Insurance Company Wins Challenge to its Independent Contractor Relationship with Agent

Having previously prevailed in two prior challenges by agents who claim they were not  independent contractors (ICs) but rather employees, an insurer wins for a third time in a lawsuit by a Washington State insurance agent.

Claiming he was misclassified as an IC instead of an employee, the agent brought wage claims under the federal Fair Labor Standards Act (FLSA) and Washington Minimum Wage Act.  In response to a motion for summary judgment by Allstate, the U.S. District Court for the Western District of Washington last week granted judgment in favor of the insurer in Daskam v. Allstate Corporation.

The court noted that Allstate had prevailed in other legal challenges to its IC relationship with agents in Colorado and California over ten years ago, but it found that those cases were not determinative of IC status in this case in Washington. The judge observed that “there are certain aspects of plaintiff’s relationship with Allstate that could support a finding that he was an IC and other aspects that make him look like an employee,” but the weight of the evidence favored IC status.

The court found that while “[a]t some point, Allstate may go too far toward controlling the ‘when, where, why, and how’ of selling insurance products,” Allstate “has not yet gone too far.”  The court noted in particular that the agent had the right and opportunity to “turn his one-man shop into a multi-agent, multi-office business” and had a “transferrable interest in the business, a circumstance unheard of in a normal employee-employer relationship,” but chose to “operate his agency as if he were still an employee.” In the court’s view, an individual cannot create an employment relationship out of an independent contractor relationship by choosing not to exercise opportunities made available to him or her to operate an independent business.

Analysis

Some courts have chosen only to examine the particular circumstances of the individual’s relationship in practice and not his or her contractual right to conduct an independent business.  Here, Allstate wisely argued its point based not on how this particular plaintiff elected to conduct his own business affairs but rather on what the plaintiff had the opportunity to accomplish under his IC agreement – and what other Allstate agents were able to achieve.  The federal district court agreed with that argument, noting that “plaintiff was given the opportunity for profit or loss that depended on his business and managerial choices, including whether to employ assistants in the endeavor and how much to spend on advertising and other aspects of his business.”

Takeaways

1.  Not all courts have been as willing as this federal court to consider evidence of what rights the worker has under an IC agreement to become an independent business person. Federal courts are generally more willing than state courts to examine such evidence, but the key in this case was to introduce into the record evidence of what other similarly situated workers have been able to accomplish in exercising their right under the IC agreement to  achieve greater business profits or experience a business loss.

2.   Another key takeaway is that businesses that rely on ICs should be using IC agreements that are state-of-the-art. This document is critical in establishing an IC’s right to operate an independent profit-making business without direction or control over the manner and means of performing the services. Remarkably, it has been our experience that many agreements are not drafted in a manner that places the company in the best position to defend claims of this nature – whether such claims are in court or before administrative agencies. Indeed, it is not unusual to find IC agreements that contain a number of  provisions capable of being used against companies seeking to minimize their potential IC misclassification liability.

Best Practices

As discussed at length in our White Paper, minimizing IC misclassification exposure can be accomplished in multiple ways, one of which includes restructuring and re-documentation.  This can be accomplished  by first engaging in a form of IC Diagnostics™ that includes an analysis of all applicable federal and state IC tests and an examination of each of the “48 Factors-Plus” found by the courts and administrative agencies to be relevant to a determination of IC status. Any restructuring that needs to be done – from fine-tuning to more substantial changes – can then be undertaken to minimize the likelihood of a successful challenge to the IC business structure. At that point, re-documentation of the IC agreement should be done,  and the existing agreement can be modified to add state-of-the-art provisions keyed to the relevant legal tests for IC status. Finally, any restructuring and re-documentation should be thoughtfully implemented in a manner that enhances the IC relationship and minimizes the likelihood of legal challenges.

Your comments are invited.

Richard Reibstein
Lisa Petkun
Andrew Rudolph

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2 Responses to Insurance Company Wins Challenge to its Independent Contractor Relationship with Agent

  1. Paul E. Gapp says:

    My firm does not practice in Court as we are not a law firm, but we do represent a vast number of companies that utilize IC’s. Question-Although I have not researched it, but isn’t there a statutory exclusion for insurance Agents and real estate Agents?

    • This is an excellent question. There are exemptions in some states under the tax laws or workers comp or unemployment laws, but this case is a wage claim under the federal and state wage laws, and those laws may not be covered by any such exemptions in WA state or in most other states. Unfortunately, many folks think that an exemption under one law or in a particular state applies in other states, and that is not the case in many instances. Thus, what is required is a close examination of laws in the states in which the business operates and in states where an IC lives or works. In those states without any such exemptions or where the exemptions are only for certain laws and not all laws otherwise exposing companies to IC liability, enhancing IC compliance is the best way for companies not to lose sleep over IC misclassification exposure. Where some businesses may wish to take certain business risks, the biggest concern for companies is taking a risk they never knew about or were not told about. With such information in hand, sometimes enhancing IC compliance can be very easy to accomplish, and any “i”s can be dotted and “t”s crossed. But if the company assumes it does not have to dot or cross any letters when that would have been able to have been done if they only knew about it, the company has needlessly been exposed to IC misclassification liability it could have avoided. In today’s legal climate, where the crack-down on IC misclassification is increasing at the state level, that is a risk most companies do not wish to undertake without a full understanding of the relevant laws and what it may take to shore up their IC compliance. Rich Reibstein, co-publisher of IC Compliance Legal Blog. reibsteinr@pepperlaw.com

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