Summary
finding insurance agents independent contractors in part because not subject to restrictions on when they must be at work
Summary of this case from Lockett v. Allstate Ins. Co.Opinion
Nos. C 96-03606 CW, C 99-02074 CW.
November 7, 2000.
ORDER DENYING PLAINTIFFS' MOTION AND GRANTING DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT ON CERTAIN CAUSES OF ACTION
These related cases arise from a decision by Defendant Allstate Insurance Company (Allstate) to terminate all of its insurance agent employees and rehire them as independent contractors under its Exclusive Agent (EA) program. Plaintiffs file a consolidated motion for summary judgment on their claims under California Business and Professions Code § 17200 and for an adjudication that they are "employees" of Defendant under California Labor Code § 2802 as a matter of law. Defendant opposes the motion and cross-moves for summary judgment on Plaintiffs' fourth, sixth, and ninth causes of action in the Desimone action, and on all claims in the McNabb action, arguing that the evidence demonstrates, as a matter of law, that Plaintiffs are independent contractors. The matter was heard on September 15, 2000. Having considered all of the papers filed by the parties and oral argument on the motions, the Court denies Plaintiffs' motion and grants Defendant's cross-motion.
Section 2802, which was originally enacted as California Civil Code § 1969 in 1872, provides:
An employer shall indemnify his employee for all that the employee necessarily expends or loses in direct consequence of the discharge of his duties as such, or of his obedience to the directions of the employer, even though unlawful, unless the employee, at the time of obeying such directions believed them to be unlawful.
Cal. Lab. Code § 2802.
The § 17200 claim is claim nine in the Desimone action and claim one in the McNabb action. The § 2802 claim is claim four in the Desimone action and claim two in the McNabb action.
BACKGROUND I. Factual History
Prior to 1984, Defendant employed its insurance sales agents under the R830 Allstate Agent Compensation Agreement (R830 Agreement). Agents employed pursuant to the R830 Agreement were reimbursed for business expenses through the Neighborhood Service Office (NSO) program. Under the NSO program, Defendant provided its agents with office space, limited secretarial support, and basic office equipment.
In 1984, Defendant ceased to employ new agents under the R830 Agreement. Rather Defendant employed them under the R1500 Allstate Agent Employment Agreement (R1500 Agreement). Instead of the NSO program for agent provisions and reimbursement, Defendant instituted a new set of procedures for reimbursing agents, known as the Neighborhood Office Agent (NOA) program.
Defendant allowed its NSO agents to convert to the NOA program if they so desired. Under the NOA program, agents were entitled to an annual office expense allowance (OEA). Each agent received an OEA of 1.6% of the agent's annual customer premiums.
Defendant provided no compensation for an NOA agent's expenses beyond the amount provided by the OEA. Each agent was responsible for leasing office space, obtaining staff, and purchasing any necessary supplies, using the OEA.
Both the R830 and the R1500 contracts required employees to solicit, sell, and service insurance business exclusively for Defendant and required covered employees to expend all of their business time working for Defendant.
Defendant treated both its NSO agents and its NOA agents as employees for federal and State tax purposes. However, in a case involving an individual agent, Dan P. Butts, the United States Tax Court and the Eleventh Circuit Court of Appeals concluded that the NOA agent was in fact an independent contractor, not an employee, within the meaning of the federal tax code. See Butts v. Commissioner of Internal Revenue, 1993 WL 410704, 66 T.C.M. (CCH) 1041 (U.S. Tax Ct. 1993), aff'd, 49 F.3d 713 (11th Cir. 1995). The Tax Court noted that Butts earned income only through commissions, personally bore the obligation to pay most of his business expenses, leased his own office space, and operated the office with his own funds. In addition, it noted that he was solely responsible for hiring and supervising the personnel working in his office, and established and paid their compensation. The court explained,
Under the [NOA] Agreement, Allstate played no role in determining whether Mr. Butts could or should hire personnel, other than reserving the right to approve personnel retained by Mr. Butts (generally obtained through background checks paid for by Mr. Butts), reserving the right to limit the number of agents who may occupy one office, and providing an administrative requirement that personnel retained by Mr. Butts be routed through a third-party employee leasing company approved by Allstate.
Id. Finally, the court noted that Butts was not restricted to any manner of advertising, and that he used his own style and methods to sell insurance. Taking into account all of these factors, the Tax Court concluded that Butts was an independent contractor. It stated,
The record reveals that the essential purpose underlying Allstate's establishment of the NOA position was to offer Allstate agents the opportunity to distance themselves from corporate control and to permit them to seek maximum profit within their profession by operating with their own business judgment. The price the NOA's were forced to pay to obtain such control over their careers . . . was the willingness to run their own affairs, pay their own expenses, and, ultimately, risk incurring business losses.
Id.
The Tax Court acknowledged that Butts was entitled to an OEA, but noted that the OEA was insufficient to reimburse Butts completely for incurred business expenses, and that Butts was responsible for paying the expenses exceeding his OEA. The court further acknowledged that Allstate had the right to control the level of minimum acceptable sales productivity.
However, it stated that "we believe that the right to control minimum output is distinct from the right to control the manner and means by which such minimum output is achieved." Id. The court also recognized that Allstate demanded that NOAs maintain regular office hours. It concluded that this factor was not dispositive, however, because it found that the requirement "was a broad notion reflecting the Company's concern in providing a high standard of customer service, and in practice and effect was not a mandate that Mr. Butts spend certain specific hours in his office." Id. Finally, the court recognized Butts was required to attend occasional training and development programs, but stated that
these programs were designed to inform NOA's as to the nature and operation of new insurance products, and were not part of a pattern or practice used by Allstate to dictate how NOA's were required to sell insurance. In contrast, the record reveals that as an NOA, Mr. Butts' attitudes and methods of selling insurance, that is, the "when, where, why, and how" of selling insurance, were left to his professional discretion.
Id.
