select
This is a tooltip for the edit command button
Anthony Spina, Esq.
Anthony Spina, Esq.
VORYS, SATER, SEYMOUR AND PEASE LLP
(614) 464-4958
View Profile
Thomas E. Szykowny, Esq.
VORYS, SATER, SEYMOUR AND PEASE LLP
(614) 464-5671

INSURANCE AGENTS HELD TO BE EMPLOYEES FOR ERISA PURPOSES

In August 2017, the United States District Court for the Northern District of Ohio (the “Court”) certified a class of 7,000 insurance agents (the “Insurance Agents”) who claimed they were misclassified as independent contractors by American Family Insurance (“American Family”). In Jammal v. American Family Insurance, the Court concluded that the Insurance Agents were in fact employees of American Family under the Employee Retirement Income Security Act (ERISA) because American Family retained sufficient control over them. The Court recognized the potential repercussions of its decision and expressly authorized American Family to file an immediate appeal with the Sixth Circuit Court of Appeals.

Determining Independent Contractor Status

In order to determine whether the Insurance Agents were in fact employees under ERISA, the Court examined the degree to which American Family retained the right to control the manner and means by which the Insurance Agents accomplished their service. The Sixth Circuit has consistently held that a worker can be classified as an “employee” if the employer retains the right to direct or control the manner and means of work, regardless of whether the employer exercises this right.

In Nationwide Mutual Insurance Co. v. Darden, the United States Supreme Court outlined a myriad of non-exclusive factors that courts should consider in evaluating whether an employer’s right to control exists in these cases: the skill of the job; the source of the instrumentalities and tools; the location of the work; the duration of the relationship; whether the hiring party can assign additional projects; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; the provision of employee benefits; the tax treatment of the hired party; and whether there is an express agreement between the parties. The United States Supreme Court held that the ability of the hiring party to control job performance and the employment opportunities of the worker are the most important factors in the analysis. However, under the Supreme Court’s Darden test, no one factor controls.

The Evidence Weighed in Favor of Employee Status

The Jammal Court explained that “Sixth Circuit law is clear and consistent in holding that employee status is determined based on the company’s retention of right to control the manner and means of the worker’s services.” The ultimate and most important inquiry is what is the level and breadth of such control. After a 12-day bench trial, the Court found the evidence to be almost evenly split between the Darden factors favoring employee status and the factors favoring independent contractor status:

Factors Showing
Employee Status

Factors Showing
Independent Contractor Status

American Family and the Insurance Agents maintained a long relationship.

The Insurance Agents receive commissioned-based payments rather than a set salary.

American Family had some authority to regulate when and how long the Insurance Agents worked (including whether and when they could take vacation and file reports).

The Insurance Agents employed and managed their own staff, at their own expense, and paid taxes as their employers.

American Family could assign additional work not directly related to the sale of insurance, for which Insurance Agents were not always compensated.

American Family did not provide Insurance Agents with any employee benefits (e.g., sick or vacation leave, insurance, etc.).

Insurance Agents are integral to American Family’s business and “part and parcel of its core function,” and “it could not exist” without the sales generated by the Insurance Agents.

American Family treated its Insurance Agents as independent contractors for tax purposes.

American Family hired inexperienced and untrained Insurance Agents so that it could train them in the “American Family way.”

The Insurance Agents worked off-site (although American Family retained some control over the work location and some supervision over the Insurance Agents).

The Insurance Agents invested heavily in their offices and claimed significant expenses in their IRS filings (even though American Family provides certain computers and software essential to the performance of the Insurance Agent’s job).

In sum, the method of payment and tax treatment clearly favored independent contractor status, while the duration of the relationship and the fact that the Insurance Agents’ work is the core business of American Family clearly favor employee status. All other factors contain a mix of characteristics between the two designations. But “the employer’s ability to control job performance and the employment opportunities of the aggrieved individual are the most important of the many factors to be considered.” And here, even though the Insurance Agents had written independent contractor agreements, American Family retained enough control over them to be deemed employees.

According to the Court, “The degree of control managers were encouraged to exercise was inconsistent with independent contractor status and was more in line with the level of control a manger would be expected to exert over an employee.” American Family appeared to retain at least some degree of control over the Insurance Agents’ decisions in nearly every category. And “if the agent did not agree with or follow American Family directives and suggestions, control would be exercised by most managers in the form of reprimands, threats, and potential termination.” This control is inconsistent with independent contractor status.

