(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.