Payment of Producers Under New Overtime Rule

My last post concerned the exemptions from the overtime payment requirements of the Fair Labor Standards Act (“FLSA”) that will most likely apply to the employees of an insurance agency.  While the job duties of a customer service representative can probably be defined in such a way as to qualify him or her under the administrative exemption, because a producer’s primary job duty is the sale of insurance products that exemption would not be available for a producer.  The only exemption for which a producer who is not a door to door salesperson may qualify is the one for highly compensated employees, but as of December 1, 2016, that will require a producer to earn at least $134,004 a year, of which $47,476 was paid as a salary.

If a producer will not qualify for an exemption from the overtime payment requirements of the FLSA, an agency must decide whether to prohibit the producer from working more than 40 hours in any one work week, so no overtime pay will be required, or pay the producer one and a half times their calculated hourly compensation for each hour worked in excess of 40 in any one work week.  The latter option can get expensive in a hurry, so the question becomes is there a way a producer can be paid for working more than 40 hours in a week that is not as expensive as the traditional way.

The answer to that question is Yes by using what is known as the fluctuating workweek method of payment.  To be able to use that method of payment for any employee, the following requirements must be satisfied:

1. The employer and employee have an understanding that the employee will receive a fixed salary for the hours the employee works in a workweek, regardless of how few or many hours are worked, and payment of that salary is made.
2.  The hours the employee works fluctuate from week to week.
3.  The salary paid is such that in any given week, the employee never receives less than minimum wage pay when the salary is divided by the total hours they work during that week.
4.  The employee receives pay at a rate not less than half the regular pay rate for that week for any hours they work in excess of 40 hours in a workweek.

The financial benefit from using the fluctuating workweek method of payment is that the amount of overtime pay is calculated by dividing the total number of hours worked in any one week by the agreed on fixed salary and then using that hourly rate to calculate the amount of overtime pay due for any hours worked in excess of 40 during that week.  For example, if the fixed salary is $800 per week and an employee works 50 hours during that week, their hourly rate of pay is $16, not $20 which it would be if the employee were being paid a salary of $800 a week for an expected 40 hours of work  The overtime pay rate under the fluctuating workweek method would be $24 ($16 + $8), instead of $30 ($20 + $10), resulting in a savings of $60 ($30 – $24 x 10 hours).  This savings will increase with every extra hour worked because the hourly rate of pay on which the overtime pay rate is calculated will decrease.

The main problem with using the fluctuating workweek method of payment for producers is the requirement that a fixed salary must be agreed on, which will be paid no matter how many hours are worked in any given week, 50 or 30.  The fixed salary requirement will prevent a commission only compensation arrangement, but it could be used for new producers if the agency’s practice is to pay its new producers a guaranteed minimum amount and account for any commissions earned above that with a year-end bonus.  For veteran producers, an agency could agree to pay a fixed salary based on the commissions earned the prior year with a similar year-end bonus for any commissions earned above the salary amount.  In both situations, the salary should be adjusted to account for the expected number of overtime hours, so that the salary and overtime pay are equal to what the salary would have been without taking overtime pay into consideration.

Use of the fluctuating workweek method of payment will not work for all agencies or all producers, but it is an option that should be considered when an agency is determining how it will pay its producers and other employees to comply with the new overtime rule’s requirements.

What Are You Doing to Ensure the Success of Your Agency’s Producers?

Last week I wrote about the need for an agency to have a perpetuation plan and what goes into creating such a plan.  For those agency owners who want to pass on their agency to family members or other employees, it is important to have both a healthy agency operation and able buyers.  These two ingredients go together in that a healthy agency operation means its producers are growing their books of business and by doing so they become more financially able to buyout the agency owner.

A recent article in the IA newsletter discussed 11 reasons why producers fail to achieve success in growing their books of business.  By doing what they can to help their producers avoid these reasons, an agency owner can go a long way toward ensuring their agency’s healthy operation.  The reasons involve failures on the part of the producer (not asking for help, not learning the people side of the business, all talk, no action), as well as the agency management (no training program, not connecting the producer with other staff that could help, not using readily available referral sources).  Perhaps the most interesting point made in this article was that studies have suggested that prospects are not generally ready to buy from a salesperson until at least five prior contacts have been made and maybe as many as 10 or 12.  So it is important for the producer to be persistent in their dealings with prospective customers.

Another recent IA newsletter article discussed eight tips for successful sales appointments that would be a helpful guide for all producers.  The tips focus on the importance of the producer being comfortable with themselves and putting themselves in the shoes of the prospect to arrive at an approach that would be of interest to the prospect and would make things as easy as possible for the prospect to decide to do business with the producer.  Perhaps the most important tip is the first one.  The producer should be clear about the purpose of each contact they make with a prospect.  Until the producer decides what they want to achieve with each contact, it will be difficult to decide on the proper approach.   What they want to achieve will depend on where in the sales process the producer is and who they are dealing with.

