Fourteen financial services industry trade groups are taking their fight directly to Congress in their effort to derail a provision in the Protecting the Right to Organize (PRO) Act to reclassify independent contractors as employees. If enacted, the proposal could seriously impair the independent broker-dealer (IBD) business model
The provision in the Pro Act—which is set for a U.S. House vote next week—would expand union reach by forcing companies to reclassify their independent contractors as employees. The change could cripple the businesses of independent financial advisors and insurance agents across the country and hurt consumers who depend on them for financial products and advice, 14 CEOs said in a letter they sent today to House Speaker Nancy Pelosi and House minority leader Kevin McCarthy.
“This legislation seeks to change the definition of ‘independent contractor’ in a way that would cause significant disruption to the independent financial services and property casualty insurance industries and the customers we serve,” the CEOs told House leaders.
The legislation is expected to pass the House. But with a 50-50 split in the Senate, Democrats will need to convince every moderate Democrat and some Republicans that the measure will not negatively affect their constituents.
The bill, which critics say would make it nearly impossible for any worker to qualify as an independent contractor, incorporates measures that follow California's new independent contractor law and erodes right-to-work laws in 27 states. The bill’s proponents say it would grant all workers a bargaining position for access to healthcare, improved benefits and pay increases.
Rep. Bobby Scott, D-Va., who initially introduced the bill in 2019, pointed to a 2019 report by the Bureau of Labor Statistics that found union members on average make 19% more than workers in the same field not represented by a union.
But independent financial advisors and insurance agents are not employees, the CEOs argued. “By effectively reclassifying independent contractors as employees, the PRO Act would create unintended consequences for the industry, and specifically insurance producers and independent financial advisors,” the CEOs said in their letter.
They added that the PRO Act’s “ABC test” could eliminate the choice a majority of practitioners have made to serve clients independently. In turn, that could drastically reduce clients’ ability to access high quality advice for their insurance, investment and retirement security needs.
“Many have substantial relationships with one or more insurance companies, broker dealers, or registered investment advisors, which allows them to offer expanded options to their customers,” the letter stated. “These small business owners enter into written agreements with insurance companies (or general agents of insurance companies), broker dealers or registered investment advisors that carefully set forth the terms of the independent contractor status. It would be enormously disruptive to negate these agreements through Federal legislation.”
Advisors already have a long history of “appropriate classification as independent contractors” and are not involved in the worker classification problems found in other industries, the CEOs said, noting they are not employees for purposes of determining applicability of federal reporting requirements and state wage and benefit provisions. Compensation practices in the securities industry are carefully recorded, with IRS Form 1099 reporting universally required.
The classification of IBD reps was fiercely fought in the 1990s between the Internal Revenue Service and several trade groups. Typically, independent brokers pay for their own rent, utlities, computer and administrative staff. Consequently, their business relationship with broker-dealers lacks some of the murky details that have emerged in other industries as the gig economy has taken off in the last decade.
The trade groups sought to drive this point home in their letter.“As a result, the problems of cash payments and unreported income that may exist in other industries do not exist in the securities and insurance professions,” the trade groups said. “Furthermore, the insurance industry and independent broker dealers are highly regulated.”
Among the CEOs who signed the letter opposing the provision were those from the Financial Services Institute, American Council of Life Insurers, Investment Retirement Institute, National Association of Insurance and Financial Advisors, and Securities Industry and Financial Markets Association.