Insurance Agents Properly Classified As Independent Contractors, Circuit Court Rules

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The Sixth Circuit ruled that agents were properly classified as independent contractors in an Employee Retirement Income Security Act (ERISA) class action brought on behalf of thousands of current and former insurance agents in Jammal v. American Family Insurance Co., No. 17-4125 (6th Cir. Jan. 29, 2019).

The Court reviewed the lower court’s analysis of the factors for determining employee or independent contractor status set forth in Nationwide Mut. Ins. Co. v. Darden as conclusions of law rather than fact.

On an interlocutory appeal, the Sixth Circuit, looking solely at whether or not the plaintiffs were employees or independent contractors, reversed the District Court’s finding that the approximately 7,200 agents were employees and were owed health and retirement benefits. The District Court found that American Family acted consistently with the industry by classifying its agents as independent contractors, rather than employees, and took many steps to structure the relationship as such. Agents signed a written agreement stating they were independent contractors and filed their taxes consistent with this, deducting business expenses as self-employed business owners. American Family paid by commission and did not provide vacation, holiday, sick, or other paid time off. The agents worked out of their own offices, set their own hours, and hired and paid their own staff. However, as noted by the lower court, the plaintiffs were referred to as employees in company training manuals and received extensive company training.

The Sixth Circuit pointed out that in applying Darden, a court takes into account factors such as control exercised, skill, tools required, duration of the relationship, location of the work, discretion over hours, method of payment, establishment as a business, tax treatment, as well as whether or not there is an express agreement between the parties. The Sixth Circuit in its review held that each Darden factor is in itself a “legal standard” that the District Court applies to the facts, disagreeing with its sister circuits that had treated these as factual matters subject to review for clear error only. As a result, the Sixth Circuit found it could review the District Court’s conclusions about the individual factors de novo.

The Court further noted that, depending on the legal context, more or less weight of a Darden factor might be warranted in the analysis. In this case, the Court found that the District Court incorrectly applied the legal standards to determine the skill required of an agent and the hiring and paying of assistants. The Court also noted that control and supervision are less important in an ERISA context and that the lower court should have given greater weight to the parties’ express agreement. When these factors were properly applied to the facts, the Court held that the entire mix of Darden factors favored independent contractor status, thus warranting reversal of the District Court’s finding of employee status.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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