Mark Pestronk
Q: Because you have written or reviewed a lot of contracts between host agencies and independent contractors, I wanted to ask you some questions: First, are all host agency contracts pretty much the same? Second, are most host contracts negotiable or nonnegotiable? Third, is there a standard commission split? Fourth, from a prospective IC's point of view, what are some things in host contracts to look out for; i.e., what are some red flags that might indicate that I should not join that host?
A: No two host agency contracts are the same or even close to the same. They vary widely, from 35-page tomes written by teams of lawyers to three-page agreements written by do-it-yourself hosts. The median length seems to be about eight pages, and those that I draft are typically about that length.
Some host contracts appear to emphasize tight control by the host, and they are written as though the host is ignoring the risk that the relationship might get reclassified as one of employment due to the degree of control they exercise over the IC. These hosts are probably preoccupied with preventing fraud by rogue ICs or their clients.
Other host contracts bend over backward to establish that the IC is free of control, so that the relationship can pass muster if it is audited by a federal or state taxing authority. These contracts may expose the host to fraud because of the lack of controls on an IC's conduct.
The best host contracts are somewhere in the middle: They have reasonable restrictions on the IC in order to prevent fraud, but they also clearly establish that the IC is truly a self-employed businessperson.
Many host contracts are indeed negotiable, especially if the IC comes with a good book of business. However, most ICs will probably find it difficult or impossible to negotiate business or legal terms with the largest host agencies.
There is no standard commission split. It depends on the competitive environment, the kind and volume of business brought in by the IC, the amount of work the IC performs, the IC's ability to get offers from multiple hosts and the host's supplier deals.
One big red flag is a contract that gives the host the ability to change the commission split at any time as well as to raise fees and impose new ones without limitation. Like any other business contract, the business terms should be fixed for the length of the contract, or the terms by which a party can make changes should be clearly spelled out.
Another big red flag is a contract that provides that all the clients belong to the host, even if the IC solicited and secured them. Clients that the IC brings in should always belong to the IC unless a sales lead was generated by the host.
A similar red flag is a noncompete clause that prohibits the IC from working for a competitor or establishing their own agency for a year or more after termination.