This IA newsletter article also suggests a couple of approaches to getting appointments that involve using the names of existing customers.  That is one of the approaches suggested in a recent article in the Property Casualty 360 newsletter that discusses eight great opening lines for producers.  The others range from being honest about the possibility that what the producer may have to say may not be of interest to the prospect to suggesting the use of online presentations.

Finally, for those producers who just can’t seem to get going, another recent article in the Property Casualty 360 newsletter suggests eight steps that can be taken to overcome the tendency to procrastinate.  These steps are probably familiar to anyone who has dealt with this problem, but they offer a handy guide for what to do and why to do it.

If an agency owner wants to be able to successfully transition from owner to retiree, there is no more important thing they can focus on than how to make their producers as successful as possible.

Department of Labor Goes After Independent Contractors

A little over a week after issuing its Notice of Rulemaking that will result in more than doubling the minimum salary that must be paid to an employee for them to be eligible for the administrative or executive exemption from the overtime pay requirements of the Fair Labor Standards Act (“FLSA”)(click here for my blog post on this subject), the Administrator of the Wage and Hour Division of the U.S. Department of Labor (“USDOL”) issued an Administrator’s Interpretation that focused on what workers would be considered employees for purposes of coverage by the FLSA.   In essence, the USDOL will now consider any worker who is “economically dependent” on their employer to be an employee, regardless of what label the employer and worker have placed on their relationship.  The main target of this Administrator’s Interpretation is those workers who are being treated by their employers as independent contractors.

That Interpretation discusses the six factors that will be used by the USDOL to decide whether a worker is “economically dependent” on their employer.  Although not identical, those six factors are very similar to the factors used by the IRS to make the same determination for tax purposes. What can happen to an employer if the IRS determines that a worker it has treated as an independent contractor is really an employee is discussed in an article that I wrote about this subject for an IIAG publication.  That article also applies the IRS factors to a typical agency/producer relationship to see what the likely outcome would be if an agency attempted to treat its producers as independent contractors. The result was not a good one for the agency.

The same result is likely using the six factors identified in the USDOL Administrator’s Interpretation, especially since throughout that Interpretation the statement is made that no one of those six factors is more important than the other and they are not to be mechanically applied (i.e., a majority of them one way or the other will not necessarily answer the question).  Instead, the focus will stay on whether the worker in question is “economically dependent” on their employer.  The Interpretation analyzes the six factors in some detail and gives examples of how they would indicate employee or independent contractor status.

My take on this analysis is that if a worker performs services for only one employer and does not incur significant expenses in doing so for which there is no reimbursement from the employer, the USDOL will consider that worker to be an employee for purposes of the FLSA and thus, entitled to overtime pay for any hours worked in excess of 40 in any one work week, unless they qualify for an exemption.  The employer in that situation would be faced with having to pay overtime for any excess hours worked during the previous three years and unless the employer had kept track of the number of hours worked by the “independent contractor”, it would be stuck with whatever number the worker provided.

In addition, as part of its misclassification initiative, the USDOL would report its finding to the IRS and the taxing authorities of those states with which it has memorandums of understanding for action by them.  Fortunately for Georgia employers, the USDOL does not have a memorandum of understanding with the Georgia Department of Revenue, at least not yet.  Agency and other business owners should carefully review the Administrator’s Interpretation to make sure that any independent contractor relationships they may have will pass the test of economic independence.


Which Agency Employees Can Be Exempt Employees for Overtime Pay Purposes?

In last week’s post, I mentioned the concept of exempt and nonexempt employees and provided a brief description of what makes an employee exempt from the requirement under the Fair Labor Standards Act (“FLSA”) that employees be paid extra compensation for any work done in excess of 40 hours per week.  This subject is an important one, as the misclassification of an employee as being exempt when in fact they are not can be very costly to the employer, as explained later in this post.

A few weeks ago, I listened to a webinar that focused on whether certain employees of insurance agencies could be classified as exempt employees.  In particular, what it would take for customer service representatives, or account executives, and producers to be classified as exempt employees.  The presenter discussed in some detail the two main exempt categories that may apply to the former type of employees, known as the executive and administrative employee exemptions.  As noted in last week’s post, at this time, to qualify for either exemption an employee must be paid on a fixed salary basis in an amount that equals at least $455 per week ($23,660 per year) and that salary cannot be reduced based on the quality or quantity of the work performed by the employee during any one work week.

