Allstate Agents Oppose Switch to Contracting

Allstate Insurance Co. agents who learned recently that they will soon become independent contractors, losing benefits such as health and life insurance and reimbursement for expenses, are planning a legal challenge to block the change.

Allstate, one of the largest insurance companies in the state, has decided to terminate all 1,656 California agents effective May 1 and switch to independent contractors to sell insurance policies.

About half of those agents, including many in Orange County, have joined together to fight the decision, hiring a San Francisco law firm, Wilson, Shryock & Bolton.

“This is one of the cruelest stunts I’ve ever seen a company pull,” attorney Gregory Wilson said. “They’re taking people who have 30 years with the company and telling them, ‘You’re terminated in 90 days.’ ”

Allstate representatives, however, say it is a sound business decision prompted in part by a class-action lawsuit by an employee who was upset that the company would not pay for some major expenses. California law requires employers to pay such work-related employee expenses as computers and rent on buildings. On Jan. 4, Allstate tentatively agreed to pay $25 million to about 2,400 current and former employees to settle the case.

“Any business must have the ability to manage its costs as best it can,” Allstate spokesman Al Orendorff said.

Agents throughout Orange County say most are unhappy about the change, which gives them an additional 2% in commissions but eliminates valuable benefits. Even those likely to break even say they prefer the security they now enjoy.

“I think if you talk to any agent out there they would prefer to stay the way they are,” said an agent who has been with the company for nearly two decades and whose father also worked for Allstate. “It’s going to be a worse deal for most people.

“I’m probably going to be in a break-even situation,” added the agent, who has joined the legal battle. “If I didn’t have three kids and dental and all the other good stuff, I probably would be ahead of the game.”

Allstate’s benefits package includes health and life insurance coverage, retirement benefits and profit-sharing plans. As independent contractors, employees would have to pay for these benefits. Their Social Security taxes would double, and they also would have to pay their own office expenses.

“We’re going from having benefits and a retirement plan and the works to nothing,” said another agent, adding that his wife is “panicky” about the change and his colleagues have been losing sleep since learning about it. “We’re talking bone dry, and we’re responsible for everything. It’s a shock, to be honest with you.”

Most Allstate employees would not give their names, saying company policy prohibits individual agents from speaking with the press.

The change at Allstate reflects an industrywide trend toward using independent contractors to control costs, said Steve Goldstein, a spokesman for the Insurance Information Institute, a New York public relations firm for property and casualty insurers.

Agents for two other major insurers in the state--State Farm Insurance Co. and Farmers Insurance Group--already operate as independent contractors.

Since 1989, Allstate has been switching to independent contractors in other states. “For the most part, the agents who are in the program like it,” said Allstate spokesman Orendorff.

The company has been trying to persuade California agents to become independent contractors the last six years, but fewer than 50 have done so, said Wilson, the agents’ attorney.

While news of the change is unnerving for the employees, Goldstein said, the increased use of independent contractors is one way for companies to keep costs down, thereby meeting a financial obligation to shareholders and policyholders.

“Is this difficult for the agents? Yes, absolutely,” Goldstein said. Agents “are concerned . . . about making sure they can provide for their families and have a decent way of living. The company executives feel the same way.

“We’re just in a different time,” he added. “The job security that used to exist for our parents doesn’t exist anymore.”

Allstate representatives say they had little choice but to make the change, considering the implications of the state law requiring the reimbursement of expenses.

“I think employers like Allstate in California who have an agent-type relationship or sales-type employees need to take a look at this particular labor code,” said Bob Murphy, a spokesman at Allstate’s headquarters in Northbrook, Ill. “It basically jeopardizes a business’ ability to manage its cost.”

Company representatives say they will not profit financially by cutting their employees loose, a position Wilson disputes.

“This is less about saving money than it is about our ability to manage our business,” Orendorff said. “For the most part, this is going to be a wash.”

The tentative agreement in the class-action lawsuit is scheduled for a final hearing Feb. 29 in Alameda County. In addition to trying to block the company’s plan to terminate their employees, Wilson said, he will also try to negotiate a better overall settlement in the class-action case.

Some agents say they also are concerned that Allstate may not allow them to switch to independent contractors if the company prevails. But Allstate representatives say the company is encouraging all agents to stay on board.

“We don’t want to lose one single agent,” Murphy said. “They are our distribution point. Their relationship with their customers is extremely important to Allstate.”

Generally, Allstate representatives say, their customers should not notice any difference in rates or service as a result of the change.

To entice California agents to sign on as independent contractors, company representatives say the agents will be offered other incentives, in addition to the increase in commission.

“We think that . . . virtually everybody’s going to be part of this new contract,” Orendorff said.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Empty Hands

Allstate Insurance will convert agents to independent contractors effective May 1. Details on the current arrangement and the new plan:

Agents affected: All 1,656 in California

Benefits: Agents lose company-paid retirement and profit-sharing plans plus all insurance, including medical, dental and life. Those wishing to remain covered by current plans pay entire premium cost.

Pension funds: Accrued benefits as of May 1 will be paid at retirement in accordance with rules of existing pension plan. Agents must fund own pensions, Social Security after May 1. If participating in profit-sharing plan, they can transfer the money into a 401(k) plan.

Commission: Currently 8%; increases to 10% under new plan

Business expenses: Company currently provides office space, staffing, supplies and equipment. Agents will begin providing these necessities but can deduct from income taxes.

AFTER THE TRANSITION

Allstate will add the following incentives to entice California agents to sign on as independent contractors:

Instead of owning their “book of business,” or client list after five years, agents will own it after one year, and may sell it to another agent.

Company will pay some transition-related expenses. For example, if agent must move to a less-expensive office, the company will pay for the move.

Company will pay for some recently incurred debts.

If asked, company will help train agents on how to deal with transition technicalities such as how to pay Social Security tax.

Source: Allstate Insurance, Wilson, Shryock & Bolton; Researched by LESLIE EARNEST / Special to The Times