Insurance Journal: Allstate Agents Petition IRS for Review of Independent Contractor Status

The Insurance Journal published this article on October 8, 2009

By Stephanie K. Jones
October 8, 2009

The National Association of Professional Allstate Agents (NAPAA) has published and is distributing a petition to the Internal Revenue Service, written by an unidentified Allstate agent, questioning whether Allstate has lived up to its side of the bargain since it converted the majority of its sales force from employee to independent contractor status in 2000.

The agents’ association charges that the company has not. The non-profit organization, which represents the rights of Allstate agents, cites a Private Letter Ruling issued by the IRS in 1989.

The NAPAA, of which an estimated 10 percent of Allstate’s agency force are members, asserts this letter gave Allstate tax-advantaged status by promising the IRS that the agents would become true independent contractors and be treated as such.

The agents contend that rather than being true independent contractors, with complete control over their businesses, they are in a sort of limbo, somewhere between a company employee and an independent contractor, because of the limitations Allstate places on the agents’ operations.

According to the group, some of those restrictions include:

• Mandatory office hours.
• Sales quotas.
• Verbal and written warnings threatening loss of contract for not meeting company quotas.
• A requirement to forward office telephone calls to company service centers after hours.
• Subjection to a number of employee-like controls, including annual performance reviews.
• Mandatory meetings and training sessions.
• Submission of oral or written production reports.
• Risk of termination at-will.

“It’s a situation where Allstate gets to have its cake and eat it, too,” said Jim Fish, NAPAA executive director and a former Allstate agent. “Agents bear all of the expenses and risks associated with operating an independent business, but are controlled as employees. Meanwhile Allstate enjoys a huge competitive cost advantage by avoiding expenses associated with pensions, health insurance, 401k’s, Social Security and, most importantly, federal taxes. You would think that alone would rate the IRS’s attention, but that’s not been the case.”

NAPAA says that a planned IRS audit of some 6,000 businesses on employment tax issues should include Allstate, hence the timing of their petition drive.

IRS spokesperson, John Lipold, said that while the IRS has not published a news release announcing the audit, one of the organization’s tax executives told Bloomberg news service in September that such an audit was planned. He said he was unaware of the NAPAA’s petition drive.

Allstate’s independent contractor agent policy has been confirmed many times, Allstate spokesperson Laura Strykowski told Insurance Journal, and the company stands by its policy. Numerous courts, as well as the National Labor Relations Board and the IRS have confirmed its legitimacy, she added.

Allstate has more than 14,700 exclusive agents under contract, according to Strykowski, and those agencies provide jobs for some 17,000 employees.

“I believe most agents would prefer the independence that comes with being a true independent contractor,” NAPAA’s Fish told Insurance Journal. “However, we are seeing more and more agents who long to return to the days of employee agents because there is little value in being an ‘independent contractor’ with Allstate.

“Besides paying employment taxes, Allstate agents must pay for their own health insurance and provide for their own retirement,” he added. “The bottom line is that if the company continues to treat them like employees, why shouldn’t they receive employee-style benefits?”

Fish said most Allstate agents would be interested in selling insurance for other companies but there are restrictions on what and where they can sell.

“They can sell for other carriers in some instances, but these carriers must be pre-approved by Allstate and the commissions can be 50 percent less than independent agents earn,” he said. “In addition, Allstate agents do not earn any contingency bonuses from these companies. The perception most agents have is that Allstate pockets any contingency bonuses along with the remainder of the commissions.”

Basically, “Allstate agents can’t sell anything that Allstate doesn’t condone.”

For instance, he said, the company doesn’t sell coastal property in Florida but it has negotiated contracts with other insurers in that state who do. Allstate agents can place coverage through those five or six companies, Fish said, but he they don’t get as much commission as true independent agents that place coverage with the same companies. He estimated that Allstate agents would receive commissions of 8 to 10 percent, while independent agents might get commissions in the 12 to 18 percent range for the same types of accounts.