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BenefitsLink > Q&A Columns >

Who's the Employer?

Answers are provided by S. Derrin Watson, JD, APM

Commissioned Insurance Sales

(Posted May 31, 2002)

Question 189: An insurance agency uses several independent agents who are paid on a commission-only basis. Do they have to be included in the agency's 401(k) plan, or are they considered independent contractors?

Answer: The foregoing is exactly the way the question came to me. I have not deleted a word. I include it here because the approach this question takes is typical of the approach many people take in dealing with employee/independent contractor questions.

Rev. Rul. 87-41 listed 20 factors to look at in reviewing employee status. I can name 10 others that have been used in various court decisions. But people want simplicity and certainty. They'd like to reduce everything to one or two factors and see if we can get an answer based on that.

It's like the old story of the drunk looking at a billboard reading "Drink Canada Dry" who says "It cannot be done."

Employee status cannot be determined on the basis of one issue. In this case, the issue is how the worker is being paid (by commissions rather than an hourly wage). That is a valid and legitimate factor which points to a person being an independent contractor. But there may be a host of factors which point in a different direction.

More often I find this with someone saying, "They signed an independent contractor agreement; that means they're not an employee, right?" Not necessarily. Who controls what the agent does? How much training does the agent receive? Does the agent have to work specified hours? To what extent does the company have the right to control how the agent goes about making a sale? Does the agent have unreimbursed expenses? Who pays the agent's staff-- the agent or the company? Many facts should be considered before one reaches a conclusion as to whether a worker is an employee or an independent contractor. I discuss these at length in Chapter 2 of my book, Who's the Employer.

Complicating matters further is section IRC 7701(a)(20), which says that certain full-time life insurance salespeople are regarded as employees of the insurance company for pension purposes, even if they are independent contractors. Because the question didn't mention product lines, I have no way of knowing whether that's an issue.

But even if I know the worker is treated as an employee for retirement plan purposes, that doesn't mean the worker has to be included in the 401(k) plan. That's a matter of the wording of the plan document and how the plan is passing the coverage tests of IRC 410(b).

The bottom line is that a determination of employee status in questionable cases should be referred to an attorney who is being paid to review the matter carefully and render a professional opinion. Alternatively, you can submit the matter to the IRS for an opinion via a ss-8 form.

Important notice:

Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.

The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.

Copyright 1999-2017 S. Derrin Watson
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