Travel Agencies Ahoy: Overtime And Other Employment Issues Are On The Horizon

In four months, the salary at which travel agencies must start paying employees overtime will increase to $47,476, likely triggering higher compensation expenses for many travel agency owners. While agencies evaluate their current pay and business models to prepare for the impact of the rule, they need to think beyond just dollars and cents, the American Society of Travel Agents (ASTA) said.

For example, agencies may need to look at reclassifying employees from exempt to non-exempt. They may want to examine what types of roles employees perform and how they are compensated for them. Or they may want to look at near-term salary increases.

Whatever decisions agents make, they have until Dec. 1. On that date, almost anyone earning less than $47,476 per year will be subject to overtime pay, up from the $23,660 threshold that has been in place since 2004. (ASTA estimates the typical travel-agency employee earns approximately $38,000 annually.)

Under the Fair Labor Standards Act (FLSA), employees classified as “non-exempt” work on an hourly basis and are entitled to overtime pay (1.5 times their hourly rate) for any hours worked beyond 40 hours a week.

ASTA is taking steps to lessen the impact of the Department of Labor’s (DOL) new rule mandating the salary threshold increase. Specifically, it will be seeking to have travel agents made exempt from overtime rules based in part on a 1997 U.S. District Court ruling, Reich v. Cruises Only, where a travel agency demonstrated it met DOL requirements. (Independent contractors are not impacted by this rule.)

“There are efforts on Capitol Hill to address the issue, but it’s an election year. It’s a legacy issue for President Obama. There are no court challenges pending. And even if that did happen, it would likely be a multi-year process,” said Eben Peck, ASTA senior vice president, government and industry affairs. “These rules are coming.”

Options abound

ASTA last week held a webinar (attended by 170 agents) to educate members about the rule and the many issues it raises, and presented some options agents should consider. ASTA cautioned attendees to consult with an accountant and/or a lawyer expert in labor issues as they review their options because compensation programs vary widely, not every agency operates with the same business model and different owners can tolerate different levels of risk.

“There is no single best solution,” cautioned ASTA general counsel Peter Lobasso.

The first and easiest option is to maintain an employee’s exempt class, but raise the employee’s salary to the new threshold level.

Lobasso gave an example of an employee making $45,000 on a straight salary basis. “Give them a raise of just over 5.5% and they’ll be at the new salary threshold,” he said.

Another factor to consider is how other compensation figures into an employee’s total package. In this year’s rulemaking, DOL said employers will be able to add nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% “of the new threshold salary level” of an employee, “provided these payments are made on a quarterly or more frequent basis.”

This means that “you could pay a base salary of $42,729, and then you could make up the difference with a commission and non-discretionary bonus,” Lobasso said.

Conversely, if you were paying an employee a total of $50,000 a year, and his or her commission and bonus amounted to 20% of that total package ($10,000), Labor would find that commissions comprised almost 16% of the $47,476 threshold (more than the allowable 10%), and the employee would still be subject to receive overtime pay.

Lobasso believes that the most attractive option for agencies with exempt employees who primarily sell travel would be to reclassify them as non-exempt. “You could take this opportunity to properly classify the worker. The number-one benefit is that your compensation package can be restructured so that there is no increase in total labor costs,” he said.

Lobasso gave an example of an exempt employee who earns $45,000 a year for approximately 42 hours a week, including two hours overtime per week. The equivalent hourly wage would be $20.13/hour. But another employee earning the same annual salary, working five hours of overtime per week, would only be earning the equivalent of $18.22 an hour.

“You need to track your employees’ hours and estimate your overtime exposure,” he said.

However, if you change an employee’s classification, “it may well prompt a question about ‘Why is this being done, and why they weren’t paid in the past for overtime prior to making the transition.’ “

Lobasso also noted that being moved to non-exempt/hourly status “might make employees feel that they have been demoted.”

Potential administrative and morale burdens

Audits by Labor or a state counterpart are rare, ASTA said, but if an agency has a history with a government agency, or a problem employee, agencies need to be able to defend how they have classified their employees. This means agency owners/employers relying on a “white-collar exemption” will need to show that their employee’s job duties satisfy the requirements for the exemption being claimed.

Then there are the issues of employee morale. If an owner moves a salaried employee to hourly compensation, “it requires employee cooperation. They may resent having to account for every minute of their workday, but they will have to. You’ll need to ensure there is a company policy that states employees will not work more than 40 hours without approval. And the law requires an employer to pay all overtime, even if the overtime is unauthorized or against stated employer policy.”

Managing time clocks could be even more difficult, Lobasso noted, when employees work remotely.

Owners will have to consider all of these administrative issues.

Is it Independence Day?

Some agency owners might be tempted to replace employees with independent contractors. “This could maintain or even reduce your overall labor cost,” Lobasso acknowledged, but ICs also require “signed written agreements that describe the parties’ relationships and commission structures, and the process behind paying them. And you need to take into account that you will have less control over the performance of their work. If you try to maintain control, you could have a de facto employee,” and that could trigger either a lawsuit or an audit.

Peck noted how ICs also usually have the right to contract with other agencies, so the decision is not a simple one. “Labor has been coming down hard on ICs lately,” he cautioned.

“It’s tempting to lay off an employee and bring them back as an IC,” Lobasso said. “But if you terminate and bring back someone doing the same work that raises red flags with Labor.”

Agency owners might also declare their freedom from the DOL rule entirely by asking for DOL guidance on meeting the “retail and service establishment exemption criteria,” Lobasso noted. In the case of Cruises Only, the U.S. Circuit Court found that the travel agency fully met the requirements, and therefore should not be held to the FSLA overtime rule.

Depending on their employees’ compensation level and structure, an agency relying on the so-called “RSE” exemption “might be able to pass muster with DOL,” Lobasso said.

Fighting for agents

ASTA intends to file a “petition for rulemaking” with the Department of Labor after August 5, Lobasso said. Labor could potentially issue an opinion letter to abide by the Cruises Only decision. “We’re going to need our members’ help in this effort. When we file this petition, it will be a public document and comments from interested parties are welcome.”

If that fails, he said, “we’ll have to go to Congress. It’s challenging to get Congress to act on something as narrow as this. But it’s a fight worth fighting.”

ASTA also will continue to educate agents as the Dec. 1 deadline nears. It will be publishing a white paper on the issue for members, which it will make available on its website in the coming weeks. In addition, the issue will be addressed at the ASTA Global Convention in Reno this September.