A recent California Court of Appeals decision is good news for employers—especially insurance companies. The court’s opinion provides a blueprint for how these employers should treat their agents to establish and maintain their status as independent contractors. The case was especially notable because the court dismissed it, in the employer’s favor, before trial.

Insurance Agent Files Class Action

"Sue" was a nonexclusive insurance agent for the Mutual of Omaha Insurance Company, appointed to the Mutual’s Concord sales office in Contra Costa County. She first contracted with the company in November 2006. At that time, she also acted as an independent contractor on behalf of two other insurance companies. Sue’s contract with Mutual stated that she was “an independent contractor and not an employee” and that no terms of the contract “shall be construed as creating an employer-employee relationship.”

Sue’s chief duties were to procure and submit applications for Mutual’s products, collect monies, and service clients. Her compensation was based on commission for the products she sold, with a chargeback on any commission paid if the money due for a sale was uncollected or refunded.

Either party could terminate the contract with or without cause through written notification. The contract automatically terminated if Sue did not submit an application for one of Mutual’s products for a period of 180 days.

In March 2008, Sue terminated her relationship with Mutual. She notified the company that she had entered an exclusive contract to represent another insurance company. Sue subsequently filed a class action lawsuit under the California Labor Code on behalf of others employed by Mutual as “licensed agents” or “sales representatives.” The suit sought reimbursement for business-related expenses and waiting time penalties for the untimely payment of final wages.

The trial court dismissed the case before trial. It found that the claims depended on Sue being a former “employee” of Mutual, but she was actually an independent contractor. Sue appealed.

The Test for ‘Employee’

The trial court had applied a test derived from past court cases—known as the “Borello test” or the “economic realities test”—to determine if Sue was an employee.

Under this test (which also applies for purposes of workers’ compensation law and claims under the California Fair Employment and Housing Act), the most significant factor to be considered is whether the employer has control or the right to control the worker both as to the work done and the manner and means in which it is performed.

Additional factors include the following:

• whether the work is part of the company’s regular business
• whether the company or the worker supplies the equipment, tools, and place for the person doing the work
• the worker’s financial investment in the equipment or materials required to perform the work
• the skill required for the occupation
• the kind of occupation, with reference to whether, in the locality, the work is usually done under the company’s direction or by a specialist without supervision
• the worker’s opportunity for profit or loss depending on his or her own managerial skill
• how long the services are to be performed
• the degree of permanence of the working relationship
• the payment method, whether by time or by the job
• whether the parties believe they are creating an employer-employee relationship

A Roadmap for Employers

The Court of Appeals began its analysis by considering whether Mutual had the right to control the manner and means of the services Sue performed. The court found that the employer did not have such control because:

• Sue used her own judgment in determining whom to solicit for applications; the time, place, and manner in which she would solicit; and the amount of time she spent soliciting for Mutual’s products.
• Her relationship with Mutual was nonexclusive, and she in fact solicited to sell products for other companies while working for Mutual.
• Her assistant general manager at the Concord office didn’t evaluate, monitor, or supervise her work.
• The training Mutual offered was voluntary for agents, except as required for legal compliance.
• Agents who chose to physically work out of the Concord office were required to pay a fee for their workspace and telephone service.
• Sue’s minimal performance requirement to avoid automatic termination was to submit only one application within each 180-day period.

Moreover, the additional factors of the test also weighed in favor of an independent contractor relationship. For example, although Mutual could terminate the relationship at will, it’s perfectly acceptable for independent contractor agreements to incorporate termination-at-will clauses—the presence of such a clause by itself isn’t an adequate basis for changing the relationship to employee-employer.

The court further noted that Sue was responsible for her own tools and resources she used to perform her job. And although the company paid its agents in “a systematic way every two weeks,” the payment was based on her results, not the amount of time she worked on Mutual’s behalf. Arnold v. Mutual of Omaha Ins., Calif. Court of Appeals (Dist. 1) No. A131440, (2011).

9 Tips to Protect Yourself

Don’t leave your independent contractors’ status to chance. Here are some tips for clearly establishing that workers are indeed independent contractors:

1. Clearly define the relationship in an independent contractor agreement.
   
2. Use the appropriate tax forms, including IRS Forms W-9, 1099, and 1096, and Form DE 542 for California.
   
3. Don’t hire former employees as independent contractors.
   
4. Use contractors only for work that isn’t part of your core business.
   
5. Only use contractors who have their business formalities in place (for example, a business name, business cards, invoices on letterhead).
   
6. Pay by the job, not by the time.
   
7. Don’t supervise contractors in the same way that you do employees.
   
8. Limit the duration of the relationship.
   
9. Don’t be the contractor’s sole source of income.

Practice Tip: Remember that simply designating a worker as an ‘independent contractor’ in your records or even a formal contract won’t decide the matter if the nature of the job indicates he or she is actually an employee.