Critical Legal Factors for Producer Contracts

First, a caveat: I’m not an attorney, so do not take the following as legal advice. However, I have extensive experience and knowledge of the legal requirements for producer contracts, which many of the attorneys writing producer contracts for agencies do not have.

Below are four federal laws that likely apply to every state. Many agency owners tell me their attorneys have advised the law in their state is this or that. That is all well and good, but federal law generally trumps state law, so it’s best if their attorneys familiarize themselves with federal law.

This rule applies to salespeople. In a nutshell, the rule requires salespeople to be on the road 51% of working hours, and if they are not, their employer must pay them overtime. This means they must spend more than 50% of their working hours outside of the office. This includes their home office.

Clearly, this is a silly rule, but it is THE rule, and I’ve seen agencies fined by the Federal Department of Labor for failing to comply.

One reason an employer might lose their case is because they cannot prove how much time producers spend in or out of the office. They don’t track their time, so the regulators assume the producer is owed overtime and the employer is fined. I’ve seen agencies implement various timecard systems after a regulatory visit, so they can subsequently show how much time the producer is in or out of the office.

I don’t know how to pay overtime on commissions. And if a producer is working only 40 hours a week, unless they’ve plateaued, I doubt they will achieve a desirable book size. The solution lies with hiring an excellent employment attorney knowledgeable of this rule. Based on the solutions I’ve seen, there is no one-size-fits-all solution, so it is best to hire an attorney tailored to your needs.

It is next to impossible to have legitimate independent contractor producers in agencies today. The specifications required are too onerous. Agency owners frequently tell me their attorney has devised a way around the rules. One rule that attorneys say they have figured out how to circumvent is the “control” rule. Their solution is to not control anything the independent contractor producer does.

Among other red flags this arrangement might raise is the potential conflict with the agency’s errors and omissions insurance (E&O) coverage because the E&O policy likely includes control requirements.

There are some scenarios where 1099s can exist, but those are rare today. The best scenarios require complex legal structures and extensive accounting details that eliminate any employment tax savings. There are employment law considerations, too, because if the producer is a 1099, not only can they not be instructed, but they cannot instruct people like account managers. It can be a knife-edge of compliance.

Furthermore, the idea of not controlling what producers write, the quality of their submissions, and how they interact with staff is just lazy management, likely combined with a dose of wishful thinking that everyone will always do the right thing.

This is a huge issue. In the early 2000s, Congress passed a significant tax law on this subject. The part of the tax code that regulates these items is Section 409A. I regularly see agency owners, their attorneys, or their accountants write their own vesting plans without knowledge of these rules. The penalties for violating these rules are onerous, often more than 50% of the contract value payable immediately, in cash.

The rules are immense (around 600 pages now) and complex. Once a contract is signed, you may not tear it up and sign a new contract, even if the employer and employee agree. You effectively must get the IRS to agree or have an excellent attorney craft a solution with great care.

This law applies to all forms of delayed compensation. For example purposes only, think of a bonus paid two years after achieving a milestone and earning that bonus. The delayed payment likely exceeds the limits under the tax code, and therefore, the bonus agreement must comply with Section 409A. In a vesting agreement, the delay before the producer is paid may be 20 years or more later.

An agency with a noncompliant deferred compensation plan might also become unmarketable to smart buyers because many do not want anything to do with such noncompliant plans.

I strongly recommend hiring an Executive Compensation Tax Attorney to write one of these plans correctly. Regular attorneys and CPAs are generally inadequate. This has become a highly specialized niche profession.

Done correctly, a good plan creates a significant competitive advantage by making an agency more attractive to high-quality producers. I am a huge fan of these plans when they are done well.

This one is pretty straightforward: do not give ownership in a book and then expect your noncompete to be upheld. If someone owns something, how can you expect them not to compete with it? That is a little oxymoronic, isn’t it?

Employment and tax law are both complex. Producer contracts often require significant knowledge in both areas. This is not a DIY project, and it is definitely not something to rely on what your peers are doing. Just because someone else has written a contract poorly and nothing bad has happened, that is not evidence the contract is good. There is no way to know if a contract is good until it has been tested.

In all the examples above, I have seen these clauses tested, and I haven’t seen an employer win yet unless their contracts were well written. I encourage every reader to have their contracts reviewed by experts and, if necessary, rewritten by an expert.