The Tax Court conceded that several aspects of Butts' relationship with Allstate were typical of an employer-employee relationship, such as Butts' lack of a vested interest in the business he produced, Allstate and Butts' long-term relationship, the fact that Butts' work was a part of Allstate's regular business, the at-will discharge provision in the NOA agreement, the statement in the NOA agreement that Butts was an employee, the fact that Butts reported his income as wages on his federal income tax return, and the fact that Allstate provided Butts certain fringe benefits, such as compensated vacation days, participation in an Allstate-funded pension plan, matching funds for a portion of his 401(k) contributions, and payment of his annual insurance licensing fees. The court, however, did not consider these facts significant enough to outweigh the inference that Butts was an independent contractor. It explained,
In drawing this inference we are particularly persuaded by: (1) The high degree of control Mr. Butts exercised over the manner in which he operated his business; (2) the fact that Mr. Butts personally incurred most of his business expenses; and (3) the fact that Mr. Butts bore the burden of risk of loss from his business as an NOA.
Id. The Eleventh Circuit affirmed, based upon the Tax Court's findings and reasoning. See Butts, 49 F.3d at 714.
In 1990, Defendant stopped accepting new agents into its NOA program in California and introduced its EA independent contractor program. Existing NSO and NOA agents were given the option of converting to the EA program.
In 1992 and 1993, two class action lawsuits were filed by former Allstate employees, alleging that Defendant had violated California Labor Code § 2802 by failing to reimburse them for expenses incurred as a result of their employment duties. The two class actions were eventually consolidated into a single action negotiated a settlement with Defendant. The settlement class was defined to include "[a]ll persons who have been active Allstate agents in California under an R830, R1500 or R3000 agreement at any time between January 1, 1990 through April 30, 1996." On the day the settlement was made public, Defendant announced its decision to terminate the employment of all NSO and NOA agents in California. Defendant sent letters to its agents informing them that their employment contracts would be terminated as of April 30, 1996, but that all agents would be offered the opportunity to work with Defendant as independent contractors under the R3001 Exclusive Agency Agreement (the R3001 Agreement). The Desimone and McNabb Plaintiffs accepted the offer to work with Defendant as independent contractors.
The McNabb Plaintiffs also accepted proceeds from the settlement, in consideration for which they released any wrongful termination claims they had against Defendant.
Unlike the McNabb Plaintiffs, the Desimone Plaintiffs opted out of the 1996 State court settlement. Consequently, they were not required to, and did not, release their wrongful termination claims against Defendant. On October 3, 1996, the Desimone Plaintiffs filed this lawsuit, claiming wrongful termination and breach of contract in addition to their claims that Defendant has wrongfully misclassified them as independent contractors.
They alleged that since May 1, 1996, Allstate has treated them as employees by "exercising a degree of control over Plaintiffs' activities that prevented them from enjoying true independent contractor status as defined in Labor Code § 3353 and elsewhere, as interpreted by California state and federal courts." Complaint ¶ 77. They further alleged that Defendant's classification of them as independent contractors is a sham designed to avoid Defendant's employer responsibilities under State and federal law and policy.
On October 20, 1997, the Desimone Plaintiffs filed their second amended complaint, in which they alleged the following nine causes of action: (1) breach of the R830 and R1500 contracts; (2) breach of implied contract; (3) breach of the implied covenant of good faith and fair dealing; (4) violation of California Labor Code § 2802; (5) wrongful termination in violation of public policy on the basis of Defendant's violation of § 2802; (6) wrongful termination in violation of public policy on the basis of violations of California's Unemployment Insurance Code, Labor Code, and Revenue and Tax Code; (7) breach of the R3001 contract; (8) intentional misrepresentation; and (9) violation of § 17000 of the California Business Professions Code.
On April 30, 1999, the McNabb Plaintiffs filed suit against Defendant, bringing claims under California Business and Professions Code § 17200 et seq., and under California Labor Code § 2802.
On June 1, 1999, the Desimone Plaintiffs moved for summary judgment on their claim under California Labor Code § 2802. The Court granted Plaintiffs' motion in part and denied it in part.
Specifically, the Court denied Plaintiffs' motion for summary judgment that they had incurred necessary expenses in the discharge of their duties for which Defendant had failed to reimburse them. However, it granted summary judgment that Plaintiffs were employees prior to 1996, relying exclusively on Defendant's admission of such in its answer. With respect to the holding in Butts, the Court noted that Defendant represented to the IRS, in sworn testimony, that its NOA agents were employees and that the facts underlying the Butts action were aberrant and atypical of the work experience of the majority of Defendant's NOA agents. See September 14, 1999 Order on Motions for Summary Judgment at 16 n. 8. Thus, the Court concluded that, prior to January 8, 1996, the Desimone Plaintiffs were employees of Defendant. As previously noted, the McNabb and Desimone Plaintiffs now move for summary judgment that, despite their change in title on May 1, 1996, Defendant has continued to treat them as employees. Defendant cross-moves for summary judgment that Plaintiffs are independent contractors.
II. The R3001 Agreement
The R3001 Agreement under which Plaintiffs have operated since May 1, 1996 states, "You are an independent contractor for all purposes and not an employee of the Company. You will have full control of your time and the right to exercise independent judgment as to the time, place, and manner of performing your duties under this Agreement." Warenski Dec., Ex. 8 ¶ I(B). It further states,
The Company recognizes that you may, in your sole discretion, arrange to have business conducted at your sales location in your absence by your own employees or other persons and that the time during which you are physically present at your sales location is entirely in your sole discretion. You must, however, remain actively involved in the conduct of business at your sales location.
Id. ¶ II(D). With respect to the agents' employees, the agreement also provides, "You have sole and exclusive control over your labor and employee relations policies, and your policies relating to wages, hours, and working conditions of your employees. You have the sole and exclusive right to hire, transfer, suspend, lay off, recall, promote, assign, discipline, and discharge your employees." Id. ¶ III(A). Furthermore, the agreement provides that the agents are "solely responsible" for their employees' salaries and other compensation, as well as for all contributions, taxes, and assessments required to be paid.
