Ruling on Independent Contractors Helps Employers

Posted on Fri, Feb 03, 2012

A recent Californiacase provides employers with a good checklist on how to treat workers, such as salespeople, so the employer can maintain an independent contractor relationship.

Arnoldv. Mutual Omaha Insurance Company, 2011 WL 6849652 (2011), is the firstCaliforniacase to detail the factors under which insurance agents may properly be classified as independent contractors.

The court of appeal applied the “right of control” test: Does the employer have the right to control the manner and means by which the individual performs his work? This is a common test applied by courts and some government agencies to determine whether a worker is an independent contractor or actually an employee.

Employers face significant consequences for misclassifying workers as independent contractors when the workers are really employees. Employers could be liable for employment taxes and penalties, and liable for failing to fulfill the many legal obligations owed to an employee, such as wage and hour requirements. Government agencies, such as the U.S. Department of Labor and the Internal Revenue Service, have stepped up their enforcement efforts to stop misclassification.

Non-Exclusive Insurance Agent Claims She Is an Employee

Kimbly Arnold worked as an insurance agent for Mutual of Omaha Insurance Company (Mutual). She had a non-exclusive arrangement, meaning that she was authorized to offer products from Mutual, but was also allowed to offer (and did offer) products from different companies.

After working with Mutual for a little over a year, she entered into an exclusive employment relationship with another insurance company that prohibited her from continuing to represent and offer Mutual’s products.

Arnoldthen filed a class action lawsuit against Mutual, claiming that she, along with other Mutual agents and sales representatives were employees, not independent contractors. As employees,Arnoldclaimed that these agents were entitled to reimbursement for business expenses and to waiting time penalties for unpaid final wages.

Factors Point to Independent Contractor Status

The court examined the evidence presented by Mutual and found that Mutual exercised little control overArnold(or over the other agents). “Mutual had no significant right to control the manner and means by whichArnold” sold its products, according to the court, and as a result, Arnold and the other agents were properly classified as independent contractors.

The following factors, as a whole, were persuasive to the court:

  • Arnoldsigned a contract with Mutual explicitly stating thatArnoldwas an independent contractor. Both parties believed they were creating an independent contractor relationship at the start of the arrangement.
  • Arnoldused her own judgment in how she would do her work, including:
  • Determining who she would solicit for applications for Mutual’s products;
  • The time, place and manner in which she would solicit; and
  • The amount of time she spent soliciting for Mutual’s products.
  • Arnold’s appointment with Mutual was non-exclusive, and she, in fact, sold for other insurance companies during the same time as she worked for Mutual.
  • No one at Mutual monitored or supervisedArnold’s work or evaluated her performance.
  • The only minimal performance requirement in the agreement was thatArnoldhad to submit one application for Mutual’s products within each 180-day period.
  • Training offered by Mutual was voluntary for agents. The only mandatory training was compliance training required by state insurance law.
  • Office space was available to Mutual agents on an optional basis. However, the agents had to pay a fee for the workspace and for telephone service.
  • Mutual did not provide business cards, vehicles or computers, free of charge. Mutual also did not pay or reimburse for business expenses.
  • Arnold’s payment was based on her results, not the amount of time she spent working on Mutual’s behalf.
  • Arnold was engaged in a distinct occupation and was responsible for maintaining her own insurance license.

The court also rejectedArnold’s argument that inclusion of “at-will” language in the independent contractor agreement changed the relationship to one of employee. “A termination at-will clause for both parties may properly be included in an independent contractor agreement, and is not by itself a basis for changing that relationship to one of an employee,” the court noted.


Helpful Decision

Based on the above set of facts, the court gave Mutual the news employers facing class actions always want to hear — the lawsuit will be dismissed before trial.

Companies that use sales agents to sell their products and want to confirm that they have properly set up an independent contractor arrangement can look to the factors above to analyze their arrangements.

Employers should be mindful that different government agencies may apply different tests for analyzing the independent contractor relationship. The potential liabilities and penalties are significant if an individual is treated as an independent contractor and later found to be an employee. Each working relationship should be thoroughly researched and analyzed before independent contractor status is established, and employers should seek legal counsel if they have any questions or concerns.

Best Practices

  • Use an independent contractor agreement, preferably drafted by legal counsel.
  • Avoid controlling the manner and means by which the worker performs his/her work.
  • Have the worker use his or her own tools, equipment and supplies.
  • Do not reimburse expenses.
  • Make sure your independent contractors have the ability to, and in fact do, work for other clients.
  • Avoid long-term relationships with any one independent contractor without any break in work.
To learn about the Consequences to Misclassification order HR Allen's HRCalifornia Express for more information.


Labor Commissioner Posts Updated FAQ on New Wage Notice

California employers have struggled with a new state law that took effect this year. The law requires employers to provide nonexempt employees with a notice at the time of hire that lists specified wage information.

To help answer questions from employers, the Labor Commissioner issued an updated “Frequently Asked Questions (FAQ) Wage Theft Protection Act of 2011 - Notice to Employees” in late January.

Employers had questions on how to put the new notice into practice and how to comply with the law, and sought guidance on several issues, including:

  • What should an employer do if the employee has multiple hourly pay rates or piece rates?
  • Does the rate of pay required on the notice include other compensation for work performed?
  • When does a “hire” occur for purposes of providing the required notice?

The Labor Commissioner prepared a notice for employers to use, and the notice contains all required information plus other information the Labor Commissioner deems “material and necessary.” The new notice is also available for download from HR Allen Consulting Services.


Author: CalChamber/HR Watchdog

HR Watchdog, HRCalifornia’s Employment Law Blog, © California Chamber of Commerce.

Tags: New CA Employment Laws 2012, New California Employment Laws 2012, 2012 California Laws, New Wage Notice Form, New Wage Notice, California Wage Notice