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Independent Contractor Rep No More?

If the Obama administration and House Representative Rob Andrews of New Jersey have their way, the independent contractor rep may become a thing of the past.

If the Obama administration and House Representative Rob Andrews of New Jersey have their way, the independent contractor rep may become a thing of the past.

This month, the Financial Services Institute, the independent b/d industry's lobbying group, said it was concerned about proposed legislation that would change the way independent b/ds classify affiliated reps. As it stands, IBD reps are classified as independent contractors.

But some in Washington grumble that employers often misclassify their workers—identifying workers who are really full-time employees as independent contractors in order to benefit the bottom line. (Unlike employees, independent contractors don’t get workers’ compensation coverage, minimum wage and overtime protections and family and medical leave, nor do they have the right to organize and collectively bargain. In addition, employers don’t withhold taxes for independent contractors.) As a result, legislators are considering changing the laws to restrict employers’ ability to classify workers as independent.

Rep. Andrews, who sponsored legislation last year that would do just that, has confirmed his intent to re-introduce the legislation. And this time, he’s presumably got the support of President Obama, who co-sponsored a similar bill in 2007 when he was a U.S. senator. Meanwhile, U.S. labor unions, major supporters of Obama’s candidacy, are urging Democrats to get the legislation going.

But the Financial Services Institute says the consequences of such a change in the laws would be devastating to independent broker-dealers, independent financial advisors and their clients. “If the safe harbor provisions targeted in this legislation were repealed, independent broker-dealers and independent financial advisors would be exposed to unnecessary IRS scrutiny of their worker classification status, potentially subjecting them to substantial back taxes, penalties, and interest. If independent broker-dealers were forced to reclassify their financial advisors as employees, the additional costs and compliance burdens would cripple their ability to remain profitable while also providing the services needed by their advisors and their clients,” the group says.

Further, the FSI says independent broker-dealers and independent financial advisors “operate in a heavily regulated and documented industry in which cash payment for services is strictly prohibited. They are not involved in the industries of concern to labor unions and responsibly pay their taxes.”

Last spring, U.S. House Democratic lawmakers including Andrews sponsored The Employee Misclassification Prevention Act of 2008, which, among other things, would have imposed penalties on employers who misclassify employees as independent contractors. It also would have required employers to keep records on and notify workers of their employment or independent contractor classification and their right to challenge that classification and it would have required state unemployment insurance agencies to conduct audits to identify employers who are misclassifying employees. Finally, it would have tracked and monitored states’ effectiveness in identifying employers who misclassify employees.

At the time, Representative Lynn Woolsey of California, said, “Employers who misclassify their employees as independent contractors rob workers of needed pay and benefits and cost government at all levels substantial uncollected revenues.” Further, Rep. Andrews says by improperly categorizing employees as independent contractors, employers are able to avoid payroll taxes. His office points to a Coopers & Lybrand study, which estimated that the federal government lost $34.7 billion in unpaid taxes between 1996 and 2004 as a result of the misclassification of workers.

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