See id. ¶ III(B).
Under the R3001 Agreement, the agents are given "sole discretion" to sell Allstate insurance to current or prospective policyholders who are referred to them by Defendant. See id. ¶ IV(A). With respect to sales location, the agreement provides that the agents may select their sales location, within a geographical area specified by Defendant, subject to Defendant's approval. See id. ¶ V(A). It further states, "You agree to keep your sales location open for business as appropriate in the market to provide a proper level of customer service." Id. ¶ V(B). With respect to advertising, the agreement provides that the agents may advertise in their "sole discretion." Id. ¶ VI(A). However, it also requires the agents to submit all signs and advertising copy to Defendant for approval "if they use or contain any reference to any service mark or trade name of the Company." Id. ¶ VI(B). Defendant retains the right to disapprove any such advertising materials if, in the exclusive judgment of Defendant,
they do not conform to Company policy regarding use of Company service marks or trade names; may subject the Company to liability or loss of goodwill; may damage the reputation of the Company or Company customer relations; may fail to adhere to the requirements of any federal, state, or local governmental rules, regulations, or laws; may fail to conform to community or Company standards of good taste and honest dealing; or may be detrimental to the business interests of the Company.
Id. With respect to the agents' performance of other professional services, the agreement provides,
You will not, either directly or indirectly, solicit, sell, or service insurance of any kind for any other company, agent, or broker, or refer a prospect to another company, agent, or broker, without the prior written approval of the Company. You may, however, write applications for insurance under an assigned risk, cooperative industry, or government established residual market plan or facility.
Id. ¶ 1(E).
Under the R3001 Agreement, the agents are responsible for payment of all expenses incurred in the performance of the agreement, and for obtaining certain insurance policies, which must name Defendant as an additional insured. See id. ¶¶ VIII, XI(A)-(B). If, in Defendant's opinion, "such policies do not afford adequate protection for the Company, the Company will so advise you, and if you do not furnish evidence of acceptable coverage within 15 days, the Company will have the right to obtain additional insurance at your expense and deduct the cost of such insurance from monies owed you by the Company." Id. ¶ XI(C).
The agents' compensation is based solely on commissions.
See id. ¶ XIV(A). Commission amounts may be increased or decreased at the sole discretion of Defendant, on ninety days written notice to the agents. See id. "The Company will leave in [the agent's] account all policies credited to [the agent's] account so long as the policyholder resides within a state in which [the agent is] licensed and appointed by the Company, except that the Company may transfer any policy to the account of another agent of the Company when a policyholder has made a request for such transfer." Id. ¶ XII.
The agreement may be terminated "[b]y either party, upon providing 90 days prior written notice to the other." Id. ¶ XVI(B)(2). Agents may transfer their interest in the agreement with the prior written approval of Defendant. See id. ¶ XV(A). If the agreement is terminated for a reason other than Defendant's approval of a transfer of the agent's interest in the agreement, Defendant will provide the agent a termination payment, to be calculated as specified in the R3001 Agreement.
See id. ¶ XVIII.
The Supplement to the R3001 Agreement (Supplement) and the Exclusive Agent Independent Contractor Manual (Manual) are "expressly incorporated in their entirety as part of [the R3001 Agreement]." Id. ¶ 1(D). Defendant "reserves the right to amend the Supplement and Manual at any time without prior notice to [the agent], except that notice regarding changes to commission amounts will be given as indicated in Section XIV." Id.
The 1998 Manual requires agencies to be open from 9:00 a.m. until 6:00 p.m. on weekdays, and from 9:00 a.m. to 1:00 p.m. on Saturdays, except for Company-approved holidays. See EA Program Manuals, Ex. C at 496. It also provides that, when the agency is not open, the agencies must forward their phones to the Allstate Agency Support Center. See id. The 1996, 1997, and 1998 Manuals provide that the EA program is designed for one-and two-agent locations. See id., Ex. A at 914; Ex B. at 711; Ex. C at 504. They also provide, "As an R3001 Agent, you are not permitted to work out of your home as a primary office or place of doing business. Also, your home should not be used as an additional office location." Id. Lastly, the three Manuals provide that the agents' right to relocate is subject to Defendant's approval. See id., Ex. A at 916, Ex. B at 712, Ex. C at 505.
The 1997 Manual states,
The EA program is not designed for absentee owners who maintain a long distance relationship with the agency and Company management. Our expectation is that you will have regular in-person contact with your agency operation during normal business hours and that your primary residence will be within a reasonable proximity to your office. We also expect you to be reasonably available in your market to meet with sales management to discuss market objectives, business results, and to learn of new products, services, policies and procedures.
Id., Ex. B at 701; see also Ex. C at 494 (1998 Manual), Ex. D at 2161-62 (1999 Manual). The 1997 Manual also requires all agencies to complete "Relationship Establishment training." Id., Ex. B at 703. Under the 1996, 1997, 1998, and 1999 manuals, the agencies are subject to annual performance evaluations, during which performance areas such as customer satisfaction, retention, profitability, and growth are considered. See id., Ex. A at 910-11, Ex. B at 704-06, Ex. C at 497-99, Ex. D at 2163-65. The 1997 and 1998 Manuals further provide,
As an R3001 Agent, you will be expected to maintain a professional business relationship with the Company. This includes meeting with Company representatives to discuss various business topics. When a company representative contacts you to arrange for a convenient time for both of you to meet, we expect you to make a reasonable effort to meet with the representative. Also, since you are conducting business with the public under the Allstate name, the Company representative should be welcome to stop by your agency at any time.
