A federal judge in Ohio recently issued a ruling that may have a profound effect on carriers that write policies through captive agents.

In a class action lawsuit, captive agents of American Family Insurance Company argued that the insurer misclassified them as independent contractors when they actually qualified as employees under the Employee Retirement Income Security Act (ERISA). American Family, the 13^th largest property-casualty carrier in the U.S. with operations in 19 states, argued that the agents are independent contractors who retain full control of their agencies, as set forth in the parties’ agent agreement.

In reaching its decision that the agents are employees rather than independent contractors, the court examined several factors from a previous U.S. Supreme Court case that considered whether a captive agent classified by an insurer as an independent contractor should have been classified as an employee for ERISA purposes. According to the court, some of the factors, such as the agency’s investment in its business and payment by commissions, weighed in favor of independent contractor status. Other factors, however, such as the length of the parties’ relationship and the fact that the captive agents’ work is the core business of the insurer, weighed in favor of employee status.

The Big “I” prepared a summary of the various tests used when determining whether a worker is properly classified as an employee or independent contractor, as well as a memo with tips for complying with the federal Fair Labor Standards Act in terms of worker classification, non-exempt vs. exempt status and calculating overtime. Access these documents by logging in to the Big “I” website—they’re available only to Big “I” members.

In the American Family case, the court put the greatest weight on American Family’s control—both the control it actually exercised and the control it reserved the right to exercise—over the captive agents. While acknowledging that other judges have concluded that captive agents are independent contractors and not employees, the court ruled that “none of the factual scenarios presented in any of the cited cases show retention of the same level and breadth of control by the Company that was evidenced in this case.”

The court emphasized that American Family controlled the captive agents’ employment opportunities—for example, by retaining ownership of all business, prohibiting agents from selling for other companies, discouraging any outside employment, and requiring non-compete agreements with agents and agents’ staff. Moreover, the court ruled that American Family trained its managers to believe they were the agents’ bosses, would be judged by the agents’ successes and failures, and had the authority to approve and demand compliance with the agents’ business plans and assign additional projects unrelated to the sale of insurance products.  

The court’s ruling did not address the question of how much American Family may owe to the captive agents as a result of the misclassification. The captive agents’ attorney asserted that the damages could reach $1 billion, according to reports. Given that the court’s ruling is contrary to decisions reached in similar lawsuits, the court permitted an immediate appeal to the U.S. Court of Appeals for the Sixth Circuit prior to ruling on the captive agents’ damages. The Sixth Circuit hears federal appeals from Kentucky, Michigan, Ohio and Tennessee.

If the court’s ruling stands, it will immediately affect the classification of captive agents within the Sixth Circuit’s jurisdiction and could have a ripple effect elsewhere in the country. Although the court only determined classification under the ERISA statute, the factors the court examined are commonly considered when determining worker classification under other federal and state statutes.

Joseph Doherty is Big “I” associate general counsel.