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RIA Fears DOL Independent Contractor Proposal Will Hurt Business

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What You Need to Know

  • About 13.5% of U.S. financial professionals are independent contractors.
  • The U.S. Department of Labor wants to make the independent contractor definition tougher than the current federal definition but looser than the definition California uses.
  • Some financial services sector commenters predict the proposal would make it easy for independent contractor financial professionals to continue to operate as independent contractors.
  • Others fear the proposed independence test conflicts with financial services regulatory reality.

A North Carolina registered investment advisor told the U.S. Department of Labor that its effort to narrow the definition of the term “independent contractor” is bad for RIA firms.

Laird Hepburn, a partner with an RIA firm in Apex, North Carolina, noted that state and federal law requires him to supervise the firm’s investment advisor representatives, who are independent contractors. Hepburn worries that, under the proposed DOL independent contractor definition update, supervising the IARs will turn them into employees.

“Uncertainty surrounding the status of our IARs hurts my business,” he wrote, in a comment posted on the federal government’s website.  “It decreases the value of the business that I have built and takes resources away from the core work of helping clients with financial planning.”

Other advisors told the Labor Department that they think its proposed “economic reality test” should help financial professionals who want to continue to be independent contractors maintain their status.

What It Means

If you operate as an independent contractor, you might have trouble continuing to do so.

Similarly, any clients who operate as independent contractors might face their own fights to avoid turning into employees.

Independent Contractors vs. Employees

The federal Fair Labor Standards Act, or FLSA, and other federal labor laws provide many provisions, such as minimum wage laws, for employees. Employers typically report their earnings on W-2 forms.

Independent contractors usually get their payment reports on Form 1099.

Although independent contractors may have less job security and less access to employer-paid benefits than employees, they may have an easier time deducting expenses from taxable income.

They may also have more control over the assignments they accept and how they spend their time.

The Numbers

About 13.5% of financial professionals — including 8.5% of securities reps, 11.4% of financial advisors and 17.1% of insurance agents — operate as independent contractors, according to  2017 U.S. Bureau of Labor Statistics data presented in an independent contractor proposal comment submitted by the Financial Services Institute.

The institute also provided an analysis, prepared by NERA Economic Consulting, showing that, in 2017, the percentage of all workers at 17 major financial services firms who were independent contractors ranged from 21.7% at Guardian, up to 97.8% at Primerica.

The History

Labor unions and some workers argue that Uber, meal delivery services and other “gig economy” companies hurt workers by forcing some people who would prefer to be full-time, year-round employees to be independent contractors.

Workers in other fields where independent contractors are common, such as the television and film production industry, have argued that, for them, the benefits of self-employment outweigh the disadvantages.

In 2019, California adopted a narrow definition of an independent contractor, based on an “ABC test” described in a court ruling. Under the ABC test definition, a worker can be classified as an independent contractor only if the worker is free from direction and control; the service is out the employer’s usual scope of business; and the individual is in a trade or profession related to the service being provided.

In January 2021, when former President Donald Trump was still in office, the U.S. Labor Department completed work on a federal independent contractor rule update that would have made it easier to classify workers as independent contracts, based mainly on factors such as the nature of the worker’s work; the worker’s opportunity for profit or loss; the amount of skill required for the work; and how long the relationship between the worker and the employer lasts.

After Joe Biden became president, the Labor Department withdrew the Trump-era regulation and released the definition update draft that included the economic reality test.

“An employee, as distinguished from a person who is engaged in a business of his or her own, is one who, as a matter of economic reality, follows the usual path of an employee and is dependent on the business which he or she serves,” according to a summary posted by the department’s Wage and Hour Division. “The employer-employee relationship under the FLSA is tested by ‘economic reality’ rather than ‘technical concepts.’”

Officials noted that many factors, such as the permanency of the relationship, the worker’s opportunities for profit and loss, and the nature and degree of control by the principal help determine whether a worker is an employee or an independent contractor.

In March, a federal judge in Texas vacated the Labor Department’s move to withdraw the independent contractor regulations.

The department released a new proposed rule in October. The department has received about 54,400 comments on the draft rule.

The Supportive Comments

Some commenters have argued that requiring employers to classify more workers as employees could increase the employees’ access to employee benefits.

Krystyn Reid, an Oklahoma resident, wrote that employers are “misclassifying workers as gig workers to avoid their responsibilities on everything from employer-sponsored health insurance to paying employer contributions toward Social Security.”