Here, the Court concluded that the evidence supported both sides but that the amount of control American Family exercised (or could have exercised) tipped the scales in favor of employee status. At the same time, the Court noted that prior case law has been “nearly unanimous” in finding insurance agents to be independent contractors and that the resolution of damages will be “unusually complicated.”

Lessons Learned

Jammal provides an important reminder that an insurance agent’s independent contractor status hinges on the employer’s level and breadth of control. Agents who are supposedly independent are not like franchisees who must follow all of the franchisor’s rules. Insurance companies seeking to avoid a similar fate should review their policies, practices, and agency agreements, which may not have been reviewed in years. Insurance companies may also want to consider:

  • Carving out agents they deem to be independent contractors from ERISA plans;
  • Not referring to agents as employees in training and personnel manuals;
  • Adding a term to agents’ agreements expressly stating when the agreement will be renewable;
  • Allowing the agents to control their book of business, or, at the very least, having discretion in selling their agency and in writing business for other insurance carriers (particularly when the agency does not write a particular line of business).

This case also raises interesting questions about the scope of the Court’s ruling and its application to other areas of the law. The fact that the Court found the Insurance Agents to be employees under ERISA does not necessarily mean they will be deemed employees in other contexts. Under Ohio law, for example, whether a person is an independent contractor or employee depends on the fact-intensive inquiry of who had the right to control the manner or means of doing the work. Will the Insurance Agents be deemed “employees” for purposes of wage-hour laws, family-medical leave laws, discrimination laws, unemployment compensation, or workers’ compensation? And it remains to be seen how the IRS will view Jammalwith respect to unpaid employer taxes and already-paid employee business expenses.

Contact your Vorys lawyer if you have questions about the insurance agency-agent relationship or other independent contractor issues.


7,000 insurance agents held to be employees FOR ERISA PURPOSES

In August 2017, an Ohio federal court recently certified a class of 7,000 insurance agents of American Family Insurance who claimed they were misclassified as independent contractors. In Jammal v. American Family Insurance, the Court concluded that the agents were actually employees under the Employee Retirement Income Security Act (ERISA) because American Family retained sufficient control over the agents. The Court recognized the potential repercussions of its decision and expressly authorized American Family to file an immediate appeal with the Sixth Circuit Court of Appeals

Determining Independent Contractor Status

To determine whether a worker is an employee under ERISA, courts examine the degree to which the hiring party retains the right to control the manner and means by which the service is accomplished. A worker can be an “employee” if the employer retains the right to direct or control the manner and means of work, even if it does not exercise this right.

Additionally, courts consider myriad non-exclusive factors in evaluating whether the right to control exists: the skill of the job; the source of the instrumentalities and tools; the location of the work; the duration of the relationship; whether the hiring party can assign additional projects; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; the provision of employee benefits; the tax treatment of the hired party; and whether there is an express agreement between the parties. The ability of the hiring party to control job performance and 6the employment opportunities of the worker are the most important factors.

The Evidence Weighed in Favor of Employee Status

The Court found the evidence was almost evenly split between favoring employee status and favoring independent contractor status. In sum, the method of payment and tax treatment clearly favored independent contractor status, while the duration of the relationship and the fact that agents’ work is the core business of American Family clearly favor employee status. All other factors contain a mix of characteristics between the two designations. But “the employer’s ability to control job performance and the employment opportunities of the aggrieved individual are the most important of the many factors to be considered.” And here, even though American Family’s insurance agents had written independent contractor agreements, American Family retained enough control over them to be deemed employees.

According to the Court, “The degree of control managers were encouraged to exercise was inconsistent with independent contractor status and was more in line with the level of control a manger would be expected to exert over an employee.” American Family appeared to retain at least some degree of control over their agents’ decisions in nearly every category. And “if the agent did not agree with or follow American Family directives and suggestions, control would be exercised by most managers in the form of reprimands, threats, and potential termination.” This was inconsistent with independent contractor status.

Conclusion

Here, the Court concluded that the evidence supported both sides but that the amount of control American Family exercised (or could have exercised) tipped the scales in favor of employee status. At the same time, the Court noted that prior case law has been “nearly unanimous” in finding insurance agents to be independent contractors and that the resolution of damages will be “unusually complicated.” So it recognized its decision has “far-reaching” repercussions. Consequently, it stayed the case and authorized American Family to file an immediate appeal with the Sixth Circuit Court of Appeals. Contact Anthony Spina at (614) 464-4958 or Tom Szykowny at (614) 464-5671 if you have questions about the insurance agency-agent relationship or other independent contractor issues in Ohio.