case the relationship would pass muster under most states’ criteria.

Second, unless the contract between the host and the IC prohibits sub-ICs or requires that the IC get the host’s consent, the IC is free to retain sub-ICs without interference by the host. However, some hosts require sub-ICs enter into contracts directly with the host so that the sub-IC can be subject to the same fraud-prevention and other rules as ICs are.

Third, if both the IC and sub-IC sell to consumers in the states that have seller of travel laws and exemptions for ICs that qualify, then a sub-IC can be exempt if that worker meets all the state’s criteria for exemption. One of those criteria is that there must be a contract with the host, so if the host and sub-IC enter into such a contract, it is certainly possible for a sub-IC to be exempt from having to register as a seller of travel.

Fourth, there is no reason why the IC and sub-IC cannot be in different states. Indeed, an IC could have multiple sub-ICs in many states.

In a future column, I’ll cover liability for the sub-IC’s negligence. 

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