Id., Ex. B at 706, Ex. C at 499; see also Ex. D at 2165 (1999 Manual). The 1997 and 1998 Manuals also state, "All agencies must maintain a professional office environment which is suitable for conducting Allstate business. All offices must be neat, clean and well-maintained, and all agency personnel must be dressed in business attire appropriate for the markets they serve." Id., Ex. B at 703; Ex. C at 496.
The 1997, 1998, and 1999 Manuals provide that agents are required to attend certain meetings, including meetings to provide training mandated by the Department of Insurance and "[m]eetings to disseminate information on products, policies, procedures, processes or programs which are necessary to ensure compliance with state and federal laws and regulations, or to avoid legal liability and loss of goodwill in the marketplace." Id., Ex. B at 704, Ex. C at 497, Ex. D at 2163. The 1999 Manual states,
As an R3001 Agent, you may conduct other businesses. However you may not be involved (other than through a financial interest) in any insurance or other business in which insurance products or mutual funds are sold. It is the intent of the Company that any other business conducted by you should be clearly separate and distinct from Allstate in the eyes of the customer. . . . If the business is conducted in your agency location, it must be done in a separate space and the business must be clearly identified by its full corporate name or trade name.
Id., Ex. D at 2170.
According to the 1998 Manual, sales producers licensed as part of an agent's support staff to solicit, sell, and bind insurance for an agency must be approved by Defendant. See id., Ex. C at 511; see also Ex. E at 1164-65 (1995 Manual). "[T]he authority granted by the Company for a support staff member to act as a Sales Producer, including binding coverage, can be withdrawn by the Company at any time in its sole discretion." Id., Ex. C at 511.
In September, 1998, Defendant established certain "agency standards." The agency standards manual provides,
As an Allstate Agent you are responsible for meeting the standards in this manual at all times. For employee agents, failure to adhere to the standards as outlined could lead to disciplinary action, up to and including termination of employment. For independent contractor agents, failure to adhere to the standards could jeopardize your agency relationship with Allstate.
Id., Ex. F at 1239. The agency standards provide guidelines for customer contact and the "relationship establishment" process. With respect to customer contact, the agency standards mandate that the agents contact identified customers by telephone prior to renewal of their contracts. See id. at 1247-48. The agents are required to document that they have called the identified customers. See Millar Dep. at 239:5-240:13 (deposition testimony of Allstate Regional Vice President Frank Millar). In December, 1998, Defendant informed its agents that it was
continuing to stress the importance of customer contact and calling each customer before renewal. By the second quarter new technology will be in place that will let us know whether that phone call was made and how long the call lasted. Its not a trust factor but a survival factor. The competition will be calling your customers. So you had better get to them first.
Warenski Dec., Ex. 24 at 757.
Defendant also regularly conducts promotions, during which the agents must submit to Defendant reports on their sales. See Class Decs. ¶ 11 ("When Allstate conducted promotions, such as life insurance promotions, I generally have been required to report my sales for those products to my agency manager on a regular basis."); see also Warenski Dec., Ex. 24 at 1480 (June 26, 1998 memorandum to all agents stating, "If I do not receive your summer promotion reporting by 3:00 today, I will then have to put "unwilling" by your name. Those are the instructions I have been given by home office."). In 1999, Defendant imposed a requirement that each agent sell at least six "Parts and Labor" policies within a ninety-day period. See Class Decs. ¶ 10; see also Warenski Dec., Ex. 24 at 1087 (May 7, 1999 memo from an agency manager to his district). The agents were required to report on their efforts to sell these policies. See Class Decs. ¶ 10.
According to Defendant, its EAs are divided into markets, with an agency manager for each market. The agency managers report to territorial agency managers.
Since becoming EAs, Plaintiffs have filed their taxes and established their own retirement plans as independent contractors. See De La Rosa Dep. at 161:15-164:17; Gibson Dep. at 76:15-21; Lahey-Leeds Dep. at 96:22-97:4; Pryor Dep. at 235:1-2, 237:6-12.
The parties agree that the foregoing evidence is undisputed. Thus, they urge the Court to determine as a matter of law whether, based on this evidence, Plaintiffs are employees or independent contractors. See S.G. Borello Sons, Inc. v. Department of Indus. Relations, 48 Cal.3d 341, 349 (1989) (the determination whether one is an employee or independent contractor is a question of fact if it turns on the resolution of disputed evidence or inferences; however, if the material evidence is undisputed, the question is one of law).
DISCUSSION I. Legal Standard
Summary judgment is properly granted when no genuine and disputed issues of material fact remain, and when, viewing the evidence most favorably to the non-moving party, the movant is clearly entitled to prevail as a matter of law. See Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Eisenberg v. Insurance Co. of North America, 815 F.2d 1285, 1288-89 (9th Cir. 1987).
The moving party bears the burden of showing that there is no material factual dispute. Therefore, the Court must regard as true the opposing party's evidence, if supported by affidavits or other evidentiary material. See Celotex, 477 U.S. at 324; Eisenberg, 815 F.2d at 1289. The Court must draw all reasonable inferences in favor of the party against whom summary judgment is sought. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Intel Corp. v. Hartford Accident and Indem. Co., 952 F.2d 1551, 1558 (9th Cir. 1991).
Material facts which would preclude entry of summary judgment are those which, under applicable substantive law, may affect the outcome of the case. The substantive law will identify which facts are material. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
Where the moving party bears the burden of proof on an issue at trial, it must, in order to discharge its burden of showing that no genuine issue of material fact remains, make a prima facie showing in support of its position on that issue. See UA Local 343 v. Nor-Cal Plumbing, Inc., 48 F.3d 1465, 1471 (9th Cir. 1994). That is, the moving party must present evidence that, if uncontroverted at trial, would entitle it to prevail on that issue. See id.; see also International Shortstop, Inc. v. Rally's, Inc., 939 F.2d 1257, 1264-65 (5th Cir. 1991). Once it has done so, the non-moving party must set forth specific facts controverting the moving party's prima facie case. See UA Local 343, 48 F.3d at 1471. The non-moving party's "burden of contradicting [the moving party's] evidence is not negligible." Id. This standard does not change merely because resolution of the relevant issue is "highly fact specific." See id.