I say at this time because, at the direction of President Obama, the Department of Labor has been reviewing those and the other exemptions from the overtime pay requirement and is expected to release updated regulations for them sometime this Spring. Most knowledgeable commentators expect the minimum salary requirement for the administrative and executive exemptions to be increased significantly.

The most likely exemption for customer service representatives would be the administrative exemption, which requires that the employee’s primary duty be the performance of “office or non-manual work directly related to the management or general business operations of the employer or the employer’s customers” and include the “exercise of discretion and independent judgment with respect to matters of significance” to the employer’s business.  Such employees can engage in some sales activity on behalf of the employer, but that activity cannot be their primary duty. (Click here for a more detailed explanation of the requirements of the administrative exemption.)

For producers, the most likely exemption is one for outside sales persons for the reasons discussed in a 2009 opinion by the Wage and Hour Division of the Department of Labor that focused on life insurance producers, but the language of which would apply equally to property and casualty or health insurance producers.  That exemption requires the employee’s primary duty to be the making of sales or the obtaining of orders for services and they must “customarily and regularly” perform that duty outside of the employer’s place of business, which for this purpose means at the home or office of the customer or potential customer. (Click here for a more detailed explanation of the outside sales person exemption.)

If an agency’s producers don’t meet the second part of the outside sales person exemption, it is possible that they can meet what is known as the commissioned sales person exemption.  That exemption requires that the employee be paid at a rate in excess of the overtime pay rate (at this time $10.88) for every hour worked and that more than half of their total compensation be from commissions. (Click here for a more detailed explanation of the commissioned sales person exemption.)

An employee who was not paid overtime compensation when they should have been has the right to sue the employer in federal court to recover the extra compensation they should have been paid for up to three years before the lawsuit is filed.  In addition, if the employee convinces the court that the employer willfully violated the FLSA, they can receive liquidated damages up to double the amount of extra compensation they should have been paid.  Finally, a successful employee is entitled to an award for the attorney fees and other litigation expenses incurred by them, which award can sometimes be far higher than the amount of extra compensation the employee recovers.  Last year, an employee in Georgia who was awarded a little over $6,500 in extra compensation, also received an attorney fees award of over $173,000.00.  It is easy to see why lawsuits for unpaid overtime compensation are the most frequently filed employment related lawsuits in Georgia and elsewhere.

Successful Young Producers – What do They Have in Common?

Would you be surprised to learn that a slight majority of the successful young producers studied by Reagan Consulting, an Atlanta-based insurance industry consulting firm, were recruited right out of college and most of the rest came from another industry?  How about that the producers who had GPAs in school under 3.0 (a B average) achieved validation(i.e., the income they brought into the agency equalled the compensation and other expenses incurred by the agency for them) over 6 months sooner than those who had GPAs of 3.5 or above?  These are just a few of the background facts that were common among successful young producers discussed by Brian McNeely of  Reagan Consulting in his presentation to the IIAG annual convention at the beginning of this month.

That presentation was based on the study conducted by Reagan Consulting in 2009 of 91 successful young producers, who were under 30 years old and selling commercial P&C or employee benefits products.  The validity of that study was confirmed in 2012 when Reagan Consulting followed up with the young producers and found that 80 of them were still working for the same agency in a sales position and all but one of the others were still in sale positions with other agencies.  The one who was not had left the business to have a baby.  The average new commercial P&C business production in 2012 for the producers who agreed to participate in the follow up study ranged from almost $41,000 a year for producers in agencies with less than $1.25 million in annual revenue to over $100,000 for producers in agencies with over $25 million in annual revenue.  Not bad for any producer, young or old.

Specialization with office support and value added services was one of the five keys to success for the young producers studied by Reagan Consulting.  The others were training in insurance and sales techniques, mentoring, and developing relationships with referral sources.  Not surprisingly, training and supportive mentoring were found to be the most important of these keys to success.  Along these lines, the May 30, 2013 edition of the IA Insurance News and Views spotlighted an article by John Graham on how to act like a salesperson.  In his article, Mr. Graham discusses eight basic principles that every salesperson should live by, and it would make good reading for all producers, but especially young ones just starting out.  None of these principles are new, but if learned and implemented they would get a young producer off to a good start. (Click here for the article.)

At their core, all insurance agencies are sales organizations. If they want to be successful, they must sell insurance policies.  That makes finding, developing, and retaining good producers one of the most critical things a successful insurance agency must do.  It is especially important for agencies to find and then develop good young producers.  To review the 2009 Reagan Consulting study that discusses how this can be done click here and for the 2012 follow-up report click here.

How Should Producers Be Paid?

