After the Scare: Sixth Circuit says Insurance Agents Are Still Independent Contractors

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Last week, many insurance carriers breathed a sigh of relief when the Sixth Circuit Court of Appeals held that more than 700 American Family Life Insurance agents were properly classified as independent contractors, not employees.  The case is Jammal v. American Family Life Insurance Company, 2019 U.S. App. LEXIS 2905. 

In 2017, the District Court in Jammal gave the insurance industry a scare when it held that agents were improperly classified as independent contractors, and should instead have been classified as employees who were eligible for benefits under ERISA.  Both the District Court and the Sixth Circuit used the independent contractor test factors outlined by the U.S. Supreme Court in Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992).

 That case established the factors to consider when ERISA coverage was at issue, as it was in Jammal.  The Darden court promulgated the “right to control” test, which examines the degree to which a company retains the right to control the manner and means by which a worker’s service is done.  The Darden factors are similar to those used by many federal courts to determine independent contractor versus employee status, but differ substantially from some other tests, such as the “ABC Test” applied in some states like California and Massachusetts.

The District Court in Jammal recognized that “nearly all” of the cases that considered insurance agents had found them to be independent contractors, essentially because they operate their own insurance sales business.  However, the District Court found that unique facts of significant control exerted by American Family was greater than that exerted by most insurers, so much so that the court was compelled to find that company’s agents to be employees.  Although an outlier, the District Court’s holding made many insurance carriers re-examine their practices regarding independent agents and left them wondering whether Jammal was the start of more scrutiny of a common industry practice.  Recognizing the significance of his ruling, the District Judge in Jammal submitted his own decision for review by the higher Sixth Circuit Court of Appeals.

The Sixth Circuit has now decided the issue in a split 2-1 opinion, holding that the District Court was wrong and that the agents were properly classified as independent contractors.  Ultimately, that is good news for insurance carriers with independent contractor agents.  The Sixth Circuit’s opinion may also help companies of all kinds using independent contractors because it emphasizes that significant weight should be given to situations where the two parties expressly state their intent to have an independent contractor relationship—a reminder that companies should use independent contractor agreements.

However, the opinion also opens up the analysis of independent contractor status to new arguments on both sides by holding that the weight given to the independent contractor factors should vary depending on the legal context of the inquiry.  As an example, it states that because financial benefits were at issue in Jammal, the factors examining financial structure should carry more weight than those considering the right to control.  This holding creates a twist in the independent contractor analysis, allowing either side to argue that the factors that are in their favor should be given more weight than those that are not.  The Jammal case has been closely watched since 2017, and carriers and defense lawyers alike are breathing a sigh of relief at the outcome.

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