For the past 18 months, insurance companies have been holding their collective breath to see if an appellate court would affirm or reverse an Ohio district court decision concluding that thousands of current and former agents for American Family Insurance Company were employees and not independent contractors under ERISA, the federal law governing pensions and other employee benefits. Historically, agents have been treated by most insurance companies as independent contractors and have not been covered under employee pension and welfare benefit plans. The plaintiffs’ lawyers had estimated that if the district court’s decision was upheld on appeal, the company’s liability would exceed a billion dollars.
Insurance companies are now breathing easier because earlier today the U.S. Court of Appeals for the Sixth Circuit, based in Cincinnati, Ohio, reversed the district court and held that insurance agents serving American Family policyholders were properly classified as independent contractors under ERISA and are not eligible for pension and other employee benefits.
In many ways, this is a monumental independent contractor misclassification decision, allowing the industry, at least for the moment, to be confident that their business models had not been up-ended by the federal courts.
Most insurance companies, though, will not likely be tempted to regard this decision as a conclusive determination that insurance agents are independent contractors under all federal and state laws.
As noted above, the federal law in question, ERISA, only covers pension and employee benefits. It is not a determination that insurance agents are independent contractors under all other federal laws, including the federal wage and hour and discrimination laws. It is also not a determination that agents are independent contractors under a host of state labor and employment laws, including wage payment, unemployment, and workers’ compensation laws.
The test under ERISA is the so-called “common law” test, which is regarded as considerably more friendly to independent contractor status than the tests for IC status under the federal Fair Labor Standards Act and almost all state wage and hour and unemployment laws. Current or former agents may well bring new class actions for independent contractor misclassification under such laws. Their lawyers will undoubtedly argue that the decision in the American Family Insurance case is inapplicable under those laws with more employee-friendly tests for IC status.
Some class action lawyers may also take another shot under ERISA. The Sixth Circuit’s opinion recognized that the independent contractor status of American Family agents was a close decision. It pointed out the district court had concluded that the common law factors were “almost evenly split between favoring employee status and favoring independent contractor status.”
The Sixth Circuit chose to reverse in large measure because, in its view, the district court had mistakenly regarded one of the 12 common law factors as favoring employee status instead of independent contractor status and another factor as “neutral” when it should have treated that factor as favoring independent contractor status. This suggests that a slight change in some of the key facts might influence another court to side with agents in a future “close case” brought under ERISA against a different insurance company – either in a stand-alone ERISA lawsuit or one brought, for example, alongside a claim under the federal wage and hour law for unpaid overtime or minimum wages.
In reaching its decision, the Sixth Circuit also gave great weight to the agreement between American Family and the agents, finding that it fully supported the parties’ independent contractor relationship. The appellate court concluded that the district court “apparently did not weigh this important component when reaching its conclusion” and, had it done so, “it would have further swung the balance in favor of independent-contractor status.”
Thus, perhaps the biggest takeaway from the decision is that insurance companies, like businesses in virtually every industry, can and should re-document their independent contractor agreements in a state-of-the-art manner, ensuring that their agreements reflect the actual practices of the parties. We provide insights to our readers as to how they can accomplish this objective in the final paragraphs of this blog post.
The Sixth Circuit Decision
The appellate court first traced the history of this case, including the 12-day jury trial, the jury’s “advisory” verdict that the agents were employees and not independent contractors, and the district court’s adoption of the jury’s verdict.
The Sixth Circuit decision noted that the U.S. Supreme Court had issued a decision in 1992 in Nationwide Mutual Insurance Co. v. Darden that stated: “In determining whether [an individual] is an employee [or independent contractor] under the general common law of agency, we consider the hiring party’s right to control the manner and means by which the [performance of services] is accomplished.” The Sixth Circuit then set forth 12 factors that the Darden court stated are among those that are relevant, noting that “all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.”
The key portion of the Sixth Circuit decision was brief: “Here, the district court incorrectly applied the legal standards in determining the existence of the Darden factors relating to (1) the skill required of an agent and (2) the hiring and paying of assistants. Had the court applied those standards properly, it would have found that those factors actually favored independent-contractor status. We analyze each of those [two] factors below.”
In analyzing the skill factor, the Sixth Circuit rejected the district court’s conclusion, which found that the amount of skill under Darden weighs “slightly in favor of employee status” because American Family “sought out agents who were unskilled” and then trained them. Instead, the appellate court found that the sale of insurance is a “highly specialized field” that requires “considerable training, education, and skill.” Accordingly, the Sixth Circuit concluded that the district court should have weighed the skill factor in favor or independent contractor status.
