Email Address:       Password:             Forgot your password?

Jammal Vs. American Family Insurance


Read the 44-page opinion from Judge Nugent

Independent Contractor Status at Risk

By Robert O'Connor, NASFA Legal Counsel

Since February, 2013 there has been pending in the United States District Court for the Northern District of Ohio a lawsuit named Walid Jammal v. American Family Insurance Group et al.  Mr. Jammal and several other Plaintiffs filed the action seeking a determination that they were employees under the Employee Retirement Income Security Act of 1974 (ERISA).  Named as Defendants were most if not all of the American Family Insurance Companies and its affiliates as well as the other employee benefit plans such as 401(k) Plan, Group Life Plan, Group Health Plan, Group Dental Plan, and Long Term Disability Plan.

This is a very important case to State Farm Agency.  The American Family Agent's Agreement and the way American Family treats its agents is very similar to the State Farm Agent's Agreements and the way State Farm treats its agents.  As a consequence the decision in this case; that American Family agents are in fact employees for purposes of ERISA is very important to all State Farm agents.  It has always been the position of NASFA that the best way to sell State Farm Insurance is through independent contractor agents.  Part of the NASFA Articles of Incorporation and By-Laws include statements to that effect.  NASFA is always in favor of the independent contractor relationship.  Thus this opinion finding the agents of American Family to be employees would signify a very bad precedent for State Farm agents.

The Jammal suit was initially filed in February 2013.  Thereafter almost immediately American Family sought to have the case dismissed.  Those Motions to Dismiss were overruled and the next issue before the Court was whether or not it could proceed as a Class Action.  A Class Action generally speaking in the Federal Court System is an attempt to minimize the duplicity of lawsuits necessary for each person similarly affected to have their case decided. In other words, a class representative is selected, in this case Mr. Jammal and several others, to represent all of those past and current American Family agents who had a similar contract and were similarly adversely affected by their treatment as independent contractors rather than employees.  The Complaint was amended several times and ultimately the claims that were permitted to go forward included claims that the purported members "were employees" for all purposes and based upon that finding of employee status under ERISA that they are entitled to reformation of their contracts and restitution of benefits that other American Family employees enjoy.  Count II sought injunctive relief to prevent or require American Family to reclassify them as employees and thus receive the benefits.  Count III was a claim for benefits under the Termination Benefit Plan, making it a true ERISA pension plan with funding, reporting, disclosure and investing requirements.  Count IV again sought reformation of the contract as well as damages suffered as a result of the misclassification.  Counts V and VI sought damages for failure to provide health and welfare benefits, retirement plan, 401(k) plan, group health, dental and life.

After Motions for Summary Judgment were for the most part overruled, a jury trial was held from April 3 through April 18, 2017.  An advisory jury was impaneled to listen to the testimony and answer one simple question "Please answer the following question "Yes" or "No" according to your findings:  Did Plaintiffs prove by a preponderance of the evidence that they are employees of Defendant American Family?"  The jury answered that question in the affirmative.  It was then up to the Judge to determine whether or not he was going to be bound by that advisory jury verdict determination.

On August 1st, Judge Nugent filed a 44 page written opinion (available on the NASFA website) adopting the juries determination and explaining the legal basis for his findings.

Ultimately, the legal basis in every ERISA case determining employment status Courts are instructed to look at the degree to which the hiring party retains the right to control the manner and means by which the service is accomplished.  That rule or requirement comes from the Supreme Court decision in 1992 in Nationwide Mutual Insurance Company v. Darden.  The Court of Appeals for the Sixth Circuit, in which Ohio sits, has consistently held that a worker can be classified as "an employee if the employer retains the right to direct or control the manner and means of work, even if it doesn't exercise that right."  The Darden case outlines eleven factors that a Court should consider when deciding whether the hiring party retains the right to control the manner and means by which the service is accomplished.  These include:

  1. The skill required;
  2. The source of the instrumentalities and tools;
  3. The location of the work;
  4. The duration of the relationship between the parties;
  5. Whether the hiring party has the right to assign additional projects to the hired party;
  6. The extent of the hired party's discretion over when and how long to work;
  7. The method of payment;
  8. The hired party's role in hiring and paying assistants;
  9. Whether the work is part of the regular business of the hiring party;
  10. The provision of employee benefits; and
  11. The tax treatment of the hired party.

Judge Nugent then goes on to analyze the evidence presented in light of those eleven requirements.  You can read his exact analysis in the opinion.  For purposes of this article, what follows is a summary of those factors the Court found important, which are very similar to the treatment of State Farm agents by State Farm.  In other words, these factors would likely to be found in a case by State Farm agent against State Farm seeking the same type of ERISA finding.

For your information, you should be aware that the American Family Agreement is similar for the State Farm Agreements, contains language which says that the agreement is an independent contractor relationship. The Court noted it but did not find that to be binding or conclusive with regard to defining the relationship.

Similar to the State Farm Agreement, the Court found in the American Family Agreement one the relationship that there is no limit on the duration of the agency relationship; the testimony showed agents were offered an extended earnings benefit based on their years of service; the Company calls its agents "business owners" and "partners" and tells new agents they will be "agency business" owners and they need to "invest in their business."

