Author: Al Diamond
An Employment Agreement protects both the employee and the agency. Owners would be wise to re-negotiate Employment Agreements with existing and/or new employees, with a legitimate form of consideration to sponsor that agreement (avoiding any whiff of coercion).
Agency Consulting Group, Inc. becomes involved in the creation, review and, unfortunately, the enforcement of many agency Employment Agreements. Here are a few “Do’s and Don’ts” that will keep you legal and out of trouble as you try to protect your agency and its assets through Employment Agreements:
1. Separate the terms Non-Compete from Non-Piracy. In its simplest terms a Non-Compete clause protects the agency from a former employee taking accounts that (s)he produced or for which (s)he was responsible while an employee of the agency. A Non-Piracy clause protects the agency from a former employee taking any other accounts owned by the agency for which (s)he may not have been responsible for producing or servicing.
2. Understand the term “employee.” Agencies are so paranoid about the responsibility for payroll taxes and benefits that they try anything to avoid referring to some people as ‘employees’. However, whether W-2 or 1099, whether you are treating that person correctly or not, the IRS has a simple list of qualifications of employee vs. independent contractor status. If the people working for you “fit” the majority of that list of qualifications, IRS will consider that person an employee, whether or not you do. The one notable exception specified in IRS code refers to the ability to treat a life insurance agent (not P&C) as an independent contractor even if (s)he otherwise qualifies as an employee.
3. Please do NOT use geographic limitations in the Non-Compete Clause of your employment agreement – they are consistently struck down in courts all over the U.S. – the courts’ feeling is that you cannot stop a person from working in his/her profession in his/her home area. Instead, simply forbid them to take (or have anything to do with another entity in the insurance business taking) any accounts that they produced or for which they were responsible (Non-Compete) or any other accounts in the agency, actively being prospected by the agency or that had been lost to the agency in the last year before the employee’s departure (see 5. below).
4. Why involve prospects or departed clients in Non-Compete and Non-Piracy Clauses?
No one can deny that you spend agency time and money in the prospecting process. That time and money makes the relationship built and the information gathered in the prospecting process agency property even if that information is in the public scope. If a former employee claims that the information is available to the public, let him/her spend her time and money to again gather that information. The information that was gathered while employed by and being paid by the agency belongs to the agency.
The information in your files, created during the period that a client was with your agency, is both valuable and can be used to re-solicit a departed client in the event that his new agent did not fulfill his promises or did not cement the relationship with the client. Unfortunately, we have been involved in several cases as Expert Witness in which a soon-to-leave employee caused clients to move during the year prior to his departure, assuming that “former” clients would not be subject to the employee’s Non-Compete Clause. If written properly, you can plug this hole and protect clients who have been influenced to leave by any means. This clause is much more effective, of course, if you have a history of re-soliciting lost clients and refuting efforts of prior employees to “raid” your book of business.
5. The duration of a Non-Compete or Non-Piracy clause must be “Reasonable.” Defining reasonable has always been somewhat subjective with defense attorneys claiming that six months was a sufficient non-compete period. However, we have made strong cases for a minimum two year non-compete and non-piracy clause by pointing out that the re-establishment of relationships using other agency employees takes a full policy period (one year) and one renewal process (a second year) to cement. Two things happen at that point. First the client should have determined that the agency has provided a strong or better replacement for the lost employee. Second, the information available to the employee two year prior to that point in time is probably stale and could not be used as confidential information only available to that person because of his/her association with the agency.
If the agency has not cemented relationships within two years and if they have not updated their client information to supercede the data in file prior to the employee’s departure, they should expect to be vulnerable to a marketing attack by the former employee. Courts have also accepted three year period for these clauses accepting that the prior information does not stale for three years, thereby “leveling the playing field” if the former employee desires to compete on an account for which they had confidential information when they were employed by the agency.
6. If you may ever merge or sell your agency (the company), make sure your Non-Compete and Non-Piracy Clauses are assignable to any entity owning the agency. Otherwise you may be seeking approval from producers and other account servicing employees before you can sell your agency. What happens if they don’t want or intend to work for the new agency owner? A sale will quickly disappear if a buyer finds that he will not only lose employees, but they have free reign to compete against the new owners on the very book of business that is being purchased.
7. If you are purchasing a book of business or an agency make sure that the Employment Agreements or at least the Non-Compete and Non-Piracy Clauses are transferable. If there is a question about their transferability, make the acquisition or merger contingent upon getting signed Employment Agreements with specific employees.
An Employment Agreement protects both the employee (who is given specific duties and rights) and the agency. If an agency is being purchased or sold in an asset sale, this becomes critical because we have seen wholesale departures that effectively ruin a transaction. If the sale is a stock sale, a strong Employment Agreement can provide a transition and period of stabilization that protects both the buyer and seller.
Either way, the new owner would be wise to re-negotiate a new Employment Agreement with pre-existing employees with a legitimate form of consideration to sponsor that agreement (avoiding any whiff of coercion).