December 17, 2021

Insurance Agents as Independent Contractors: Best Practices To Preserve This Status

There are multiple benefits to insurance companies from utilizing an independent contractor model with its insurance agents. These include, for example, typically not having to supply office space, equipment or benefits, as well as avoiding state unemployment and workers’ compensation insurance obligations. The independent contractor status also should allow the company to steer clear of myriad employment law issues while affording greater flexibility and independence to the insurance agent. 

However, there continues to be litigation over challenges to these classifications. For example, on November 3, 2021, an insurance agent filed a complaint in the U.S. District Court for the Middle District of Florida, alleging that the defendant insurance company misclassified her as an independent contractor and owes her unpaid wages. Wilkie v. Fla. Fin. & Ins. Grp., LLC, 2:21-cv-00815 (M.D. Fla.). Thus, it is prudent for insurance companies that classify insurance agents as independent contractors to evaluate whether they could successfully defend this classification. 

The key inquiry as to whether insurance agents are properly classified as independent contractors — rather than employees — is the company’s degree of control over the means and manner of the insurance agent’s performance. Insurance companies should consider the following factors relevant to this issue: 

  • The applicable agent agreement. An agreement explicitly referencing an independent contractor relationship reveals the intent to establish such a relationship. However, memorialization in the contract may not be sufficient, as the parties’ conduct can undermine the agreements’ terms.
  • The source of the materials, tools and personnel used. Establishing that insurance agents are responsible for obtaining and maintaining a license to sell insurance and supplying their own office space and equipment support the independent contractor status. 
  • Insurance agents’ control over staffing. Courts are more likely to find that insurance agents who have the authority to hire or fire their own employees are independent contractors.
  • The economic aspects of the relationship, such as the method of payment, the provision of employee benefits and the tax treatment of the insurance agent. Agents that are paid exclusively by commission, responsible for paying their own self-employment taxes, and not entitled to benefits or formal vacation or leave policies are more likely to be considered independent contractors. See, e.g., Hernandez v. Combined Ins. Co. of Am., No. 2-20-00225-cv, 2021 WL 520456 (Tex. App. Feb. 11, 2021); Fox v. Nationwide Mut. Ins. Co., 117 N.E.3d 121 (Ohio Ct. App. 2018). 

Although limiting control over the agent’s means and manner of performance furthers the independent contractor relationship, courts nonetheless have recognized that insurance companies may impose certain restrictions without forfeiting their agents’ independent contractor status. These include the following:

  • Company authorization before discharge of any insurance contract. For example, in Mears v. Jones, 756 F. App’x 404 (5th Cir. 2018), the Fifth Circuit rejected the argument that requiring an insurance agent to receive authorization from the insurance company before discharging any insurance contract created an employment rather than independent contractor relationship. 
  • Compliance with company guidelines and instructions. The Mears court also concluded that an insurance company can require an agent to comply with company guidelines and instructions without altering the agent’s status as an independent contractor when the company did not dictate the manner in which the agent sold the insurance, prescribe the agent’s sales technique or dictate how the agent solicited customers. 
  • Noncompete, nonsolicitation and confidentiality provisions. Courts also have held that including noncompete, nonsolicitation and confidentiality provisions in insurance agent agreements does not necessarily alter the agent’s independent contractor status. See, e.g., Guidry v. Allstate Fire Cas. Ins. Co., No. 18-6660, 2019 WL 1002537 (E.D. La. Mar. 1, 2019); Hernandez, 2021 WL 520456. 

Utilizing the independent contractor model with agents provides multiple benefits. For those companies seeking to maintain this independent contractor designation, careful consideration of the factors discussed above should better their defense against potential challenges to this model.

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