Where the moving party does not bear the burden of proof on an issue at trial, the moving party may discharge its burden of showing that no genuine issue of material fact remains by demonstrating that "there is an absence of evidence to support the non-moving party's case." Celotex, 477 U.S. at 325. The moving party is not required to produce evidence showing the absence of a material fact on such issues, nor must the moving party support its motion with evidence negating the non-moving party's claim. See id.; Lujan v. National Wildlife Federation, 497 U.S. 871, 885 (1990); see also Bhan v. NME Hospitals, Inc., 929 F.2d 1404, 1409 (9th Cir. 1991). If the moving party shows an absence of evidence to support the non-moving party's case, the burden then shifts to the opposing party to produce "specific evidence, through affidavits or admissible discovery material, to show that the dispute exists." Bhan, 929 F.2d at 1409. A complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial. See Celotex, 477 U.S. at 323.
Where the moving party does not bear the burden of proof on an issue at trial, the moving party may also discharge its burden of showing that no genuine issue of material fact remains by producing evidence negating an essential element of the non-moving party's case. See Nissan Fire Marine Ins. Co., Ltd. v. Fritz Companies, Inc., 210 F.3d 1099, 1106 (9th Cir. 2000). To avoid summary judgment, the non-moving party must then produce evidence sufficient to raise a genuine issue of material fact as to that element. See id. at 1107.
II. Classification
Under California law, "`[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.'" Borello, 48 Cal.3d at 350 (quoting Tieberg v. Unemployment Ins. Appeals Bd., 2 Cal.3d 943, 946 (1970)). However, several other factors are also relevant. These include
(a) whether the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee.
Id. at 351. The right to discharge at will is an additional factor, and is considered "strong evidence" in support of an employment relationship. See id. at 350. However, "`the individual factors cannot be applied mechanically as separate tests; they are intertwined and their weight depends often on particular combinations.'" Id. at 351 (quoting Germann v.
Workers' Compensation Appeals Bd., 123 Cal.App.3d 776, 783 (1981)).
"The label placed by the parties on their relationship is not dispositive, and subterfuges are not countenanced." Id. at 349. It is Defendant's burden to show that Plaintiffs are independent contractors rather than employees. See Fisher v. San Pedro Peninsula Hosp., 214 Cal.App.3d 590, 608 n. 6 (1989).
III. Application
The parties dispute whether Defendant has an employer's right to control the manner and means by which Plaintiffs accomplish the results desired. Plaintiffs argue that they are employees under California law because Defendant has an absolute right to control their activities. In particular, they contend that because Defendant may, in its sole discretion, rewrite the EA Manuals, which are incorporated by reference into the R3001 Agreement, it may unilaterally change the terms of that agreement. Plaintiffs' suggestion that Defendant may unilaterally change the terms of the R3001 Agreement by rewriting the EA Manuals is incorrect. The R3001 Agreement expressly provides that it "may not be modified except by a written agreement between the Company and [the agent] which expressly states that it modifies this Agreement." Warenski Dec., Ex. 8 ¶ XX(A). Furthermore, the 1999 Manual provides that it
it is intended to explain and expand upon the provisions of the R3001 Agreement. The Manual is intended to be consistent with the express terms and conditions of the R3001 Agreement. To the extent that there is any conflict between any of the provisions of the Manual and the express written terms of the R3001 Agreement, the R3001 Agreement shall govern.
EA Program Manuals, Ex. D at 2154. These provisions make clear that Defendant may not unilaterally change the terms of the R3001 Agreement.
Turning to the specifics of the control Defendant exercises, Plaintiffs argue that, in its EA Manuals, Defendant imposes extensive control over the manner and means of accomplishing their work. Defendant counters that it merely establishes the results that must be achieved. While Defendant exercises a certain amount of control, the Court finds that on balance Plaintiffs retain sufficient control to weigh in favor of independent contractor status. As described above, the R3001 Agreement provides Plaintiffs "full control over [their] time and the right to exercise independent judgment as to the time, place, and manner of performing [their] duties under this Agreement." Warenski Dec., Ex. 8 ¶ I(B).
Plaintiffs contend that many of Defendant's arguments are at odds with the arguments it made to the IRS in 1997, in connection with Butts and other cases. Thus, they state that Defendant has "lost all credibility." However, Defendant's representations to the IRS in 1997 concerned the NOA program, not the EA program. Furthermore, its position that its NOAs were employees was rejected. Thus, there is nothing improper about Defendant now taking a different position with respect to the factors relevant to Plaintiffs' classification. See Masayesva v. Hale, 118 F.3d 1371, 1382 (9th Cir. 1997) (judicial estoppel applies only where the court has adopted the party's prior position).
Consistent with this provision, Plaintiffs may hire employees to perform their duties, and are solely responsible for compensating those employees, and for the terms and conditions of their employment. See id. ¶¶ II(D); III(A), (B).
Each agent has sole discretion to determine whether to perform a task personally or to assign it to one of her employees. The only employees hired by Plaintiffs who are subject to Defendant's approval are sales producers licensed as part of an agent's support staff to solicit, sell, and bind insurance for the agency. See EA Program Manuals, Ex. C at 511. Under California law, to sell insurance, an individual must be licensed by the California Department of Insurance and appointed by an insurer admitted to transact one or more classes of insurance included within the scope of the license sought.
