Court Finds That Insurance Agents Were Independent Contractors As A Matter Of Law

As we have noted in prior blogs, litigation involving alleged independent contractor status is on the rise, and is increasingly the topic of class action claims. Plaintiffs in these cases tend to argue that they were misclassified as independent contractors and were improperly denied their rights as employees, ranging from employee benefits to overtime to the right to assert certain types of discrimination claims. In several industries these challenges have proven successful, but a recent California case reflects that victory for the plaintiffs is far from a certainty.

In Arnold v. Mutual of Omaha Insurance Co.pdf., Case No. A131440 (Cal. 1st App. Dec. 30, 2011), the plaintiff sought to bring a class action against insurer Mutual of Omaha, with which she had been an agent. She claimed that although classified as an independent contractor agent, she was in fact an employee and had been denied the incidents of an employment relationship under California law, such as the right to reimbursement of business expenses and immediate payment of wages upon termination. The claims were brought solely under California law.

The trial court granted summary judgment, and the court of appeals affirmed. The court of appeals held that in California a common law test was to be used to determine independent contractor status. The primary focus of the common law test was whether the alleged employer had “the right to control the manner and means of accomplishing the result desired.” Quoting S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341, 350 (1989). Although the right of control was the primary factor, it was not exclusive, and the inquiry might require review of additional factors such as whether the relationship was at will, the intent of the parties, the type of business etc.

The court rejected arguments by the plaintiff that a different (and more favorable) standard should apply under the California Labor Code. Instead, it found that the California Labor Code provisions should be read “with” the common law test for employment.

Applying the common law factors, the court concluded that the agents were independent contractors. It began by examining the plaintiffs’ evidence first, but found that managers generally assisted agents rather than supervise them. The company did not reimburse agents for their expenses and paid them solely by commission. No one dictated how agents made sales or how they spent their time. Further, the contract provided that the relationship was at will and was one of an independent contractor and not an employee. Taken as a whole, the court had “little difficulty” concluding that the Mutual of Omaha agents were independent contractors.

Interestingly, the case was decided solely under California law. The court therefore had no reason to cite, and did not cite, two significant federal cases addressing the same issue of whether insurance agents were independent contractors. See Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992) (applying common law test; agents were independent contractors under ERISA); Barnhart v. New York Life Insurance Co., 141 F.3d 1310 (9th Cir. 1998) (agent was independent contractor and could not recover under ERISA or ADEA).

The Bottom Line: Even courts perceived to favor plaintiffs can be persuaded that agents are independent contractors with the right facts.