Agents do not own a book of business; there is no book of business separate and distinct from American Family's business; even during the agency relationship, the Company retains the right to transfer customers to other agents at its own discretion, at any time; an American Family agent cannot sell their agency; it is undisputed that American Family agents are prohibited from selling competitive insurance products; agents must work exclusively for American Family;  American Family discourages additional employment by agents even if it is unrelated to the insurance industry and has threatened to terminate agents in order to persuade them to leave a second job; agents are required to agree to a one year non-solicitation provisions prohibiting them from contacting any customer credited to their account if they separate from American Family; any investment an agent makes to grow his client basis not recoverable if he or she separates from American Family; American Family Management is regularly involved in its agents' office selections and retains a right to approve or disapprove where an agent's office is located.  American Family enforces its right to approve locations and may not allow an agent to open a satellite office in a neighboring town; agents are required to comply with the American Family Code of Ethics; American Family monitors agents' e-mails and computer usage; American Family retained the right to block agency access to websites, including on-line retailers, barred non-American Family computers from accessing the agent's internet, and barred agents and agency staff from using American Family issued computers to access their personal e-mail accounts; managers could use the American Family computer system to track and monitor agent activity on a daily basis; when an agent's relationship with American Family is terminated American Family shuts off computer access and collects the hardware.

American Family Managers could tell agents what staff they could hire; American Family retained the right to approve the hiring of staff and to fire agency staff; American Family imposes qualification standards on agents' appointed staff; American Family required appointed staff be licensed; all agency staff are required to abide by American Family's Code of Conduct, and American Family retains the right to fire any staff for a breach of that Code; appointed staff are required by American Family to sign a non-compete agreement prohibiting them forever from soliciting any policyholder credited to their agency account.

The exception to investment by an agent is a computer provided by the Company; agents are required to pay for all of the other equipment used in their business; American Family also provided agents with "access to on-line tools" and "all branded resources" including office signs, brand and logo, the benefit of national and regional advertising and marketing campaigns and social media content.

American Family also provided agents with a Call Center that was "always available to agents and customers" for 24/7 customer service.  American Family retained the right to approve any advertising; American Family also provided computers and software that agents were required to use; American Family provides each agent with their own American Family agent website and e-mail address which they are required to use as well as other social media; agents are not permitted to use their own website, e-mails or social media.

American Family would enter into subsidy programs for new agents to pay for all of their office expenses, including phone, power, electric, staff expense and a monthly stipend for up to four years.

American Family agents are assigned to a district and geographical territory and must report to an agency sales manager.  American Family's witnesses agreed that the job of the managers is to manage the agents.  American Family's definition of the agency sales manager's job responsibilities makes clear that their role is to manage the agents and implement American Family's sales plan at the agency level.  Agency managers influenced how agents met the goals of American Family.  Agents received annual reviews and had production goals they were required to reach.  There was significant evidence indicating that agents were required to develop business plans incorporating required initiatives and that managers could revise those plans.  Agents were required to do property re-inspections or surveys and personal insurance reviews.  Agents were encouraged to follow certain activities American Family considered to be "best practices".  Plaintiffs presented testimony that showed American Family managers regularly threatened the agents with termination to obtain compliance, and some terminated employees attributed their termination to a failure to follow the "suggested" policies.

From the evidence above described, Judge Nugent then made findings of fact and conclusions of law.  Of those 117 separate findings of fact and conclusions of law, the following are the only ones which are different from the State Farm Agent's Agreement.  The rest of the 117 are substantially similar to how a State Farm Agent works for State Farm. The distinguishable findings are as follows:

  • American Family agents could not work from their homes

  • American Family required agents to provide sales reports, visit homes, participate in call nights, do cold calling, conduct personal insurance reviews, do re-surveys, prepare business plans, service policies without compensation and fill out daily activity and other reports.

  • Agents were sometimes assigned to service policies that they did not bring in, and for which they were not compensated.

  • The "right to assign additional projects" factor under Darden test weighs slightly in favor of employee status.

  • American Family does require agents to work specific times and places for periodic campaign drives, mandatory meetings, and call nights.  They have been trained that they have the authority to enforce participation in these events.

  • American Family managers have the authority to approve or deny agent vacations and have in some instances reprimanded agents for taking vacations or otherwise being absent from the office without approval.

  • American Family agents are, however, supposed to file daily activity reports.

  • American Family managers have the final say over agent's business plan, including productivity goals and means of achieving them.  This impacts the agent's ability to control their own hours.

  • American Family required agency staff to agree to a lifetime non-solicitation agreement.

The ultimate conclusion was for purposes of ERISA the American Family agents are employees.  The comparison of findings of fact and conclusions of law to the State Farm agency is frightening. There are very many similarities. Those similarities put State Farm Agency at risk. It is not in the best interest of State Farm Agents to be classified as "Employees". It is in their best interests to have State Farm reduce its level and amount of control of the day-to-day operations of your agency.

NASFA continues to believe that the independent contractor relationship is best for both State Farm and its agents.  NASFA would never undertake a suit such as Jammal.  Agents, however, need to be aware that this sort of suit is possible.  NASFA continues to urge State Farm to reduce its control over the day-to-day operations of agents' offices.

Read the 44-page opinion from Judge Nugent