See Cal. Ins. Code §§ 1631, 1704(a). In filing a notice of appointment on behalf of an applicant for a license, the insurer is deemed to have declared that the "applicant is of good reputation" and "worthy of the license sought." Id. § 1705. In order to ensure that its declarations in this regard are truthful, Defendant must have the right to disapprove any applicants for appointment. The requirement that it approve sales producers licensed to sell insurance on its behalf is reasonably related to this interest. Defendant merely conducts background and credit checks on applicants for such positions so that it may truthfully declare to the Department of Insurance that the applicant is "of good reputation" and "worthy of the license sought." See Cal. Ins. Code § 1705. Thus, this requirement does not indicate that Plaintiffs are controlled as employees, in view of the fact that, in all other respects, Plaintiffs have sole discretion over who they hire and on what terms.
Plaintiffs choose their office location, although it is subject to Defendant's approval. Plaintiffs negotiate their lease terms, pay all rent and utilities for their offices, and own all of the furniture and equipment in their offices, other than a computer system Defendant provides. Consequently, Plaintiffs' operating costs diverge significantly. See Michael Von Loewenfeldt (MVL) Dec. ¶ 4 Exs. C-I (claimed agency expenses in 1998 ranged from $16,937 to $112,377).
In their sole discretion, Plaintiffs may choose to advertise. See Warenski Dec., Ex. 8 ¶. VI(A). Defendant only requires Plaintiffs to submit to it for approval signs and advertising copy that "use or contain any reference to any service mark or trade name of the Company." Warenski Dec., Ex. 8 ¶ VI(B). As the R3001 Agreement makes clear, Defendant imposed this requirement to maintain control over its own name, marks, and goodwill. See id. Thus, this requirement does not indicate that Plaintiffs are controlled as employees.
Plaintiffs have sole discretion to decide whether to advertise, when, where, in what manner, and for how long. See id. ¶ VI(A); Maduena Dep. at 226:16-21; Christie Dep. at 158:4-11.
Although Defendant requires Plaintiffs' offices to be open on specified days and at specified hours, agents may, in their sole discretion, "arrange to have business conducted at [their] sales location in [their] absence by [their] own employees or other persons." Warenski Dec., Ex. 8 ¶ II(D). Thus, the time during which an agent is physically present at her sales location "is entirely in [the agent's] sole discretion." Id.
As a result, although Plaintiffs must be "actively involved" in the conduct of business at that location, they, unlike employees, are not subject to any restrictions on when they must be present in the office.
Likewise, the requirement that all agency personnel dress "in business attire appropriate for the markets they serve," EA Program Manuals, Ex. B at 703, places little constraint on Plaintiffs' or their employees' manner of dress.
The parties dispute the significance of the degree of Defendant's control over the actual performance of their sales activities. Defendant asserts that Plaintiffs have few contacts with their agency managers. To the extent the agency managers supervise Plaintiffs, Defendant contends that the managers do not provide direction as to the means and manner in which Plaintiffs' work is performed.
Defendant's training requirements do not indicate that Defendant has control over the manner and means in which Plaintiffs conduct their businesses. Defendant states that the "Relationship Establishment Training" that all agents must complete was designed after discrimination complaints were filed against Defendant and other insurers. The program requires merely that agents "[u]se consistent sales processes without regard to race, color, religion, sex, handicap, family status, or national origin of the prospects/customers and without regard to the racial/ethnic composition of the neighborhood in which they reside." EA Program Manuals, Ex. F at 1254.
The meetings which Plaintiffs are required to attend are used to provide training mandated by the Department of Insurance and to disseminate information concerning products and policies to ensure compliance with State and federal law. See id., Ex. B at 704, Ex. C at 497, Ex. D at 2163. Plaintiffs cite no controlling authority to indicate that the mere fact that these meetings are mandatory renders them evidence of employment. Although Plaintiffs allege that the meetings contain some sales-related presentations, they do not allege that the meetings concern the "`when, where, why, and how' of selling insurance." Butts, 1993 WL 410704, aff'd, 49 F.3d 713. Likewise, Plaintiffs' meetings with sales management "to discuss market objectives, business results, and to learn of new products, services, policies and procedures," EA Program Manuals, Ex. B at 701, do not concern the manner in which Plaintiffs are required to sell insurance.
Plaintiffs observe that they must fulfill monthly customer contact requirements and make reports, and are subject to performance evaluations. While these requirements are the strongest factors supporting Plaintiffs' position, they are not so extensive as to establish that Defendant exercises control over the manner in which Plaintiffs conduct their businesses. While Plaintiffs must submit reports on their life insurance sales, sales of Parts and Labor policies, and sales during other types of promotions, this is not necessarily indicative of Plaintiffs' status as employees. See C.C. Eastern, Inc. v. National Labor Relations Bd., 60 F.3d 855, 858 (D.C. Cir. 1995) ("Supervision of the `means and manner' of the worker's performance renders him an employee, while steps taken to `monitor, evaluate, and improve the results' of his work, without supervision over the means by and manner in which he does his work, indicates that the worker is an independent contractor.") Plaintiffs' suggestion that Defendant's reporting requirements place undue pressure on them to sell particular policies, and thereby control the manner in which they conduct their businesses, is belied by the evidence that the agents exercise discretion as to which promotions to participate in or whether to participate at all. See Lahey-Leeds Dep. 199:23-202:8; Gibson Dep. at 242:4-243:10. Furthermore, as Plaintiff Monica Lahey-Leeds testified, Plaintiffs determine their own monthly, weekly, and daily sales goals, based on the annual goals set by Defendant. See Lahey-Leeds Dep. at 190:14-191:13, 194:4-8.
The annual evaluations of agency results, like the reporting requirements, do not reflect an attempt by Defendant to exercise control over how Plaintiffs sell insurance to their customers on a daily basis, but rather are a means by which each agency's results are monitored. See Mission Ins. Co. v. Workers' Compensation Appeals Bd., 123 Cal.App.3d 211, 221-22 (1981) (a security alarm installer was an independent contractor despite the fact that the company "prescribed standards of performance" because this fact "was not evidence that [the company] controlled the manner in which the desired result was to be achieved") (emphasis in original).
