Independent insurance sales agents have been treated as independent contractors (ICs) for decades. But recently, class action lawyers have begun to target insurance companies with claims that carriers have misclassified these sales agents as ICs instead of employees. These lawsuits allege that insurance companies have violated wage and hour, employee benefit, and discrimination and wage payment laws that protect employees.

What can insurance companies do to minimize any such IC misclassification liability and, correspondingly, maximize their compliance with federal and state IC laws?

Before answering those questions, we will review two of the more recent cases affecting the insurance industry to provide you an idea of the types of IC misclassification challenges that are facing insurers.

Class Action Lawsuit Seeking Overtime Compensation.  This past March, a Texas federal court judge denied a motion to dismiss an IC misclassification class action brought against Texas Farm Bureau Casualty Insurance Company and other insurers that sought to quickly bring to an end an independent insurance agent’s proposed collective action seeking overtime under the Fair Labor Standards Act. Ferguson v. Tex. Farm Bureau Bus. Corp., No. 17-CV-111 (W.D. Tex. Mar. 20, 2018).

In this case, the agent alleged that he and other similarly situated agents had been misclassified by the Texas Farm Bureau (TFB) and affiliated defendants as independent contractors. The insurers argued on their motion to dismiss that the plaintiff was not covered by the FLSA because he had entered into independent contractor agreements with the insurers in the name of his corporation, Chris Ferguson Insurance Services, Inc., for whom he was the sole shareholder and president. The court rejected the insurers’ argument that a person cannot be an employee for purposes of the FLSA simply because “the putative employer acquired the person’s labor through a contract with a business entity rather than the person.”

The insurers also argued on their motion to dismiss that, as a matter of law, the plaintiff was an independent contractor. The court noted that the test for employee status under the FLSA is based on “the economic realities of the parties’ relationship.” The court then denied that portion of the motion, stating that the agent had alleged in his complaint sufficient facts to withstand the motion to dismiss: he alleged he had worked exclusively for the insurers for 12 years, was issued TFB business cards, had a TFB email address, and was “closely supervised” by TFB management. In those circumstances, the court stated, the plaintiff had “alleged sufficient facts to plausibly allege employee status under the [FLSA’s] economic realities test.”

Class Action Lawsuit for Employee Benefits. Currently on expedited appeal to the U.S. Court of Appeals for the Sixth Circuit is a district court’s decision in favor of an insurance sales agent’s class action seeking pension and other employee benefits. Jammal v. American Family Insurance Company, No. 17-4125 (6th Cir.). The decision being appealed held that the insurance sales agents of American Family Insurance Company (AFIC) are employees and not independent contractors for purposes of ERISA.

In addition to the brief filed by AFIC in January 2018, three “friend of the court” briefs were filed by the U.S. Chamber of Commerce, the American Council of Life Insurers, and the Property Casualty Insurers Association of America, all supporting reversal of the July 31, 2017 decision by a federal judge in the U.S. District Court for the Northern District of Ohio.

The appellate briefs in support of AFIC’s position argue that, prior to the issuance of this court decision, almost all federal courts had held that insurance agents are independent contractors. The briefs argue that the federal judge in Ohio failed to properly apply the U.S. Supreme Court’s  Darden test for IC status under ERISA.

The briefs focus on a number of alleged errors by the district court, including not giving sufficient weight to: (1) the terms of the agreements between AFIC and the insurance agents, affording agents the right to determine the manner and means used to perform their services; (2) the financial relationship between the parties and their tax treatment, including the agents’ declaration to the IRS that they were self-employed and thus able to deduct their own business expenses; (3) the agents’ investment in and management of their own offices including their right to hire assistants; (4) the agents’ opportunity for profit by growing their own businesses; and (5) the level of skill required of insurance agents operating in a highly regulated and specialized field.

The plaintiff agents filed their appellate brief in March. The brief argues that in “real life,” the agents do not have the rights they are provided in the contract.  The plaintiffs also seek to portray AFIC as an “outlier in the insurance agency context and beyond,” claiming it has an “unfair advantage over its competitors and all others who follow the law on independent contractor status.”  That position, though, seems to be at odds with the position of the U.S. Chamber of Commerce and the two insurance industry associations that filed “friend of the court” briefs in favor of AFIC.  In addition, the plaintiffs did not refer the court to any evidence in the record as to how other insurers’ practices differed from AFIC’s.

The plaintiffs’ brief includes a highly technical argument:  because of the expedited nature of the appeal, AFIC is not permitted to challenge the factual findings of the district court and is “limited to challenging the district court’s legal conclusions.”

Finally, two “friends of the court” filed briefs: Public Justice, P.C., and the AARP. Public Justice argues that the U.S. Chamber of Commerce presented an “oversimplified depiction of the economic landscape” regarding workers classified as ICs.  The AARP likewise sought to highlight the benefits of employee status and characterize IC status as one that “has contributed to lower job quality in some industries and led to a decrease in worker financial resilience” – which seems to be contrary to a comprehensive government report released in May 2015 on the contingent workforce that found that 85% of independent contractors “appeared content with their employment type.”

What Can A Company in the Insurance Industry Do To Minimize IC Misclassification Liability?

The test for IC status is different under ERISA than it is under the FLSA, and the tests under those federal laws differ from the tests for IC status under many state laws.  Regardless of the test, though, the keys to enhancing IC compliance under all of these state and federal laws is to validate the structure, documentation, and implementation of the IC relationship.  Does the IC agreement as drafted maximize IC compliance, or can and should the IC relationship be restructured or re-documented to improve the likelihood of successfully defending an IC misclassification lawsuit?

Even more important, however, is to determine whether the IC relationship is being implemented in practice consistent with the structure and documentation of the relationship.  For example, if the IC agreement states that independent insurance sales agents decide their own hours, decide how to perform their services, and determine where they will provide insurance sales services, is that what is happening on a daily basis in actual practice?

What are the consequences if a carrier does not structure, document, and implement its IC relationships with sales agents in a manner that enhances compliance? The results can be costly, such as what happened to one of the country’s Fortune 500 companies, FedEx. The wording of its IC agreement covering Ground Division drivers was held by two federal appellate courts as creating an employment relationship as a matter of law.  As a result, FedEx was forced to settle several dozen IC misclassification cases for nearly $500 million in the past several years.

What should a company in the insurance industry do?  Some companies have chosen to use a comprehensive process, such as IC Diagnostics™, assessing dozens of factors bearing on a sales agent’s IC status to minimize IC misclassification exposure.

One final note:  IC agreements containing arbitration provisions with class action waivers can provide some level of protection against most class actions brought by private litigants.  While such provisions are not applicable to governmental agencies conducting audits, investigations, or administrative proceedings, their inclusion in IC agreements is favored by many insurers. There is, however, a question about the enforceability of mandatory arbitration agreements with class action waivers.  Although that issue is currently pending before the U.S. Supreme Court, there are ways to draft such arbitration provisions to increase their enforceability.