Insurance Co. Aces ABC Test to Defeat Worker Misclassification Suit

Insurance Co. Aces ABC Test to Defeat Worker Misclassification Suit

A recent court decision highlights that New Jersey businesses can pass the State’s onerous independent contractor test, provided they have carefully structured their business relationships. In Walfish v. Northwestern Mutual Life Insurance Company, a New Jersey federal court held that independent insurance agents were not employees under the State’s “ABC Test.”

Alleged Worker Misclassification

Plaintiff Fred Walfish (“Plaintiff” or “Walfish”) is an insurance agent associated with Defendants Northwestern Mutual Life Insurance Company and Northwestern Mutual Investment Services, LLC (together, “Defendants” or “Northwestern”), for almost two decades. On August 15, 2016, Walfish filed a one-count putative class action complaint alleging that Northwestern’s method of compensating agents violates the New Jersey Wage Payment Law (“NJWPL”). According to the complaint, Defendants misclassified the Plaintiff and other insurance agents as independent contractors and deducted certain expenses from their commissions in violation of the NJWPL. 

As detailed in court documents, Walfish was a Northwestern financial representative from 1996 to 2016. During that time, he characterized himself as an “outside salesman” who sold both Northwestern policies and policies of approximately twenty other companies to “[his] clients.” Plaintiff filed taxes as a sole proprietorship called “Fred Walfish Insurance.” Walfish was required to develop his own prospects and client lists, and no clients were provided to him by Northwestern. Walfish testified that Northwestern approved his clients’ applications before issuing insurance products and that he was contractually required to recommend Northwestern products over a similar competitor’s product, unless the competitor’s product was in the client’s best interest.

Walfish was expected to meet certain minimum sales levels. While failure to meet those minimums would not necessarily result in termination of a financial representative’s contract, they could result in a waiver of the minimums, a probationary period, or a monetary penalty. He further testified that he was required to keep certain records regarding the suitability of his product recommendations; to maintain his work email signature, business cards, and voicemail with accurate information; to complete certain continuing education and compliance requirements; to attend an annual compliance review and annual staff meeting; and to comply with a “Field Compliance Manual.”

In June 2016, Walfish disassociated with Northwestern. However, he continued to sell other insurance policies to his clients and operate Fred Walfish Insurance.

New Jersey’s ABC Test

In New Jersey, challenges to an independent contractor relationship are resolved in accordance with the so-called “ABC Test” set forth in Hargrove v. Sleepy’s, LLC, 220 N.J. 289, 295 (2015). Under the ABC Test, an individual is presumed to be an employee unless an employer can show that:

• The individual was and will continue to be free from control or direction over the worker;
• The services provided were either outside the usual course of business or performed outside of all the places of business of the enterprise; and
• The individual is engaged in an independently established trade, occupation, profession or business, i.e., the individual’s profession will persist despite termination of the challenged relationship.

Failure to satisfy any one of these three criteria results in an “employment” classification. While the three-factor test is fairly straightforward, it assumes that a worker is an employee. As a result, employers often have an uphill battle when defending wage and hour suits.

Court Finds No Employment Relationship

Applying the ABC Test, the court determined that Walfish was an independent contractor. Accordingly, he was not misclassified and the defendants did not violate the New Jersey Wage Payment Law. 

To satisfy the “control” prong of the ABC Test, “the employer must show that it neither exercised control over the worker, nor had the ability to exercise control in terms of the completion of the work.” Here, the court found that the defendants met their burden, noting that Walfish’s contract stated he was an independent contractor and that Walfish “retained control over the time, place and manner of the services.” 

The court rejected the argument that, by promulgating certain rules to ensure regulatory compliance, Northwestern exercised control and direction sufficient to fail the first prong of the ABC Test. It also did not buy into the premise that the existence of sales minimums alone required a finding of control. “[W]hile Plaintiff was expected to make certain sales minimums, he also testified that failure to meet these minimums would not necessarily result in termination, but rather could result in waiver of the requirement, a probationary period, or a monetary penalty,” the court explained. “A sales incentive structure, and retention of the contractual right to modify that structure, is insufficient to demonstrate control.”

Under the “course-of-business or location-of-work” prong, the employer must demonstrate either that the individual performed work distinct from the entity or performed at some other location. In this case, the court found that prong was satisfied because Walfish did not “regularly report[] to any Northwestern office.”

For the “independent-business” prong, the court examines whether the plaintiff’s “enterprise . . . can continue to exist independently of and apart from the particular service relationship. The enterprise must be one that is stable and lasting—one that will survive the termination of the relationship.” In concluding that this prong was satisfied, the court emphasized that Walfish operated his own sole proprietorship, received income from approximately 20 different insurance companies, claimed tax deductions related to the operation of a business, and continued to operate his business after his relationship with Northwestern ended.

Key Message for New Jersey Employers

Regulators continue to closely scrutinize independent contractor relationships. Moreover, worker misclassification suits are also on the rise. To avoid unintended liability when utilizing independent contractors, it is advisable to consult with an experienced New Jersey employment attorney who can make sure the relationship will stand up to scrutiny.

If you have questions, please contact us

If you have any questions or if you would like to discuss the matter further, please contact me, Dennis Linken, or the Scarinci Hollenbeck attorney with whom you work, at 201-806-3364.