Plaintiffs argue that reliance on Mission is improper because it was decided before Borello and applied a strict common law test. However, contrary to Plaintiffs' repeated argument that Borello repudiated the common law test for determination of employee or independent contractor status and instead adopted a more liberal test favoring classification as an employee, the Borello court in fact adopted the common law test. See Borello, 48 Cal.3d at 350. While it concluded that, in workers' compensation cases, that test must be "supplemented. . . by consideration of the remedial purpose of the statute," even in that context it stated that it was adopting "no detailed new standards for examination of the issue" and that "[t]he relevant considerations may often overlap those pertinent under the common law." Id. at 353, 354. Thus, the Court concludes that Borello did not sub silentio overrule Mission or the other classification cases decided before Borello.
While Plaintiffs contend that Defendant provides them mandatory scripts, and observes and reviews their use of these scripts and other sales techniques as part of the evaluation process, they have adduced little evidence of this fact. The scripts Defendant provides are merely sample scripts. See EA Program Manuals, Ex. F at 1256-57. Plaintiff Richard Pryor testified that he had not used a script provided by Defendant "in awhile." Pryor Dep. at 255:10. Although he testified that he believed that he had once been required to make calls from a manager's office using a script, he could not recall whether that occurred before or after May 1, 1996. See id. at 256:9-257:10. He also testified that he has stopped using scripts because they are "a little cumbersome" and that his support staff has not used scripts since May 1, 1996. See id. at 255:18, 258:7-13. Finally, he testified that he could not recall an Allstate agent ever observing him use a script in his office. See id. at 262:14-16. Plaintiff David Chung testified that in August, 1999, his agency manager and territorial agency manager observed him making sales calls in his office and "made comments about the most effective way to make cross-sales calls." Chung Dec. ¶ 8. However, he did not testify that he used a mandatory script during those calls, or that his managers' comments were anything other than suggestions.
On the whole, while Defendant does exercise some control over Plaintiffs' business activities, it is not so extensive as to mandate a finding that Plaintiffs are employees.
Turning to the other, enumerated Borello factors, Plaintiffs argue that Defendant provides some of the instrumentalities of their work, such as company computers and stationery. However, as noted above, Plaintiffs provide all of the remaining instrumentalities, comprising the great bulk of such items: the office itself, furniture, signage, advertising, equipment other than the computer, and office supplies other than stationery.
Another Borello factor is the need for special training and skill to perform the job. Plaintiffs argue that little is required; Defendant argues that Plaintiffs are engaged in a distinct occupation requiring special skill. This factor does not weigh heavily for either side.
The fact that Plaintiffs are paid solely on commission and incur their own expenses in running their agencies without any reimbursement from Defendant weighs in favor of independent contractor status under one of the enumerated Borello factors.
The fact that Defendant may change Plaintiffs' commission rates on ninety days notice does not change this fact. Plaintiffs are not paid by the hour or on salary. While they acknowledge that their compensation is based solely on their sales, Plaintiffs contend that their ability to achieve profit or incur loss is nevertheless controlled by Defendant because the R3001 Agreement forbids them from brokering insurance for other insurance companies without Defendant's permission. The fact that Plaintiffs are "captive agents" who may not sell insurance for competing companies without Defendant's approval is not necessarily indicative of employee status. See Butts, 1993 WL 410704, aff'd, 49 F.3d 713 (concluding that Butts was an independent contractor although he agreed not to represent or solicit insurance for any other company without Allstate's prior written approval); Alfred v. Tennessee Farmers Mut. Ins. Co., 8 F. Supp.2d 1024, 1028 (E.D.Tenn. 1997) ("An insurance agent's status as a captive agent . . . is no more determinative of [his status as an employee or independent contractor] than, for example, a manufacturer's representative's agreement to market the manufacturer's products exclusively."). Despite the constraints imposed on Plaintiffs' ability to sell insurance for competing companies, their compensation from Defendant depends entirely on their sales.
Furthermore, Plaintiffs may engage in any other non-competing business they wish and may do so, subject to certain restrictions, in the same office as their Allstate agency. See id. ¶ I(E); EA Program Manuals, Ex. D at 2170. Unlike employees, Plaintiffs may employ others to accomplish their duties as sales agents while engaging in other non-competing business, without Defendant's approval. This fact suggests that Plaintiffs are independent contractors. See Mission Ins. Co., 123 Cal.App.3d at 224 ("In view of the ongoing nature of the relationship, we see little significance in the fact that the applicant was not to perform services for other burglar alarm companies. Far more significant is the fact that the applicant was not prohibited from engaging in any other kind of business or commercial activity.")
Plaintiffs also argue that Defendant affects their income through controlling their operating costs by requiring them to keep their offices open for certain hours. Although Plaintiffs must keep their agencies open at specified hours, whether they choose to do so by hiring employees or staffing the office themselves, like all other spending decisions, is within Plaintiffs' sole discretion. As noted, Plaintiffs' operating costs diverge significantly.
The requirement that Plaintiffs obtain certain insurance policies and name Defendant as an additional insured reflects the reality, that Plaintiffs are responsible for their profits and losses, by protecting Defendant in the event Plaintiffs incur substantial losses.
Thus, the Court concludes that Defendant does not control Plaintiffs' ability to achieve profit or incur loss. Rather, the amount of Plaintiffs' commissions and expenses are controlled by Plaintiffs, a factor that weighs strongly in favor of Plaintiffs' independent contractor status.
This factor distinguishes Penland v. Connecticut Mut. Life Ins. Co., No. C-92-3744, 1993 WL 204257 (N.D.Cal. June 9, 1993), upon which Plaintiffs primarily rely. In Penland, the court noted that, unlike here, the plaintiff was reimbursed for eighty-five percent of his agency's operating expenses, was guaranteed a salary of $50,400 per year, plus a percentage of commissions and bonuses, and was provided health care benefits. See id. at *6. Partially on this basis, the court denied the defendant's motion for summary judgment that the plaintiff, a manager, was an independent contractor not subject to the protections of the California Fair Employment and Housing Act.
