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Independent Contractors by Default?
August 14th, 2017 |

Working in the world of independent contractor compliance, I often hear the phrase “Doesn’t that make him an independent contractor by default?” From MSP program managers to procurement directors and beyond, the desire for a “default” independent contractor status is something I liken to Hollywood’s eternal yearning for the Fountain of Youth. Does a default independent contractor status exist?

A recent decision by a federal court in Ohio has further chipped away at the default dream, adding more complexity to the proper classification of the ever-expanding independent workforce. Prior to an August 1, 2017 ruling by the US District Court for the Northern District of Ohio, there was a certain class of workers often thought to be “independent contractors by default”.  These workers were insurance agents, and legal precedent had repeatedly confirmed that insurance agents working under independent contractor agreements were properly classified as such. The court’s decision in Jammal v. American Family Insurance Group deviated from that legal precedent, and common industry practice, by finding that this group of insurance agents were employees, rather than independent contractors, and therefore may be eligible for pension and employment benefits under the Employee Retirement Income Security Act of 1974 (ERISA).

The court relied on the Darden factors in their analysis. The Darden factors were derived from the Supreme Court decision Nationwide Mutual Insurance Co v. Darden, 503 U.S. 318, 320-21(1992), in which the Supreme Court applied certain non-exclusive factors to test the relationship between worker and company to determine whether an employment relationship existed. While the court in Jammal noted that certain Darden factors did lean toward independent contractor classification, their ultimate decision focused on the amount of control that American Family exercised over its agents in their performance of services, which included extensive training, control over employment opportunities, and control over job performance.

The problem with the default status dream is that it is not simply one agency or one court system creating the rules by which employers must properly classify their workers. Worker classification can be challenged for multiple reasons by multiple parties; the IRS, Department of Labor(DOL), state unemployment agency, a federal court, etc.  Even though the IRS has proclaimed that direct sellers (a category in which insurance agents could be included) are statutory non-employees/ independent contractors by default, that applies for federal tax purposes. The DOL could disagree and apply their own rules for their own purposes of determining proper classification of an insurance agent. While the IRS uses their 20 factors, the Fair Labor Standards Act uses an economic realities test. The rules by which unemployment benefits are granted vary from state to state and different tests may be used to determine whether a worker should have been eligible for unemployment. This is the complicated world of independent contractor compliance validation. Fortunately, expert service providers like TalentWave can help enterprise companies to navigate through this confusing and contradictory landscape of rules and regulations.

In Jammal, it was a court that was determining whether an employment relationship existed for purposes of eligibility under ERISA. That the IRS had deemed many insurance agents as direct sellers, and therefore default independent contractors, was not used as the determining factor in the Jammal decision.

So, what does this mean for employers, MSP managers, and procurement directors who must deal with this confusion? When a court departs from consistent precedent, it is crucial that employers review their current independent contractor classification process and ensure that it is in compliance with the most recent laws, rules, and regulations. A proper program should encompass not just one test of independent contractor classification, but incorporate many methods so that regardless of the agency reviewing the classification or court jurisdiction of a particular claim, an employer can rest assured that their workers are properly classified. This is the approach TalentWave takes on behalf of our clients. The ruling in Jammal further advocates the view that independent contractor classification should be determined on a case by case basis, taking into account the specific characteristics of each worker and engagement, and warns against applying a blanket, default classification to a certain type of worker, regardless if industry standard and legal precedent has advised otherwise.

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