As to the factor involving the hiring and paying of assistants, the Sixth Circuit concluded that the district court mistakenly weighed this factor as “neutral” after concluding that while the agents could hire their own staff, American Family provided “pre-approved” candidates whom the agents could select as their staff. The appellate court rejected that analysis, holding that where an agent has the “primary authority over hiring and paying assistants,” this factor should weigh in favor of independent contractor status.
Finally, the Sixth Circuit held that the district court failed to give sufficient weight to the parties’ written agreement, which expressly stated that the parties’ intent was to create an independent contractor relationship and that the agent was “not an employee of the Company for any purpose.” Although the district court recognized that the agreement favored IC status, the Sixth Circuit said the lower court should have given the contract even greater weight, which “would have further swung the balance in favor of independent-contractor status.”
The Dissenting Opinion
The Sixth Circuit decision was issued by a three-member panel of judges, with one judge filing a dissent – Judge Eric Clay. He concluded that the district court judge had properly analyzed the factor involving the skill required of an agent and correctly concluded that it favored employee status – noting that American Family “almost always hired untrained, and often unlicensed, agents and provided all the training they needed to be an American Family agent.”
Judge Clay then addressed the factor involving an agent’s role in hiring and paying assistants. Rather than finding that factor was “neutral,” as the district court judge had held, the dissent concluded that this factor actually favored employee status. In support of his finding, Judge Clay relied on evidence that American Family imposed qualification standards on the agents’ assistants, required assistants to sign non-solicitation agreements, and retained the right to approve or disapprove of agency staff selections above and beyond the qualification standards.
Finally, the dissent took issue with the majority’s reliance on the agents’ agreements with American Family. Judge Clay referred to court decisions holding that agreements labeling agents as ICs, “while certainly relevant,” are “less important.” He also highlighted other internal American Family documents, one of which “indicate[d] that [American Family] expected [their] sales managers to exercise control over agents’ methods and manner of performing their services,” and another referred to agents as “employees.”
The dissenting opinion may propel the plaintiffs to request a rehearing of the appeal by the all of the judges in the Sixth Circuit sitting en banc. Such en banc rehearings are generally “not favored” and will not ordinarily be ordered unless the proceeding involves a “question of exceptional importance.” Any such request must be filed within 14 days from the date the court’s opinion is entered as a judgment.
The majority’s focus on the importance of the independent contractor agreement between the agents and American Family Insurance is hardly surprising. Independent contractor misclassification cases have been decided – both for and against employee status – on the basis of such agreements, which oftentimes set forth the company’s right, if any, to control the manner and means of the other party’s performance of services.
Perhaps the most well-known case in which the courts have relied on the language of the parties’ agreement involves two opinions regarding FedEx Ground that were the subject of prior blog posts – one dealing with a decision by the Seventh Circuit located in Chicago, and the other addressing a decision by the Ninth Circuit located in San Francisco. The courts in both cases found that the drivers were employees as a matter of law, holding that they were misclassified as ICs based on language in the FedEx Ground operating agreements with the drivers. For example, in the Ninth Circuit case, the appellate court found that, under the agreement drafted by FedEx for use with the drivers, FedEx:
had the right to control the appearance of the drivers,
retained the right to control the drivers’ vehicles,
reserved the right to control the times the drivers could work,
had the right to control aspects of how and when the drivers delivered their packages, and
required drivers to conduct all business activities in compliance with FedEx Ground’s “standard of service” requirements.
Like most Fortune 500 companies, FedEx has and retains talented lawyers, but drafting independent contractor agreements that promote IC status is a process that can be counter-intuitive and, if not drafted in a state-of-the-art manner, can result in decisions where the courts use a company’s own contract language to support a finding of employee status.
For that reason, many companies resort to a process such as IC Diagnostics™ to re-document and re-implement their IC relationships in a customized and sustainable manner that maximizes compliance with IC laws and minimizes IC misclassification liability. Companies that have opted for one-size-fits-all agreements have oftentimes concluded that such form agreements are ill-fitting and cannot be reconciled with a business’s actual practices. Further, many companies still rely on IC agreements that may have sufficed years ago but have not been updated to conform to the holdings in hundreds of newly reported independent contractor cases.
This case involving American Family agents also highlights the importance of implementing the IC relationship in a manner consistent with the terms of an IC agreement. Careless wording in internal documentation, such as the types noted by the dissent, should be eliminated, and internal documentation should instead be drafted with a keen eye on IC compliance.