In reaching its conclusion, the court also noted that the defendant exercised "significant control" over the plaintiff's ability to hire and fire his staff by setting the parameters for their compensation. See id. Furthermore, it noted that the plaintiff's control over his day-to-day activities was not dispositive because "managers are usually not supervised in a formal sense and generally enjoy a substantial amount of autonomy to set their own work agenda and to exercise their reasonable business judgment." Id. at *4; see also id. at *8 (distinguishing cases in which the status of an insurance sales agent, rather than a manager of an agency, was at issue).
Plaintiffs in this case are not managers, nor does Defendant exercise any control over their ability to hire and fire staff.
Pointing to the Borello question whether the individual's work is part of the regular business of the principal, see 48 Cal.3d at 351, Plaintiffs note that they perform an integral part of Defendant's business. This factor weighs in favor of their claim to employee status.
Borello asks the length of time for which the services are to be performed, see 48 Cal.3d at 351. The fact that Plaintiffs are engaged in an ongoing and indefinite working relationship weighs in favor of their employment status.
Borello also holds that the right to discharge at will is "strong evidence" in support of an employment relationship. 48 Cal.3d at 350. Here, however, the fact that the R3001 Agreement may be terminated by Defendant without cause on ninety days written notice does not indicate that Plaintiffs are employees. Plaintiffs may also terminate the agreement with Defendant without cause on ninety days written notice. In a post-Borello case, a California Court of Appeal explained that such a mutual termination provision "is consistent either with an employment-at-will relationship or parties in a continuing contractual relationship." State Compensation Ins. Fund v. Brown, 32 Cal.App.4th 188, 203 (1995).
With respect to the Borello question whether the parties believe they are creating an employer-employee relationship, see 48 Cal.3d at 351, Plaintiffs acknowledge that Defendant characterizes them as independent contractors for tax purposes, and that they file their taxes as "self-employed" individuals.
However, they state that their tax treatment is merely a consequence of the characterization of their position in the R3001 Agreement, which they were forced to sign to save their jobs. Therefore, they assert that how they treat themselves or how Defendant treats them for tax purposes has little significance in determining whether they are employees or independent contractors.
Although this is not a strong factor, the Court concludes that the terms of the R3001 Agreement and Plaintiffs' tax treatment weigh in favor of treating Plaintiffs as independent contractors. As noted above, the R3001 Agreement, which all Plaintiffs signed, states, "You are an independent contractor for all purposes and not an employee of the Company." Warenski Dec., Ex. 8 ¶ I(B). Many members of the McNabb class were hired after May 1, 1996; thus, they were not trying to save their jobs by signing the agreement. At least as to these Plaintiffs, the terms of the agreement suggest that they did not believe that they were creating an employer-employee relationship. Furthermore, whether or not Plaintiffs signed the R3001 Agreement to save their jobs, the fact that Plaintiffs have filed their taxes and established their own retirement plans as independent contractors since becoming EAs is evidence that Plaintiffs do not view their relationship with Defendant as that of an employee.
Plaintiffs' suggestion that their tax treatment is irrelevant under California law is unavailing. In Toyota Motor Sales U.S.A., Inc. v. Superior Court, 220 Cal.App.3d 864, 877 (1990), the court stated that "the requirements that Heard pay his own payroll and income taxes and provide his own workers' compensation insurance are of no help whatever to Lee. These are merely the legal consequences of an independent contractor status not a means of proving it. An employer cannot change the status of an employee to one of independent contractor by illegally requiring him to assume burdens which the law imposes directly on the employer." In this case, Plaintiffs have made no showing that Defendant required them to file their taxes in any particular manner; rather, it appears that Plaintiffs chose to represent to the IRS that they were "self-employed."
Finally, Defendant relies on the fact that Plaintiffs earn a transferable economic interest in their books of business, and, upon termination of their contracts, have a right to sell this interest, or to obtain a termination payment from Defendant based on the policies in their account that they sold as EAs. See Warenski Dec., Ex. 8 ¶¶ VIII, XIV(A), XV(A), XVIII. The interest may be substantial, as evidenced by Plaintiff Michael Picano's recent sale of his book of business for $345,000. See Picano Dec. ¶ 3. In November, 1999, an R3001 agent in California who wished to terminate her agreement through a termination payment from Defendant, rather than to transfer her interest, would have received an average of $96,002. See MVL Dec. ¶ 14 Ex. S at 7. Further, Defendant notes that, unlike employers, Defendant is contractually prohibited from taking customer policies away from Plaintiffs and giving them to other agents without a specific customer request to do so.
In conclusion, in light of the degree of control Plaintiffs exercise over the manner in which they conduct their businesses, including hiring employees; the facts that Plaintiffs are compensated solely based on their commissions, are solely responsible for their business expenses and may conduct other businesses; the independent contractor terms of the R3001 Agreement and Plaintiffs' tax treatment; and the fact that Plaintiffs have a transferable economic interest in their Allstate books of business, the Court concludes that Plaintiffs are independent contractors.
The factors that weigh in favor of finding that Plaintiffs are employees, i.e. the long-term nature of Plaintiffs' relationships with Defendant, the fact that Plaintiffs' work is part of Defendant's regular business, and the degree of control that Defendant does exercise over Plaintiffs' business decisions and sales activities, are insufficient to overcome the strong indicia of Plaintiffs' status as independent contractors detailed above. Therefore, the Court grants summary judgment that Plaintiffs are independent contractors.
CONCLUSION
For the foregoing reasons, Plaintiffs' motion for summary judgment (Case No. C 96-3606, Docket #167) is denied.
Defendant's cross-motion for summary judgment (Case No. C 96-3606, Docket #271) is granted. Judgment in the McNabb matter shall enter accordingly. In the Desimone matter, Plaintiffs' fourth, sixth, and ninth causes of action are dismissed.