Are You Paying Your Agents Properly?

The Basics: Under the Fair Labor Standards Act (“FLSA”), employees are entitled to minimum wage and overtime pay (time and a half for any hours worked over 40 hours in a work week). Additionally, employers are responsible for keeping accurate records of all time worked on a daily basis for each employee.

As set forth more fully below, in limited circumstances, employees may be exempt from some or all of these requirements. These exemptions are narrowly construed. And, employers often mistakenly believe that employees are exempt simply because they view the employee as a “manager” or as being highly skilled, or merely because they have sales duties.

Expensive Mistakes: Mistakes in this area can be very expensive. Wage and hour litigation is on the rise. Some estimate that collective action lawsuits, which are class action lawsuits under the FLSA, are up 70% or more since 2000. Why the dramatic increase? These are claims that are easy for plaintiffs’ attorneys to litigate and they have a great incentive to do so – double backpay for up to three years plus attorneys’ fees!

The Options Available: The safest course of action is to designate employees as non-exempt. This means that the employees are paid at least minimum wage, they are paid overtime, and the employer is keeping accurate records of the time worked on a daily basis. These employees may be paid on either an hourly or a salaried basis. But, keep in mind, even if the employee is paid on a salaried basis, he still must be paid overtime for any hours worked in excess of 40 during a workweek. Outlined below are some other options considered by owners of insurance agencies.

Executive Exemption: An executive employee is one (1) whose primary duty is the management of the enterprise in which he is employed or of a customarily recognized department or subdivision of that enterprise, (2) who customarily and regularly directs the work of two or more other full-time employees (or their equivalent), (3) who has the authority to hire or fire employees or effectively recommend the same, and (4) who is paid at least $455.00 per week on a salary basis. “Salary basis” generally means the employee receives a predetermined amount for any workweek. It does not include commissions, incentives, or other compensation.

Therefore, if you have a manager who supervises two full-time agents, or four part-time agents, they may qualify for this exemption if they meet the other three requirements outlined above. Most agents will not fit into this category.

Administrative Exemption: An administrative employee is one (1) whose primary duty is office or non-manual work which is directly related to the management or general business operations of either the employer or the employer’s customers, (2) whose primary duty includes the exercise of discretion and independent judgment with respect to matters of significance, and (3) who is paid at least $455.00 a week on a salary basis.

In large agencies, there may be an office manager or other manager who qualifies for this exemption. However, secretaries, clerks, sales people, customer service representatives, and most other employees do not normally qualify for the exemption.

Outside Salesmen Exemption: An exempt “outside salesman” is one (1) whose primary duty is making sales or obtaining orders or contracts for services or for the use of facilities, and (2) who is customarily and regularly engaged away from the employer’s place(s) of business in performing that duty. There is no requirement that such employee be paid in any particular way. Therefore, this could be a 100% commissioned employee. However, pay particular attention to the second requirement for this exemption. Customer service representatives and licensed agents who generally work in the office and only occasionally visit customers or prospective customers do not qualify for this exemption.

Retail Exemption: Another common error is the assumption that paying an employee on a commissioned basis means that the employee is exempt from the FLSA requirements, discussed above. There is an exemption known as the “retail” or “Section 7(i)” exemption that applies to certain types of retail sales. However, the Department of Labor has included insurance businesses on a partial list of establishments that it believes lack a “retail” concept necessary to qualify for this exemption. While the DOL interpretation is not binding on the courts, the DOL interpretation makes use of this exemption risky in the insurance industry. Fisher & Phillips has requested that the DOL issue an opinion letter acknowledging that today the insurance business can be of a “retail nature.” Unfortunately, there is no indication as to if or when such an opinion will be issued.

Independent Contractors: In some cases, insurance agents are classified as independent contractors. Such a classification may be risky and should only be used after careful consideration with legal counsel, especially since an individual’s status could be different under different laws. Independent contractors are not covered by the FLSA. However, if an individual is mistakenly classified as an independent contractor, then as a result of litigation or an IRS or DOL audit, the employer may be subject to significant damages, back taxes with interest, and penalties. Another risk of hiring independent contractors is that they can sue you for negligence if they are injured on the job. This is something employees covered by workers’ compensation normally cannot do.

To determine whether an individual is an “employee” under the FLSA or an independent contractor, the courts generally look to see whether the independent contractor follows their own trade, business, or profession – in other words, they are looking to see whether the individual is in business for themselves. While there is no single, clear-cut test for classification, there are a number of factors that are generally looked at to determine whether an individual is properly classified as an independent contractor. For example, the IRS is more likely to classify an individual as an independent contractor if he:

• Can earn a profit or suffer a loss from the activity.

• Furnishes the tools and materials needed to do the job.

• Is paid by the job.

• Works for more than one client company at a time.

• Invests in equipment and facilities.

• Pays his or her own business and travel expenses.

• Hires and pays assistants.

• Sets his or her own working hours.

On the other hand, the IRS is more likely to classify the individual as an “employee” if he:

• Can be fired at any time by the hiring company.

• Is paid by the hour.

• Receives instructions from the hiring company.

• Receives training from the hiring company.

• Works full-time for the hiring company.

• Receives employee benefits.

• Has the right to quit without incurring liability, and provides services that are an integral part of the hiring company’s day-to-day operations.

While the parties may enter into “independent contractor” agreements, this alone is not determinative. For example, if an insurance agency employs an individual as an independent contractor, but exercises significant control over the individual, the individual is likely to be classified as an employee. Additionally, independent contractors typically provide their services to more than one business. Therefore, if the insurance agency restricts the independent contractor’s ability to sell insurance for other insurance agencies, this would be an indication that the individual is an “employee,” and not an independent contractor.

It’s Time For An Audit! The information contained above is only a general overview of very complicated legal issues. Because of the significant increase in litigation in this area, and the potential liability, employers should consult with employment counsel and review the classifications of employees to ensure all are being paid properly under the FLSA and relevant state law.

Hagood Tighe is a Partner in the Columbia, South Carolina office of Fisher & Phillips LLP. Hagood is a regular speaker at state Big I events. He concentrates his practice exclusively in the labor and employment area. He can be contacted at (803) 255-0000. Fisher & Phillips is a labor and employment law firm working only on behalf of management.

Copyright 2007 by J. Hagood Tighe. Used with permission.