“If someone works for you, you should be required to pay into [Social Security], life insurance, and medical coverage, Reid said.

Other organizations and individuals indicated that the DOL proposal should be compatible with financial professionals staying independent.

Michelle Bryan Oroschakoff, chief legal officer at LPL, predicted that the DOL proposal would not result in the unintentional classification of independent financial professionals as employees.

“We commend the DOL for proposing a rule that assesses the totality of circumstances when determining worker classification,” she said.

Richard Dworsky, an independent financial advisor affiliated with Ameriprise Financial, thanked the department for recognizing the economic realities test.

The test “will put me in a good position to continue operating independently,” he said.

The Critical Comments

Representatives from the National Association of Insurance and Financial Advisors, Finseca and the American Council of Life Insurers said they believe the DOL proposal could turn some financial professionals who want to be independent contractors into employees.

If that happens, that “could result in a mass exodus of insurance professionals that operate on a 1099 model,” NAIFA president Lawrence Holzberg warned.

David Leifer and Ian Trepanier, ACLI commenters, suggested that the DOL proposal could sweep up happy, well-paid independent contractor financial professionals along with unhappy gig workers, because the proposed economic reality test could be a poor fit for securities brokers and life insurance agents.

Because of the nature of the life insurance and annuity markets, insurers and their broker-dealer affiliates must supervise agents, and smart agents may be good at minimizing overhead expenses, the ACLI commenters write.

The proposed DOL economic realities test could punish financial professionals and turn them into employees simply because they face compliance oversight by their broker-dealers and minimize the amount of cash they spend on overhead, the ACLI commenters added.

Both the ACLI commenters and Armstrong Robinson, Finseca’s chief advocacy officer, recommended that the Labor Department clarify the regulations and note that certain factors common in the financial services world, such as compliance supervision and longstanding distribution relationships, do not turn financial professionals into unintentional employees.

Kenneth Bentsen Jr., president of the Securities Industry and Financial Markets Association, said many SIFMA members have made significant financial investments to work as independent contractors and want to stay independent.

David Bellaire, general counsel at the Financial Securities Institute, and Jodi Perry, president of the independent contractors division at Raymond James, questioned whether the Labor Department is developing the regulation update in a reasonable way.

“The department has published a proposed regulation with scant economic analysis,” Perry wrote. “It appears willing to adopt new rules after allowing only short deadlines for comment. It has rejected the possibility of discrete modifications, and has stated that it will vacate all of the current regulations if its new ones are not adopted. Thus, it appears that the department has not respected fundamental principles of due process, but has treated the notice of proposed rulemaking as a mere formality.”

Why Protect Independent Contractor Status?

Some financial professionals who asked the Labor Department to protect their independent contractor status talked about the value of that status for them and their clients.

One anonymous commenter is both an Uber driver and a life and health agent who sells Medicare plans during the annual election period from Oct. 15 through Dec. 7 every year.

“We do not get paid until January for our efforts,” the anonymous commenter said. “Plus I have an 83- and 85-year-old parents that need me as their caregiver. If I have to go back to my hours being micro-managed by the government or anyone else, I will have to stop driving Uber.”

John Barbish, an Ohio-based financial advisor who once worked for a life insurer, said he started his own financial services firm partly because he believed being self-employed helped him offer clients better service.

“I am not contractually obligated to sell any specific product from any specific insurance company,” Barbish wrote. “My clients have access to the most ideal products and services to fit their needs.”

Loren Rex, a Michigan-based advisor, said an independent contractor can also choose to offer a better level of service than an employee advisor.

“While an employee of a large corporation the bureaucracy just about killed my business,” Rex wrote. “As an independent, I was able to choose the best-in-class technology, the best office space and best-in-class investments for my clients.”

Katharine Clark, an insurance agent and securities broker, asked the Labor Department to think about what independent contractor financial professionals do for clients.

She noted that convincing people to buy insurance, invest in retirement plans, contribute to college funding arrangements for their children and save for emergencies is not easy to accomplish.

“I also have those hard discussions about credit card debt reduction and being a fiscally responsible citizen and family member,” Clark said. “This is the guidance and education I can give them. I help them make informed decisions.”

Today, she estimated her business expenses range from 40% to 45% of her revenue and are deductible.

“If my expenses become non-deductible, I would have to close my business,” Clark said.

(Photo: Adobe Stock)


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