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February 23, 2010 |
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Independent Brokers May Count As Employees |
(Dow Jones) Concerns about the possible reclassification of certain registered
representatives as employees, instead of independent contractors, are
being reignited in the wake of President Barack Obama's proposed 2011
budget.
Independent broker-dealers say language in the proposed
budget is the latest development in a longstanding debate over
independent-contractor status that could potentially undermine their
business model. Financial advisors who affiliate with independent
broker dealers are generally considered to be contractors who run their
own businesses.
The U.S. departments of Labor and Treasury are pursuing as
part of the budget a joint proposal that would enhance their ability to
penalize employers who misclassify employees, among other things.
Treasury receipts would increase by more than $7 billion over 10 years
as a result, according to the proposed budget.
"Our concern is that in an effort to address abuses of
independent contractors, that we not make it harder for companies, such
as independent broker dealers, that are appropriately using the
classification," says Dale Brown, president and chief executive of
Financial Services Institute, or FSI, an Atlanta-based trade group that
represents independent broker dealers.
The Obama administration's proposal could add momentum to
legislation introduced by Sen. John Kerry (D., Mass.) last year that
would repeal part of a 1978 law allowing individuals to retain
independent-contractor status in the context of certain "longstanding
recognized practices" in an industry, and for other reasons. Similar
legislation is also pending in the U.S. House of Representatives.
The safe harbor for "longstanding business practices" has
been particularly helpful to preserving the independent-contractor
status of affiliated advisors, according to Chrys Lemon, a
Washington-based lawyer who specializes in financial services
regulation. A repeal could give the Internal Revenue Service reasons to
question advisors' independent-contractor status, says Dale.
Labor unions have long been concerned over the issue, but
have focused on companies such as FedEx Corp. and Wal-Mart
Stores Inc.—that, they say, have classified some independent
contractors inappropriately—rather than brokerage firms. Employers
aren't required to withhold taxes on behalf of independent contractors,
who generally pay their own employment taxes. Amaya Tune, a spokeswoman
for the AFL-CIO, said that full-time workers who are classified as
independent contractors also miss out on company benefits.
A spokesman for Wal-Mart declined to immediately comment. A
FedEx spokesman says it isn't illegal for its independent contractors
to work for themselves.
Brown, of FSI, says financial advisors who affiliate with
independent broker dealers aren't in the same category as the workers
the legislation aims to help. Many advisors leave their jobs as
employees of large brokerages to become independent, he said. They
affiliate with independent broker dealers for the purpose of gaining
market access and the ability to own their own business, he said.
FSI's members include 119 independent broker dealers who represent more than 178,000 independent financial advisors.
"Obviously, there's freedom. We're not told which products to
sell to our clients," says James Crosson of Fall River, Mass., an
advisor affiliated with Investors Capital Corp., the independent broker
dealer arm of Investors Capital Holdings Ltd.
Randy Neumann, an independent advisor in Paramus, N.J., who
uses LPL Financial Corp. as his firm's broker dealer, says
reclassifying advisers wouldn't make sense. "We come and go as we
please," says Neumann. "We do things for our clients that we believe is
in their best interests."
Tax implications for the companies could be substantial.
They could owe federal employment taxes of 7.65% on reclassified
advisors, plus state taxes, which vary, according to Robert Willens, a
New York tax analyst.
Reclassifying advisors, however, may be appropriate in some
cases, says Lynn Turner, a former Securities and Exchange Commission
chief accountant. Some broker dealers affiliate with an advisor for the
purpose of selling specific products, says Turner, now a managing
director at LECG, a global consulting firm. For example, some advisors
may work in a building with a broker dealer's name on it, be paid a fee
of some type and not work for anyone else, he says. In that instance,
"why would you say they're not employees?" he says.
Copyright (c) 2010, Dow Jones. For more information about Dow Jones' services for advisors, please click here.
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