On August 1, 2017, the US District Court for the Northern District of Ohio held that insurance agents working under independent contractor agreements with an insurer were employees for purposes of pursuing pension and other employment benefits under the Employee Retirement Income Security Act of 1974 (ERISA).
The court’s decision in Jammal v. American Family Insurance Group, which it certified for interlocutory appeal, is notable for its departure from industry practice and prior legal precedent treating many insurance agents as independent contractors. It also notable in that many of the factors the court found convincing are customary, sensible and expected business practices for an insurer ensuring that its agents meet minimum standards for services conducted under its brand. Insurers and other employers will be watching the US Court of Appeals for the Sixth Circuit carefully to see what guidance this case ultimately provides for assessing contractor status.
The Jammal ruling came after a 12-day trial on this single issue (employee vs. independent contractor) and a recommendation from an advisory jury1 in the context of a class action involving many other issues. The court certified the ruling for immediate interlocutory appeal because “(1) there was evidence supporting both sides in this case; (2) prior case law has been nearly unanimous in finding that insurance agents generally are to be classified as independent contractors; (3) the repercussions of this finding are so far-reaching; and, (4) the resolution of damages will be unusually complicated.”
Applying the Sixth Circuit’s test for employment status under ERISA, the court analyzed the degree to which the insurer possesses the right to control the manner and means by which its agents perform their work and emphasized that exercising that right was not necessary to deem an individual an employee as opposed to an independent contractor. In applying this test, the court took guidance from the Supreme Court’s decision in Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 320-21 (1992), which applied 11 non-exclusive factors from the common law agency test to an ERISA claim by an insurance agent for pension benefits.2 Adding to that list, the Jammal decision noted the Sixth Circuit’s prior focus on express agreements between the parties and the employer’s ability to control job performance and further employment opportunities as the most significant factors for consideration.
In its analysis, the court found that the following evidence weighed in favor of employee status:
By comparison, the court found that the following facts weighed in favor of independent contractor status:
After concluding that the Darden factors were “almost evenly split between” employee status and independent contractor status, the court noted that the insurer still maintained some right of control in nearly all categories even if that right wasn’t always exercised. Considering the other factors that the Sixth Circuit found most important, the court concluded that the evidence weighed in favor of employee status in three other areas. First, the company had the right of control over the agents’ job performance by allowing managers to reprimand or otherwise discipline agents when they did not follow its standards or employ its techniques. Second, the court also found compelling the control over the agents’ employment opportunities in the form of prohibiting: (1) ownership over a book of business or particular policies; (2) the sale of insurance from another company even when the insurance company did not carry the particular product; (3) competition with the company for one year following termination of the contract; and (4) by actively discouraging other employment during the contract term. Third, the court was persuaded by evidence that the insurer trained its sales managers to treat agents the same as employees by giving managers traditional supervisory authority over agents, holding managers responsible for agents’ failures, and referring to agents as “employees” in the training manuals.
Ultimately, the court concluded that “[t]he 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 manager would be expected to exert over an employee.” When compared to other Sixth Circuit decisions involving insurance agents, the court found that “none of the factual scenarios presented in any of the cited cases show retention of the same level and breadth of control by the Company that was evidenced in this case.”
This holding will not necessarily result in employees receiving benefits under the insurer’s various ERISA plans; rather, eligibility will depend on the specific terms of those plans, including any eligibility provisions that may be drafted to exclude individuals classified as agents without regard to a subsequent judicial recharacterization. However, the standards that the court applied to reach its conclusion in this case are not unique to ERISA. Similar tests have been applied in the context of employment taxes, wage and hour rules, and other employment law contexts.
In Jammal, the insurer raised some of these consequences in a third motion to decertify the class of plaintiff agents. For example, the company argued that the evidence in the trial on employment status showed that some agents were happy with their treatment, did not want to be classified as employees, and some opposed the potential consequences of a reclassification. For example, some agents might be concerned about potentially having to refile tax returns and potentially pay back deductions for self-employed and business expenses. Despite this evidence, the Jammal court rejected the company’s arguments as not based on any new evidence that would support decertification, relying on much of the same rationale from its opinion on employment status to deny the motion to decertify.
As the court noted in its opinion, Jammal deviates from longstanding precedent in independent contractor classification, especially in cases involving insurance agents. The court certified its ruling for interlocutory appeal because of this departure from precedent and the potential far-reaching impacts of its ruling. Even if the Sixth Circuit ultimately reverses the Jammal decision, employers should review the facts of this case closely in light of their own independent contractor arrangements. Employers should also keep in mind that state statutory and common-law tests for contractor status vary significantly. Federal laws, such as the Fair Labor Standards Act and the Internal Revenue Code, require analysis of different factors as well. Employers should consult with counsel to conduct an appropriate and efficient review of contractor relationships that contemplates changes in the case law, the employer’s specific situation, and increased litigation over independent contractor status.
1 Because jury trials are generally not permitted in ERISA cases, the court impaneled an advisory jury under Federal Rule of Civil Procedure 39(c)(1). The jury’s decision was not binding, and the court allowed the parties to submit proposed findings of fact and conclusions of law following the jury’s decision.
2 These factors include: the skill required; the source of instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the individual; the extent of the individual’s discretion over when and how long to work; the method of payment; the individual’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; and the tax treatment of the individual. Darden, 503 U.S. at 232-24.