Second Favorable Ruling for Insurance Companies on Independent Contractor Misclassification

Following on the heels of a very favorable decision by a federal appellate court earlier this year that insurance agents for American Family Insurance were not misclassified by the company as independent contractors in a class action brought under ERISA, a federal district court in New Jersey earlier this week reached the same conclusion about an insurance agent for Northwestern Mutual Life Insurance Company who claimed he had been misclassified in a lawsuit under the New Jersey Wage Payment Law.

This decision may be more significant than the American Family case because the test for IC status under ERISA is considerably less challenging for companies to meet than the test for IC status under the New Jersey Wage Payment Law. Yet, the evidence in this Northwestern Mutual case was far stronger for IC status than was the facts in the American Family case. Thus, while insurance companies will take comfort from this new decision, the risk cannot be ignored of an adverse decision on the issue of IC misclassification affecting another carrier with regard to their agents. Nonetheless, there are steps that companies in the insurance and other industries can take to buttress their IC compliance going forward, as discussed at the Analysis and Takeaways below.

The Facts

The plaintiff, Fred Walfish, was a Northwestern Mutual financial representative for about 15 years before he entered into a new relationship in 2010 with a general agency owned and operated by a general agent, Robert Seery, doing business as the Seery Agency.  From 2010 on, Walfish sold insurance under a contract with the Seery Agency. He sold both Northwestern Mutual policies as well as the policies of about 20 other companies to his clients. Walfish received no more than one-third of his overall commissions from Northwestern products. He also filed taxes as a sole proprietorship called Fred Walfish Insurance.

The agent rented an office from the Seery Agency and later its successor. He admitted he had “no … clue” as to how much time he spent in his rented office and in the field. Walfish failed to sell a minimum number of Northwestern policies in 2015, and by June 2016 he was no longer associated with the company. He did, however, continue to sell insurance to his clients and operate Fred Walfish Insurance.

Walfish brought a proposed class action lawsuit against Northwestern Mutual claiming that it violated the New Jersey Wage Payment Law when it deducted expenses from his commissions and the commissions of other Northwestern Mutual agents. He claimed that the company exercised substantial control over the performance of his work and that under the employee-friendly “ABC” test for IC status in New Jersey, which was articulated in 2015 by the New Jersey Supreme Court in the Sleepy’s case, he alleged that the company could not establish each of the three prongs of that ABC test in New Jersey.

The Court’s Decision

Judge William J. Martini of the U.S. Court for the District of New Jersey granted Northwestern Mutual’s motion for summary judgment. As to the first prong of the ABC test, which requires that a defendant to establish that the individual in question “has been and will continue to be free from control or direction over the performance of … service, both under his contract of service and in fact,” Judge Martini noted that a worker must allege control other than that required by regulatory authorities. It therefore discounted any “control” that was simply imposed upon Walfish by Northwestern “to ensure regulatory compliance,” such as requirements that he maintain his insurance agent license, keep accurate records, and provide accurate marketing materials to his clients.

The court examined the requirement that the agent maintain minimum sales, but it found that this was a sales incentive structure, not a form of control over the agent’s performance. Similarly, as to the claim that the company required Walfish to deal exclusively in Northwestern Mutual products, the evidence showed just the opposite – that he derived substantial income from non-Northwestern business as well. Walfish also argued that the company exercised control by requiring attendance at annual meetings, but the court said that such control was “de minimis”.

The second prong of the ABC test (prong B) requires the business to establish that the services is “either outside the usual course of the business for which the service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed.” The B prong is “disjunctive,” so a company must only prove one or the other part of the second prong to satisfy this segment of the test.

The court’s decision is a bit unclear on the “usual course” part of prong B.  The court noted in one part of the opinion that the evidence was in dispute as to whether Northwestern Mutual “sells” insurance or not, but then it stated that the company does not “sell” insurance. The decision as to the “location-of- work” part of prong B, on the other hand, could not be clearer.  The court held that Walfish did not “regularly report to any Northwestern office.”

As to prong C, which mandates that the business establish that the individual “is customarily engaged in an independently established trade, occupation, profession or business,” the court found that Northwestern met its burden as to this prong as well.  The court noted that Walfish operated his own business as a sole proprietorship, received income from about 20 different insurance companies, took tax deductions related to the operation of a business, and continued to operate his insurance business after his relationship with Northwestern Mutual terminated.

An appeal by the plaintiff is anticipated.

Analysis and Takeaways

We see few IC misclassification cases that have stronger facts favoring IC status than the facts in this case.  New Jersey’s ABC test is far more challenging for a company to meet than any federal test for IC status, and considerably more challenging than any other state IC standards other than the tests in California (which is currently limited to so-called wage claims) and Massachusetts (which has been interpreted to exclude real estate salespersons). In those two states, the B prong of their ABC tests is not a two-part “disjunctive” prong it is in New Jersey.  Rather, the IC test in those two states contains a prong B that has only one part, which requires the company to prove that the service being provided by the worker in question is “outside the usual course of the [company’s] business.”

While the ABC tests in Massachusetts and California are the most employee-friendly in the U.S., there are legitimate ways the businesses can maintain an IC business model in those states, other than by reclassifying ICs as employees.

In the Northwestern Mutual case, the federal court apparently decided the “usual course” factor was satisfied when it said that Northwestern did not “sell” insurance.  But, there is some question whether California or Massachusetts, or for that matter other states with a similar ABC test, would follow the same reasoning that Judge Martini did to determine if the insurance agent performed services outside of the usual course of the company’s business – that is, determining whether Northwestern (like Walfish) actually “sells” insurance.  The judge’s analysis and logic makes perfect sense. Unfortunately, courts in other states have applied their ABC tests in ways that defy common sense.

What should a company do in the insurance business in any other industry to minimize these types of lawsuits and maximize their chances of success if they are sued for IC misclassification?  Rather than simply hoping that the plaintiff’s factual allegations are as weak as they were in the Northwestern Mutual case, a host of companies have resorted to a process such as IC Diagnostics™, which enhances compliance with IC laws by restructuring, re-documenting, and re-implementing their IC relationships in a customized and sustainable manner – and does so without any change in a company’s business strategy or business model.

The decision is Walfish v. Northwestern Mutual Life Insurance Company, No. 16-cv-4981 (WJM) (D.N.J. May 6, 2019).

Written by Richard Reibstein and Alan Levin

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