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US Judge Rules Sales Agents Are Employees, Not Contractors

By Warren S. Hersch August 9, 2017

A U.S. District Court has ruled that multi-line insurer American Family missclassified thousands of its agents as independent contractors, rather than as employees, according to a Wisconsin State Journal article.

The decision follows on the heels of other lawsuits against major U.S. insurers — including Northwestern Mutual, MassMutual and New York Life — centering on the same issue, although it had no direct impact on those cases.

The decision by U.S. District Judge Donald Nugent for the Northern District of Ohio upholds an advisory jury's verdict against American Family. If sustained on appeal, the ruling would force American Family to pay up to $1 billion in retirement benefits.

In a follow-up decision, the judge also rejected a motion by American Family to decertify a class action suit against the carrier. In rejecting the decertification request, the judged noted that only one of American Family’s producers who testified during the two-week trial, conducted in April, expressed satisfaction with the current independent contractor arrangement, according to the article.

The two decisions could be a major concern for other life-annuity carriers that distribute product through independent agents. Not least among them: Northwestern Mutual.

As reported, a lawsuit seeking class action certification alleging Northwestern Mutual misclassified and underpaid its sales reps is also moving to federal court. Plaintiffs in two similar lawsuits filed against MassMutual and New York Life claim the insurers misclassified sales reps’ employment designations and therefore owe sales reps minimum wages for hourly work and overtime pay.

While ruling in favor of the plaintiffs, Judge Nugent granted the insurer’s motion for an immediate appellate review. The case now goes before the 6th U.S. Circuit Court of Appeals. Pending a decision of the court’s three-judge panel, a restructuring of the carrier's retirement program will be put on hold, according to the article.

Citing the judge's opinion, the piece adds that prior case law exists to support both parties to the suit; and that a final ruling could have a significant industry-wide impact.

American Family Chief Legal Officer Mark Aflable expressed confidence that the appeals court will ultimately support American Family's position, the Journal notes. Also quoted in the piece is American Family's spokesperson, who asserts that the $1 billion figure significantly overstates amounts due the plaintiffs.

If the appeals court sides with the lower court’s decision, retirement benefits would have to be paid to nearly 7,000 current and former agents nationwide — all now plaintiffs to the suit — the article notes. A March 2016 procedural ruling to reclassify the case as a class action suit followed three years of litigation, begun in 2013 with a complaint by four former agents of the Madison, Wisconsin-based insurer.

In his ruling, Judge Nugent supported plaintiffs’ contention that they should be classified as employees. Among the reasons: American Family’s requirements limited the agents’ sales to products from the insurer or those of carriers financially connected with American Family; agents had to abide by a one-year non-compete agreement following their departure from the company; and the insurer circumscribed their business activities and vacation time.

According to the Journal, the judge also noted in his opinion that American Family directed managers to "exercise control" over agents' sales activities — and rebuked them when they failed to do so. Such managerial control, he wrote, is "inconsistent" with the producers' designation as independent contractors, but does align with the status of employees.

In a press statement contesting the judge’s decision, American Family notes that its agents are “solely responsible for the manner and means by which they sell insurance and run their agencies." The carrier adds that, like, other independent contractors, the producers retain ultimate control of their hours, support staff, as well as development and implementation of business plans.

As noted in a 2016 annual report, American Family had $95.6 billion in life insurance in force and $427.5 million in life insurance premiums earned last year.

Read the Wisconsin State Journal article here.

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