1099 vs. W-2: Independent agents should take a second look

Independent agency owners need to revisit how they identify independent contractors in light of the U.S. Department of Labor’s proposed rule on employee classification, which will rescind its 2021 rule. Although RIN 1235-AA43 is not yet finalized, the period for public comment ended on Dec. 13, 2022.

The proposed rule would require employers to analyze whether the worker is economically dependent on the employer for work or is in business for themselves — which can be a complicated determination.

The distinction is important and affects both, parties primarily by determining whether an agency issues a form W-2 (employee) or 1099 (independent contractor) to the worker at the end of the year. This decision, of course, affects taxation and benefits.

Economic reality factors as addressed in the proposed rule have been described by The Society for Human Resource Management (SHRM) or business law firm Brooks Pierce as:

1. The opportunity for profit or loss depending on managerial skill.
2. The investments by the worker and the employer.
3. Whether the working relationship is long- or short-term.
4. The nature and degree of employer control over the work.
5. The extent to which the work performed is an integral part of the employer’s business.
6. The worker’s use of skill and initiative.

I am not an attorney: This is an important caveat and a good reminder that people and agencies should always discuss their specific situation with a qualified attorney.

With that out of the way, one example of an independent contractor who presumably satisfies the proposed rule is an IT professional on retainer with an agency to provide IT-related services for several employees. The IT professional’s main business is not insurance, so they should qualify as an independent contractor.

Another example is a digital marketing firm on retainer by an insurance agency, as well as other businesses. Again, that should not be a problem.

However, independent insurance agencies could be particularly troubled by the fifth economic reality noted by both SHRM and Brooks Pierce: The extent to which the work performed is an integral part of the employer’s business.

The most common roles for which agencies use independent contractors are customer service representative (CSR) and producer. Let’s consider a CSR working for an agency remotely, in another state, for 20 hours a week reviewing policies before they are sent to the insured. Common sense suggests that work is an integral part of the employer’s business.

If the CSR is indeed classified as an employee, they must be covered for FICA (Social Security), workers’ compensation, vacation, health insurance if eligible, and other benefits and workforce protections. And this does not include regulatory issues at play.

The agency owner might argue: “I’m paying a higher hourly rate to the independent contractor CSR to compensate them for health insurance and retirement contributions.”

The answer: It does not matter.

Another example is a producer who is getting a 1099 because they can “come and go and work on straight commission.” Again, that No. 5 prong would apply because selling insurance is an integral part of the business. Whether or not the classification was correct under the previous rules, I suspect that many independent insurance agencies that have been issuing 1099s to their producers will need to switch to W-2s and all that the employee classification entails.

No doubt some independent agencies will try to craft a workaround. But the intent of the proposed rule seems to be directed at independent contractors who are providing services to a single agency in their primary business of insurance. If this sounds like your situation, now is the time to address it.

Dave Evans (dave.evans@Aartrijk.com) is a strategist and senior associate for insurance industry marketing-communications firm Aartrijk.

Opinions expressed here are the author’s own.

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