What Type of Relationship Will Work Best for Your Agency?
Choosing the right employer-employee contract is vital to the health and well-being of any agency. Unless the agency is entering into a contract with an independent broker, the relationship with a producer will likely be that of employer-employee. Take note! There are many advantages to an independent contractor arrangement; however, just calling the producer an independent contractor doesn’t magically make it so. State and Federal tests such as the “20 Factors Test” will govern whether or not the agency will reap the tax advantages from such a relationship.
Clearly Identify the Terms of Your Agreement
Nothing can cause more unnecessary problems and bad feelings than when a contract is vague and ill-defined. That’s why any employer-employee contract should clearly state what both parties are agreeing to. Your agreement may have a fixed term or may state that the agreement continues until terminated. A fixed term opens up the opportunity for the parties to renegotiate terms of the agreement which may or may not be desirable.
Know the Responsibilities of the Producer
Obviously, the producer’s main responsibility will be to produce business but the agreement may set forth other duties of responsibility and any limits on the producer’s authority to bind business. Further, the agreement should clearly define whether or not a producer is required to devote all of his working time to the agency or whether he may engage in other businesses or occupations at the same time. Generally, it is recommended that competitive activities be restricted. Also, will the producer be responsible for his own errors and omissions coverage or will he be covered under the agency’s policy? Who will be responsible for the collection of premium?
Know the Responsibilities of the Agency
In addition to the agency’s most important responsibility which is paying compensation, what, if anything else, will the agency provide? Maintenance of records of insurance; billing services; benefits; expense reimbursement; office space; telephone; fax; email; office equipment; support staff; payment of license fees; coverage under the agency’s errors and omissions policy are but a few things to consider. Also, be sure to state any limitations on the agency’s obligation to place business produced by the producer.
Clearly State the Terms of Compensation
Any employer-employee contract should define how the compensation is to be calculated and when it is to be paid. Compensation may be a salary, commissions, bonus or any other combination thereof. The agreement should also state any reasons for the set-off of commissions owed such as financial obligations owed by the producer.
What Agency Benefits are included in the Arrangement?
If the agency will provide benefits, they should definitely be set forth in detail in the contract. If the agency, however, has an employment manual, the agreement can state that the producer has the benefits as set forth in the manual as it may be amended from time to time. This gives the agency flexibility to amend its benefits without having to renegotiate the terms of each of its employment contracts. Employee benefits you might want to include could be health; life and disability insurance; vacation time; holidays; sick days; company car; expense reimbursement; and coverage under the agency’s errors and omissions policy.
Don’t Forget to Include a Non-compete Clause or Agreement
A covenant not to compete clause limits the producer’s ability to compete with the agency after one’s termination of employment. Such a clause must be reasonable as to geographical scope and time. If it is not reasonable, the courts may void the clause. As the law frequently evolves and changes regarding this topic, it is recommended that you draft this clause very carefully so that it can be enforced. Hiring Note: A July 2009 Massachusetts case held that an employer that hired a party that was subject to a non-compete agreement was not required to interpret the rights and obligations of the parties to the agreement and act in the role of enforcer and that hiring the party was not an unfair and deceptive act for which the employer was liable. Hence, under this case, it appears that any agency will not be held liable for hiring a producer subject to a non-compete contract. However, the producer himself may very well get tied up in litigation with his former employer and thus, caution should be taken if the agency is contemplating such a hire.
You May Also Want to Consider Non-Solicitation and Non-Disclosure Agreements
These clauses prevent the producer from soliciting or assisting others to solicit the agency’s accounts. Often disagreements arise as to whether or not the former producer solicited the account or whether the account voluntarily chose to leave the agency and go to the producer’s new agency. To discourage such, a clause may be included to prevent the producer from accepting the account. A non-disclosure agreement prohibits the producer from disclosing confidential information of the agency. As such, what will constitute confidential information should be defined in your contract.
Who Will Own the Expirations?
The most valuable asset for most agencies is their expirations. Ownership of those assets must be clearly denoted in your agreement. If your agency owns the expirations, then non-compete and non-solicitation agreements are critical to preserve those assets once the relationship with the producer is terminated. Even where the producer owns the expirations, the agency may wish to include terms that provide that the agency will retain the expirations against any outstanding financial obligations owed by the producer to the agency. Further, there may be provisions that provide for a buyout of the expirations upon the happening of certain events; e.g. the death of the producer. Or, perhaps your agency may wish to include a right of first refusal if the producer intends to sell the expirations.
Do You Want to Indemnify the Producer?
Your agency may also wish to include a clause requiring the producer to indemnify it from costs or losses arising from certain acts by the producer such as misrepresentations or errors and omissions not covered by the agency’s E&O policy.
The Terms of Termination – When, Why & How
How will the agreement terminate, on what grounds and what will happen when it does? Terms you want to include regarding this subject include termination at-will by either party, for cause, and upon other triggers such as death, disability or retirement. If the producer owns the expirations, the agreement may include a provision providing for a voluntary or automatic buy-out of the expirations for a stated price upon death, disability or retirement. Terms such as “disability” and “retirement” should always be specifically defined in the agreement.