American Family Appeals Agent/Employee Classification Ruling

A federal appeals court in Ohio on July 31 heard arguments by opposing attorneys in a class action dispute over whether agents working for an insurance carrier on an exclusive basis should be classified as independent contractors or as company employees.

The 6th U.S Court of Appeals in Cincinnati has agreed to consider an appeal of the district court’s interlocutory opinion in Walid Jammal, et al. v. American Family Ins Co, et al., which found that the plaintiff insurance agents are American Family Insurance Group employees as opposed to independent contractors.

Following a 12-day trial in April 2017, a federal advisory jury in United States District Court for the Northern District of Ohio concluded that Madison, Wisconsin-based American Family Insurance Group had misclassified thousands of sales agents as independent contractors.

In July 2017, Judge Donald Nugent affirmed that finding. He wrote in his order that the presented evidence “supports a finding that the American Family agents defined in the class description should have been classified as employees and not independent contractors.”

However, Nugent authorized the parties to take an interlocutory appeal of the order and stayed the case pending the outcome of the appeal.

He wrote that such an appeal “may materially advance the ultimate termination of the litigation because: (1) there was evidence supporting both sides in this case; (2) prior case law has been nearly unanimous in finding that insurance agents generally are to be classified as independent contractors; (3) the repercussions of this finding are so far-reaching; and, (4) the resolution of damages will be unusually complicated.”

The case was originally brought by four former American Family agents, and its outcome will impact the retirement benefits for nearly 7,000 current and former agents.

Plaintiffs in the class action had alleged that American Family avoids complying with the Employee Retirement Income Security Act of 1974 (ERISA), the federal law that protects retirement benefits, by improperly classifying its agents as independent contractors when they are actually employees.

The arguments before the federal district court had centered on the degree of control that the company held over its sales agents.

Judge Nugent wrote: “In order to determine employment status under ERISA, courts are instructed to look at the degree to which the hiring party retains the right to control the manner and means by which the service is accomplished.”

The agent agreement with the company states that agents are independent contractors responsible for payment of taxes and having the right to exercise independent judgement in how they conduct their business. As independent contractors, the agents are not eligible for workers’ compensation and unemployment benefits.

However, plaintiffs argued, while the company on paper regards them as independent contractors, company managers routinely direct the ways and means by which agents do their jobs, sometimes forcefully. The agents are required to purchase the items necessary to run their agencies but are not allowed to sell the agency if they decide to terminate their relationship with American Family.

American Family maintained that its managers work with agents only on sales goals and the outcome of those goals, not on how agents achieved them.

In lieu of the retirement plan offered to American Family employees, “testimony showed that agents were offered an ‘extended earnings’ benefit based on their years of service,” Judge Nugent wrote. “This plan offered a lifetime annuity, and was described to the agents as a retirement plan.” And in filings with state insurance regulators American Family characterized the extended earnings plan as a “defined benefit.”

The amount an agent could receive from the plan upon leaving the company was based on how many years worked, as well as the amount earned during the last six months of the agent’s “exclusive relationship” with American Family.

Questions asked by the 6th Circuit panel on July 31 indicated that the judges would again be looking at the degree of control the company has over agent activity. Judges also questioned how/whether an agent can be considered an employee when it comes to retirement benefits but an independent contractor for tax purposes. The wide-ranging impact of the case, if any, was also a subject the judges seemed to want to explore.

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