The line between whether an individual is an employee of a company or an independent contractor can sometimes be blurry. Employers like to classify workers as independent contractors because they are less expensive than employees. The correct classification depends on the weight placed on a number of factors.
A group of captive insurance agents filed a class action lawsuit in a federal court in Ohio against the insurer they represented. The insurer classified them all as independent contractors; the agents argued that they were actually employees, as the federal Employee Retirement Income Security Act (ERISA) defines that term. As independent contractors, they were ineligible for any of the benefits the insurer provided to its employees. They argued that they should be entitled to the benefits as well.
According to the appellate court’s published opinion:
- All of the insurer’s agents signed contracts stipulating that they were independent contractors
- The agents filed their taxes as self-employed individuals and were able to deduct business expenses from their taxable incomes
- They were paid commissions, not salaries
- They received no paid time off
- They established their own offices and office hours, hired and paid staff, and obtained their own furnishings and supplies
- The insurer’s training manuals referred to agents as “employees”
- The agents reported to sales managers who were not even aware that they were independent contractors
- The managers told them which products to prioritize, required daily activity reports, and required them to spend nights after hours making cold calls for life insurance
- The insurer had authority over where agents’ offices were located and over hiring and firing decisions
- The insurer provided them with a comprehensive insurance and sales training course
- They were not permitted to represent other insurers and were discouraged from taking on other work, insurance-related or not
- The insurer referred to the position of an agent as a “career position”
- Agents were subject to a one-year non-solicitation agreement following departure from the company
- Agents were prohibited from selling their agencies or from assigning the rights to their income to others
The lawsuit went to trial, and the jury concluded that the agents met the ERISA standard for employees. The insurer appealed the ruling.
The majority of the appellate court overturned the jury’s verdict and ruled that the agents were independent contractors. Citing a prior ruling by the U.S. Supreme Court, they reached this conclusion because:
- The skill required of insurance agents demands considerable training and education
- Despite the insurer’s influence, the agents had considerable latitude in hiring staff, deciding their compensation and benefits, and classifying them
- The agents “invested heavily” in their businesses, paid rent, worked out of their own offices, earned commissions, and paid taxes as independent contractors
- The contract between the agents and the insurer expressly labeled the agents as independent contractors
One judge dissented from the ruling, disagreeing with the majority’s conclusions on skill and hiring and with the relative weight they placed on each factor. He also dismissed the use of the “independent contractor” in the contract as “susceptible to manipulation such that over-reliance on (it) would ‘defeat the purpose’ of ERISA.” Regardless, the court ruled that the agents were not employees and not eligible for benefits.
Prospective captive agents must weigh the advantages and disadvantages of the arrangement. Insurers provide training, some financial and operational support, and other means of support. However, captive agents generally are ineligible for benefits, as this decision shows, and the insurer can have a great deal of control over how they spend their time. This insurer’s agents learned only after long and costly litigation that the law is on the insurer’s side.
Anyone contemplating becoming a captive agent must do so knowing what the disadvantages are, including lack of control and no employee benefits, and decide whether the benefits outweigh them. As this case shows, it is a choice that is not right for everyone.
