- Several thousand insurance agents were properly classified as independent contractors for Employee Retirement Income Security Act purposes, according to a split decision by the 6th U.S. Circuit Court of Appeals (Jammal, et al. v. Am. Family Ins. Co., et al., No. 17-4125 (6th Cir. Jan. 29, 2019)).
- While the class of current and former insurance agents alleged they were misclassified as independent contractors so that their employer, American Family Insurance Company, could avoid paying them ERISA-required benefits, the 6th Circuit found that factors relating to the agents' required skill, and their hiring and paying of assistants, favored a finding of independent contractor status.
- A dissenting judge wrote a separate opinion stating that the majority adopted an incorrect standard of review for the lower court's decision, incorrectly analyzed two of the relevant tests, and incorrectly weighed the relevant tests; he agreed with the lower court's finding that the agents were employees.
Proper classification of workers is a multifaceted, fact-specific inquiry with ramifications for employers and employees alike in terms of pay, taxes and benefits. Workers traditionally classified as independent contractors — especially insurance agents — have increasingly been challenging their classifications. And given the rise of the gig economy, this trend is likely to continue and spread across a number of industries, especially under the Fair Labor Standards Act (FLSA). Unfortunately for employers, there is no single bright-line test to follow.
The agents in Jammal were paid on commissions and signed written agreements at the outset of their work with American Family making clear that they were independent contractors rather than employees. They also filed taxes as independent contractors, deducted their business expenses as self-employed business owners and received no vacation pay, sick pay or paid time off.
However, the agents claimed their managers exerted a great deal of control over their day-to-day activities. There was an extensive training program, and agents were discouraged (but not forbidden) from taking other work. The agent relationship was not limited in duration, and an "extended earnings" lifetime annuity program was described as a retirement plan.
But other factors weighed against them. The 6th Circuit noted that selling insurance is a highly specialized field that requires considerable training, education and skill. Additionally, agents were responsible for hiring and paying their own staff and determining their proper employment classification. The 6th Circuit also said the lower court should have given greater weight to the parties' "express agreement" to independent contractor status.
For other employers, it's important to note relevant tests for applicable laws. Different circuits and states have their own standards, and federal agencies' definitions are in flux. The U.S. Department of Labor has withdrawn Obama-era FLSA guidance on independent contractors, and the National Labor Relations Board recently revised its test for the National Labor Relations Act.
In general, the more control exerted over a worker and the way the job is performed, the more likely it is that the worker will be deemed an employee. And as Jammal shows, a written acknowledgement of independent contractor status may carry some weight, although in itself is not legally determinative.