This month’s cover story for the IA Magazine focuses on the various ways in which successful agencies are paying their producers.  According to a recent study by Reagan Consulting, for the most part, there was little or no correlation between agency growth and the use of many standard producer compensation models (e.g., paying less for renewals than existing business, stair stepping of rates for new business produced).  Instead, the agencies that were experiencing above average growth set high performance standards for their producers and rewarded those producers who met them and penalized those who did not.   

One of the agencies discussed in the article was Pritchard and Jerden, which is based in Atlanta.  Its producer compensation model involves establishing annual goals for both retaining business and writing new business.  Those producers who meet their goals are paid at the top commission rates and earn an annual bonus based on the amount of growth they produced.  As an incentive to meet their new business goals, at the beginning of each year, five percentage points is withheld from renewal commissions for all the producers.  Once a producer meets his or her minimum requirements for new business, the amount withheld is paid in a lump sum.   Producers who fail to meet minimum growth requirements two years in a row have to meet those requirements for the next two years consecutively to regain their original renewal rates.  For more examples of successful producer compensation models, click here to read the full article.

How producers are compensated has been identified as an important factor in attracting young people to the insurance industry.  In a recent post, Jim Schubert of Southern States Insurance in Douglasville discusses six ways to increase the recruitment of young people and to retain them once they are recruited.  One way is to provide appropriate  compensation incentives for the conduct you want from them.  His agency pays the same commission rates for new and renewal business as a way to encourage its producers to establish strong relationships with their existing customers and thereby, make it easier to fend off attempts by other producers to take their business.  He also creates competitions among the producers with both large and small rewards for the winners.  His final piece of advice is perhaps the best and can be applied to both young and established producers, “Above all find out what really motivates your young agents.  Sometimes, its just good ole fashioned recognition.” (Click here to read the rest of the ways to increase the recruitment and retention of young producers.)   

  I am interested to hear from my readers about your experiences in determining what works best in compensating producers.  The IA Magazine article makes it clear that no one size fits all in this area.  Let us know what works best for you.

What are Your BYOD Policies?

I had an interesting telephone call today on the Free Legal Service Program that I run for the IIAG.  The caller’s questions were good ones for which I could not provide definitive answers.  They concerned what rights a former employer had to the information stored on a former employee’s smart phone. 

Under Georgia law, in the absence of an agreement to the contrary, an employer owns all the information obtained by its employees about its customers or other business activities during the course of performing services on its behalf.  I am not aware of any case law that applies this general rule to smart phones, PDAs, or other hand-held electronic devices, but it would appear that the general rule would permit an employer to require an employee to delete all such information from all such devices possessed by the employee. 

But my caller then asked what about customers who have become personal friends of the former employee or who were friends or other social acquaintances before they became customers of the former employer.  Does all the information about such persons stored on the former employee’s smart phone also belong to the employer because they are customers of the employer?  Good question and one that could take a lot of time and expense to resolve in court.    

Fortunately for me, the answers in this instance to the above questions became easier once I was informed that the former employer had purchased the smart phone for the former employee.  In the absence of any agreement to the contrary, since the former employer owned the smart phone, it had the right to demand that the former employee return the smart phone to it after his employment was terminated. 

Given the pervasive use of smart phones and other hand-held electronic devices in the workplace, serious consideration should be given by employers to drafting a policy or policies that address the above questions up front so there will be no need to resort to the courts to answer them later.  At the same time, employers should consider drafting policies that govern their right to monitor and inspect all such devices used by their employees regardless of who may own them.  Click here for an article that explores the latter subject in more depth. 

If you’ve read this far to find out what BYOD means, it stands for Bring Your Own Device.  Please share with me and my other readers any experiences you may have had with the above issues, especially how your agency may have addressed them.

Employers Beware

The IRS and U.S. Department of Labor are cracking down on the misclassification of workers.  It has become a high priority for both government agencies in these days of tight budgets due to the significant financial penalties that can be imposed on employers who improperly classify workers as independent contractors when they should be treated as employees.  Merely calling a worker an independent contractor, even if there is a written contract, is not sufficient to make that worker an independent contractor.  Instead, the IRS looks at many factors and uses a balancing test among them to make a determination on the proper status of a particular worker.

Many insurance agencies treat their producers as independent contractors to avoid having to pay FICA tax and provide benefits.  In my opinion, many times such treatment is not warranted under the particular circumstances of the agency/producer relationship and those agency owners run the risk of an unwelcome visit from the IRS or Department of Labor and the imposition of signficant financial penalties.  To find out if your agency is at risk, click here for a list of the factors used by the IRS and how they apply to a normal agency/producer relationship.  If you have any questions after doing so, you can post a comment or contact me directly at