Mark Pestronk
Q: Thank you for your recent Legal Briefs columns on contract protections for host agencies and independent contractors (ICs), but I don't think you have addressed an issue that came up recently at our agency: When ICs leave us on good terms, we continue to pay their share of commissions as they come in. However, sometimes we get commission recalls, chargebacks, airline debit memos or client refund claims long after the IC has left us and after we have paid out the last commission share that we expect to pay out. Our contract already provides that we can deduct whatever the IC owes from the commission split, but what can we do if there are no more commissions expected? Also, is there any legal limit on how long we can withhold the commission split?
A: At minimum, your IC agreement should already provide that the IC's duty to reimburse you remains in effect after termination of your agreement. So, the honorable IC should send you payment for your commission recalls or the like.
However, I recognize that you need to try to cover the case where the ex-IC does not reimburse you for whatever reason. In that case, your IC agreement should provide that you can withhold payment for a specified period after termination and then deduct the contractor's obligations when you pay the IC.
One of my clients' IC agreements specify two periods: 90 days after termination for sales that are generally not subject to commission recalls and debit memos, such as cruises and tours, and one year for the kind of sales that are more prone to debit memos and chargebacks, such as airline consolidator tickets.
The specific clauses state, "For up to 90 days after termination, Host may withhold commissions owed to IC as security for IC's actual or potential liabilities, offsets, chargebacks or debit memos. Notwithstanding the foregoing, in the event that Host determines, based on its experience, that some of IC's outstanding sales may be particularly prone to future commissions recalls, chargebacks or debit memos, Host reserves the right to increase the 90-day period to one year after termination."
Some states have "prompt payment" laws for paying ICs in any industry. For example, New York's Freelance Isn't Free Act that requires any person who hires a freelance worker to pay the contracted compensation either on or before the date the compensation is due or, if the contract does not specify a date for payment, within 30 days after the completion of the services.
In the IC contract quoted above, "the date the compensation is due" is at least 90 days or, in some cases, one year after termination, so there would be no violation unless the host failed to pay after the end of the waiting period.
I have not found any other state's laws that would be violated by my clauses, but if a reader knows of one, please let me know. In the absence of such a law, there is no legal limit on the delay that may be specified in an IC agreement.