American Association of Insurance Management Consultants

2014 Tax Implications of Agency Sales & Ownership


Tax implications of Buying & Selling Insurance Agencies

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The Paper Chase


In the 1970”s, there was a movie and TV show about attorneys and law school called “The Paper Chase.”  This is also an appropriate title for the position you will be in when you get a letter from an attorney saying that a former (or current) employee has filed a lawsuit against you.  While most agencies these days have their own Employment Practices Liability policy, that piece of paper is not enough.  Your best defense is having an adequate internal paper trail.


Employees are the key resource in any agency.  Without employees you can't make sales or service your clients effectively.  The key rule when it comes to employees is "Hire Slow, Fire Fast."  Unfortunately, most employers do the exact opposite.  It's critical that you follow certain procedures when hiring and retaining employees so that you can do your best to protect the agency.


Employment Applications


When an employer is looking to hire someone, they initially ask for resumes and then determine who to interview.  In many cases after one or two interviews, the hiring manager makes an offer to a candidate.  Besides the fact that the manager is in a "hire fast" mode, how does he or she know that everything on the resume is accurate? indicates that 42.7% of resumes have significant inaccuracies on them.  This includes outright lies or material omissions.


Resumes are inadequate.  The first piece of your paper trail is an Employment Application. It will ask for specific information that may or may not be on the resume.  It should also be industry specific.  Ask if the candidate has an insurance license, if it’s ever been revoked, agency management system experience, etc.  The application also assists you with comparing information from it to the candidate’s resume. 


Most importantly, the candidate needs to sign the Employment Application.  He or she is attesting that all the information on the application is truthful, complete, and accurate.  It should also state that the candidate understands that if there is a lie or material omission, it can be grounds for termination.  This is what happened to the CEO of Yahoo back in 2012.


Job Descriptions


If you are in the process of hiring someone, do you really know what you want them to do in your agency?  If not, you aren't ready to hire someone.  If you do know, it should be in writing and be their Job Description.  The job Description should outline:


  1. Why the person was hired
  2. Outline the areas and limits of authority
  3. Detail the position's activities and responsibilities
  4. What is acceptable performance


There should also be a "catch all" for "other duties as assigned by manager," primarily to be used for the ever changing world in the agency & the insurance industry as a whole.  


Give the Job Description to the candidate during the initial interview.  Let them know that if there is something on the job description that is a problem for them, it needs to be addressed during the interview process.  When the candidate is hired, he / she will be expected to sign the job description on the first day of work.  They will be acknowledging that they understand the job description and agree to abide by it.  This is the second piece of your paper trail.


Employment / Non-Piracy Agreements


Every employee in an insurance agency should sign an employment agreement that outlines the type of relationship, compensation structure, confidentiality of the agency's information, etc.  It should also indicate that the clients are the property of the employer and that the employee will not solicit or “pirate” the account when/if he or she leaves.  This piece of the paper trail helps an agency protect its client base.


Enforceability of non-piracy agreements varies on a state by state basis.  Nevertheless, each employee should sign one.  It can be difficult to get an existing employee to sign an agreement after he or she's been hired since typically adequate consideration is not provided.


However, with new employees the agreements are much more likely to be enforceable since the consideration is the offer of employment.  Like job descriptions, employment / non-piracy agreements should be given to the candidate during the interview process.  Again, on Day 1 the new employee will be required to sign the agreement. 


Employee Handbook


Yet another piece of the paper trail that should be given to employees during the interview process is the employee handbook.  It's a way to communicate to all employees the agency's policies and procedures and ethical and performance-related standards.  


There are some attorneys that advocate that employers shouldn't have an employee handbook because it can be used against the employer in a court of law.  This is true if the handbook if poorly crafted.  On the other hand, a well-drafted handbook will protect the employer the majority of the time. 


Make sure that there is a disclaimer that allows management to unilaterally change the handbook and state that it is not an employment contract.  The handbook should be industry (and agency) specific and should be reviewed by an employment law attorney before it is distributed to staff.


Like all the previously mentioned documents, the employee will need to sign for the handbook on Day 1 and acknowledge that he or she has read and agrees to abide by the handbook.


Attendance Records


A major area of employee lawsuits relates to the Fair Labor Standards Act and more specifically, the wage and hour laws.  Many employers assume because they pay a salary, an employee is exempt from overtime.  Unfortunately hourly vs. salary has nothing to do with whether someone is entitled to overtime.  The determining factor is whether they are "exempt" or "non-exempt."


Do you have CSRs that work more than 40 hours in a week and you are not paying them overtime?  It's possible that you might be in violation of the FLSA.  Unfortunately, there is no list of exempt vs. non-exempt positions.  Depending on the responsibilities and the amount of discretion and independent judgment, a CSR might or might not qualify for overtime.


Let's assume a worst case scenario and assume an employee is non-exempt (i.e. - he or she is entitled to overtime).  The employee is terminated and immediately goes to the department of labor to file a claim for unpaid overtime.  The employee's "proof" is multiple years of day-timers indicating he or she worked on average 50 hours a week.


When the Depatment of Labor shows up and asks you for your attendance records, what can you show them?  Most agencies don't track time, most track whether an employee was present, ill, or on vacation.    This is not an adequate paper trail.


Employers should retain legal counsel to help determine who is and is not exempt from overtime pay.  For those that are non-exempt, detailed time records must be kept.  It should also be noted that most EPLI policies exclude coverage for wage and hour violations and those policies that do provide coverage only cover it for a small amount that will be inadequate to cover the employers liability.


Performance Reviews


How is your employee doing?  Is performance exceeding your expectations, meeting your expectations, or falling short?  Over the past few years, employers have been reluctant to do performance reviews because along with the review, there sometimes comes an expectation of a raise in pay. 


Whether you plan to give out raises or not, it is critically important to do performance reviews on a regular basis.  By doing so, you are communicating to the employee whether or not his or her performance is acceptable and what he or she needs to do to improve performance.  You don't want to get into a lawsuit with an employee that claims "I was never told I was doing it wrong."


Like all the other pieces of the paper trail, the performance review should also be signed by the employee.  His / her signature isn't indicating agreement with the evaluation, it is merely indicating that the review has been discussed with the employee.


Termination Letter


Most states are "employment at will" states.  This means an employee can quit without giving you notice.  Likewise, you can terminate an employee for any reason (as long as you are not violating any of the HR Laws) or no reason at all.  This means you can give an employee a termination letter that merely states he is being terminated and not give a reason.  This is probably not a good idea.


Not giving an employee a reason for termination gives him / her an opening to claim he / she was unfairly terminated and discriminated against because of age, race, religion, etc.  If you provide a specific reason (i.e. - habitual tardiness) it makes it that much more difficult for the former employee to win a lawsuit.


EPLI Coverage


Sometimes even having all the previously mentioned paper trail is not enough.  And even if it is enough to successfully defend an employment practices lawsuit, there is still the cost of legal fees to defend yourself and the cost of your time.


Having all these supporting documents in an easily accessible location will save you time, but you still have to pay the attorney.  That's where the final piece of the paper trail comes in, your EPLI policy.


Coverages on EPLI policies vary widely so make sure you know what is and is not covered and that you have adequate limits.


About the Author:

Jon Persky , CPA, CIC, PHR is the President of Optimum Performance Solutions, LLC an insurance agency consulting firm providing valuation, merger & acquisition, workflow, strategic planning, sales and marketing plans, and agency perpetuation planning services to agencies nationwide.  He can be contacted at 813-835-7337 or