Playing Fast and Loose With "Contractors" May Get Your Agency in Trouble

Trey Wood III
November 1, 2007 — 2,365 views  
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In certain situations, employers that wish to avoid the hassle and expense of bringing on additional employees will simply enter into “independent contractor” agreements with individuals and have them perform the services desired. But does the parties’ agreement that their relationship will be considered an independent contractor relationship make it so? More often than not, the answer is “no” leading to potentially crippling liability for the owner of the agency. This was recently discovered by Bankers Life & Casualty Company in a class action lawsuit filed against it by one of its “independent contractors.” Background of the Case: Holly Paradise is a Los Angeles resident who was an insurance agent for Bankers Life for approximately two years. Other “independent contractors” such as Ms. Paradise comprised a sizable part of Bankers Life sales force, marketing its products primarily to senior citizens. The relationship between Bankers Life and its insurance agents are governed by a form agent contract which includes the following conditions: 1. [The contract] shall not create an employer-employee relationship. The relationship of Agent to [Bankers Life] shall be that of independent contractor. 2. While [the contract] is in effect, the Agent has the authority to: a. Solicit applications for insurance policies to be issued by [Bankers Life] and payments made thereon, and issue receipts for the monies collected, b. Deliver policies issued by [Bankers Life] on applications received, if the first premium has been paid, c. Give service to policy holders to maintain the policies in force, and d. Solicit applications for reinstatement of lapsed policies. 3. As compensation in full for the performance of services of the Agent as authorized in [the contract], [Bankers Life] will pay commissions as set forth in [commission schedules attached]. 4. Either party may terminate [the contract] at will, without cause, by giving notice to the other party of the intention to terminate. 5. During the term of [the contract] and for 24 months thereafter, within the territory regularly serviced by the branch sales office of [Bankers Life] where the Agent normally submits business, the Agent shall not…induce or attempt to induce…any agent, branch sales manager, divisional vice president or employee of [Bankers Life} to contract with or sell insurance with any company not affiliated with [Bankers Life]. Despite what the contract says, Paradise has alleged that Bankers Life retains and exercises a high degree of control over the insurance agents in marketing and selling products. This control is purportedly exhibited in policies and procedures that all insurance agents are systematically required to follow. Therefore, Paradise claims in the suit that she and the other class members she represents (numbering in the hundreds) were actually employees of Bankers Life and entitled to the same benefits provided to other Bankers Life employees such as unemployment insurance withholdings, disability insurance withholdings, social security contributions, workers compensation premiums, medical insurance premiums, 401(k) contributions, license fees, errors and omissions insurance premiums and other necessary expenses and losses. While this lawsuit has not yet been fully adjudicated, the U.S. District Court in Illinois, where the case is pending, has recently certified the case as a class action. With hundreds of class members, it is easy to see how this could potentially cost Bankers Life millions and millions of dollars. Employee or Contractor?: Courts and governmental entities have relied upon a test developed by the IRS to determine whether a worker is an employee or an independent contractor. The test has 11 main factors that are organized into three main groups: behavioral control; financial control; and the type of relationship between the two parties. Behavioral control covers facts that show whether the business has a right to direct and control how the work is done through instructions and/or training. Generally, an employee is subject to the business' instructions regarding when, where and how to work, and is usually trained by the business to perform the task in a particular manner, whereas an independent contractor would not be subject to this kind of behavioral control. Financial control focuses on whether the business has a right to control the business aspects of the worker's job. Factors examined are: 1) the extent to which the worker has unreimbursed business expenses; 2) the extent of the worker's investment; 3} the extent to which the worker makes his or her services available to the relevant market; 4) how the business pays the worker; and 5) the extent to which the worker can realize a profit or loss. For example, independent contractors are more likely to have unreimbursed expenses, be available to work for others in the relevant market, and make a profit or loss. The last group is the type of relationship that exists between the worker and the business. Are there written contracts describing the relationship the parties intended to create? Does the business provide the worker with employee-type benefits, such as insurance, a pension plan, vacation, or sick pay? Is there an expectation that the relationship will continue indefinitely rather than for a specific project or period? The last factor in this group is the extent to which services performed by the worker are a key aspect of the regular business of the company. An employee is more likely to have a permanent relationship with a company than is an independent contactor, and an employee is more likely to provide services that are a key aspect of the business. Conclusion: The use of independent contractors, if done correctly, can benefit everyone concerned – the independent contractor and the employer. However, those benefits can be negated, at least for the employer, in the event of litigation and a finding that the relationship is actually that of employer/employee. A review of the factors listed above in conjunction with an examination of the true relationship between the employer and the independent contractor will avoid such pitfalls, which will be especially important in a climate of increasing litigation and legal risks.

Trey Wood III


Trey has made it his professional mission to assist clients in maximizing employee relations and minimizing employee claims. This means being attentive to a client's needs and providing the type of advice that will fit within the framework of an individual client's own philosophy.