Pension & Benefits News Insurance agents properly classified as independent contractors, dealing fatal blow to ERISA class action
Friday, February 22, 2019

Insurance agents properly classified as independent contractors, dealing fatal blow to ERISA class action

By Pension and Benefits Editorial Staff

In a victory for American Family Insurance, a divided Sixth Circuit reversed a district court’s finding that the agents were "employees" in an ERISA class action suit brought on behalf of several thousand current and former insurance agents, instead finding that a proper weighing of the Supreme Court’s Darden factors established that the insurance giant properly classified them as independent contractors. In particular, in the ‘legal context’ of ERISA eligibility, "control and supervision is less important" than the financial structure of the parties’ relationship. Judge Clay filed a separate dissenting opinion, urging that the majority adopted the wrong standard of review and erred in its application and weighing of the factors.

The named plaintiffs who brought this action claimed that the company mislabeled them as independent contractors in order to deny ERISA benefits. The district court granted class certification, denied decertification, and ultimately allowed the action to proceed to a bifurcated trial on the threshold question of the agents’ employment status. A 12-day trial of this single issue took place before an advisory jury, during which both parties presented substantial evidence. The jury returned a verdict finding that the agents were employees, which the district court ultimately adopted. This interlocutory appeal followed.

Court finds agents are "employees." In applying the Supreme Court’s common-law Darden factors, the district court found the factors "almost evenly split," and then underwent a broader analysis of the level of control that American Family exercised over its agents. The judge ultimately concluded that "the 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." This, along with the evidence related to the other Darden factors, led it to conclude that the plaintiffs were employees.

De novo review. Though this interlocutory appeal only allowed for a review of the district court’s conclusions of law, the Sixth Circuit court had yet to clarify "whether and to what extent a court’s conclusions about the individual factors that make up theDarden standard are factual or legal in nature." While other circuits had treated these as purely factual matters subject to review for clear error, the Sixth Circuit disagreed with this approach and instead found it appropriate to review the district court’s conclusions de novo, including the weight assigned to of each of the Darden factors.

Misapplied two factors. The district court erred in holding that the "amount of skill" factor weighed "slightly" in favor of employee status. Notably, the Sixth Circuit previously held that the skill required of insurance agents weighs in favor of independent-contractor status because "the sale of insurance is a highly specialized field" that requires "considerable training, education, and skill." Though American Family preferred hiring untrained, and often unlicensed, agents, the underlying discipline of selling insurance remained the same regardless of American Family’s hiring preferences. Thus, the correct application would have weighed this factor in favor of independent contractor status.

The Sixth Circuit also found that the district court mistakenly weighed the "role in hiring and paying assistants" factor as "neutral" despite having ultimately concluded that the agents had "primary authority" to hire their own staff and were solely responsible for all "staff compensation matters." Having reached such a conclusion, this factor should have been deemed to weigh in favor of independent-contractor status.

Improper weighing of factors. The district court also erred by not properly weighing the Darden factors that were particularly significant in the legal context of ERISA eligibility. In particular, "control and supervision is less important in an ERISA context, where a court is determining whether an employer has assumed responsibility for a person’s pension status." Because ERISA cases focus on the financial benefits that a company should have provided, the financial structure of the company-agent relationship guides the inquiry. Here, the Darden factors that most pertained to that financial structure favor independent-contractor status and thus carried more weight in the ERISA context.

Financial structure carries greater weight. Indeed, the district court found that the agents invested heavily in their offices and instrumentalities, paid rent and worked out of their own offices, earned commissions on sales, were not eligible for employment benefits, and paid taxes as independent contractors. While the court correctly weighed the related Darden factors in favor of independent-contractor status, given the ERISA legal context, they should have carried greater weight in the final analysis. Had the court properly weighed those factors in accordance with their significance, it would have determined that the entire mix of Darden factors favored independent-contractor status.

Express written agreement. The lower court should have also given greater weight to the parties’ express agreement governing the parties’ business relationship, which clearly indicated that they structured their relationship so that the agents should be treated as independent contractors. The court correctly recognized that the agreement favored independent-contractor status but did not weigh this important component when reaching its conclusion regarding independent-contractor status. Had it done so, it would have further swung the balance in favor of independent-contractor status. Indeed, some sister circuits had already found American Family agents to be independent contractors in other contexts, and the plaintiffs failed to show that the facts here were "so radically different from these cases to justify what would be a significant departure from these rulings, especially in the ‘legal context’ of ERISA eligibility, where we have held that "control and supervision is less important" than the financial structure of the parties’ relationship.

Dissent. Judge Clay would have affirmed the district court’s determination that the agents were employees under ERISA. In an extensive discussion, Judge Clay opined that the majority adopted an incorrect standard of review for district court determinations regarding whether and to what extent the Darden factors support employee or independent contractor status; incorrectly analyzed the "skill required" and "role in hiring/paying assistants" Darden factors; and incorrectly weighed the Darden factors.

SOURCE: Jammal v. American Family Insurance Co., (CA-6), No. 17-4125, January 29, 2019.

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