Industry trade groups are fighting an independent contractor rule proposed by New Jersey's Department of Labor & Workforce Development that they say could reclassify independent financial advisors as employees of their broker-dealers.
Proposed rule N.J.A.C. 12:11 would put in place a new ABC test to determine whether a worker is classified as an employee or an independent contractor under state laws, according to the Financial Services Institute.
The proposed reg "exceeds the agency’s rulemaking authority and represents a significant departure from established precedent interpreting the ABC Test," FSI said in its comment letter.
Under the ABC test, a worker can be classified as an independent contractor only if all three conditions are met: The worker is free from the control and direction of the putative employer; the worker performs work that is outside the usual course of business of the putative employer; and the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
New Jersey's new ABC test "will make it virtually impossible for financial professionals and independent insurance agents to serve as independent contractors," according to the Insured Retirement Institute.
New Jersey's proposed rules improperly expand the definition of “control” to include securities laws. "The supervision requirements in securities laws may conflict with the conditions," according to FSI.
The ABC Test would require independent financial advisors—who have proactively and affirmatively chosen to forgo the employer/employee work model—to become employees of financial services firms.
"California enacted a stringent ABC test, but exempted the financial services sector — which FSI advocated for," FSI said. "Several other states have an ABC test or a modified version, but have not interpreted and applied it in a way that has implicated" independent advisors.
“In this case, New Jersey’s proposal would have the unintended consequence of harming independent financial advisors and the Main Street investors they serve," Dale Brown, FSI's CEO, said Thursday in a statement. "Independent financial advisors are business owners helping families plan for retirement, save for their children’s education, and achieve other financial goals. By revoking advisors’ choice to operate as independent contractors simply for complying with existing securities regulations, the proposal threatens the businesses advisors have built and could limit access to affordable, trusted financial advice — especially in underserved communities.”
In its comment letter on New Jersey's plan, the Insured Retirement Institute said that changing the definition of "independent contractor" could adversely affect consumers' choice of financial professionals and retirement products and strategies.
The proposed changes to New Jersey regulations "would negatively affect licensed financial professionals who provide retirement income planning services and products — like annuities — through independent financial professional firms, broker-dealers, and independent insurance agents," IRI said.
“Changing the independent contractor status for a broad range of New Jersey financial professionals will upend the business model and limit access to products and choice of advisors for consumers,” said Sarah Wood, director of IRI's State Policy and Regulatory Affairs. “When a financial professional can act as an independent contractor, they can present a consumer with a variety of options to ensure that they can make a recommendation that best meets a particular consumer’s financial situation and needs.”
A recent study by FSI and Oxford Economics found that 65% of independent financial advisors in New Jersey would consider relocating their business out of the state, FSI said.
IRI pointed to an analysis by NERA, the economic consulting firm, that independent contractors own and operate more than 2,300 financial and insurance services firms in New Jersey, collectively employing about 6,300 people — 25% of the industry's workforce in the state. These firms generated $1.5 billion in annual output, or nearly 19% of the sector's total. The proposed regulation would jeopardize those jobs, reducing consumer access to affordable financial guidance.
The comment period on New Jersey's plan ended Wednesday.
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