Geico faces lawsuit over captive agents' employment classification

The question of whether captive agents are independent contractors or employees of an insurance company is at the heart of a class action lawsuit filed against several Geico companies in the U.S. District Court for the Southern District of Ohio, Eastern Division.

The suit alleges that although the insurer “may call its insurance agents independent contractors, they do not treat them as such,” as the financial and management structure between the company and its captive agents are more in line for those classified as employees. The suit, which was filed on behalf of a Geico captive agent located in Northeast Ohio, claims the company employs hundreds of captive agents across all 50 states.

A captive agent is someone that contracts with a single insurance company and agrees to only sell that company’s products, while an independent agent is authorized to sell on behalf of multiple insurance companies.

The complaint lays down five claims that indicate Geico has more control over its captive agents than it would over an independent contractor, including:

1. Geico controls the location and appearance of its agents’ offices.
2. The company controls who can be a client of the agent and how the agent obtains clients.
3. Agents are assigned additional duties outside of any contractual agreement.
4. Geico requires that its agents’ employees work at its corporate offices without compensation to the agents.
5. Captive agents are allowed to opt into Geico’s health and life insurance benefits, but are barred from enrolling in other Employee Retirement Income Security Act (ERISA)-controlled plans such as 401(k)s and profit-sharing plans. Captive agents are also required to cover 100% of the premiums for life and health coverage.

Concerning the final point, the suit alleges that by misclassifying agents as independent contractors, Geico is trying to avoid the associated cost of expanding benefits to all employees protected by the ERISA.

The suit also describes how Geico is the primary source for many of the “instruments and tools” used by captive agents, including telephone systems and numbers as well as computer operating systems. Captive agents are also required to lease computers from Geico, which prohibits software from being added to the systems. Further, captive agents are required to obtain approval before attaching a printer to the systems.

Geico also controls all marketing materials and telephone scripts. The suite states that the insurance company has suspended access to the computer systems on occasions when office staff strayed from the script or other mandated sales processes.

In past years, Geico had hosted contests that required agents to submit videos showing all aspects of their offices, according to the complaint, which goes on to claim: “At the end of 2022,  defendants abandoned the pretense of such ‘contests’ and simply required agents to submit a video of every area of their office to be evaluated.”

The company also has control over where captive agents can seek business, the hours of operation, and maintains the right to assign additional projects to its captive agents and their office staff.

For a period of time, Geico required captive agent offices to handle service calls, which were at times routed from a corporate number and not limited to the agent’s customers. The insurance company required captive agents to handle calls from corporate customers, as well as other agents’ clients, free of charge. This practice intensified during the pandemic, according to the complaint. While captive agents’ offices were required to handle these calls, they did not receive commission or compensation if the customer purchased a product.

In July 2022, Geico reversed this policy and now forbids captive agents from performing service for any Geico customer, including customers that had previously purchased insurance from the agent. Customers that need service are now transferred to corporate call centers. If the policyholders purchase additional coverage, the corporate employee writes the policy and the captive agents receive no compensation, even if they sold the original policy, the complaint states.

According to Dave Evans, strategist and senior associate for insurance industry marketing-communications firm Aartrijk, it appears that there was some “creep in the amount of duties” as the original agreement between Geico and its captive agents evolved.

DOL proposal & the end of the captive agent model?

While this case plays out, could the U.S. Department of Labor’s proposed changes to how independent contractors are classified spell the end of the captive agent model? The proposal, which would rescind a 2021 rule, would require employers to look at whether a worker is economically dependent on them or if the worker is truly in business for themselves.

To determine economic dependency, the proposed rules would consider the following factors, according to a summary from The Society for Human Resource Management:

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

If that is the standard applied to the Geico case, it would appear that captive agents are economically dependent on the insurance company, Evans said.

He added the proposed rule change could make it very difficult to assert independent contractor status when so many aspects of a captive agent’s livelihood are tied to the company they are contracting with.

“The reality is, you can’t have a contract against public policy. I might agree to do something as an independent contractor, but you (a company) can’t allow me to agree to do that if it is in conflict with the law,” Evans said.

While the Geico case will be determined on facts and circumstances, the DOL’s proposal would look at these types of claims with a much wider brush.

“Before they (the employee) had to prove they weren’t an independent contractor. Now the onus is on the employer to prove the worker isn’t an independent contractor,” he said.

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