In its bid for “lost taxes” and a nod to unions, the House of Representatives late Thursday passed the “Protecting the Right to Organize Act” (also known as the “PRO Act,”) which would in effect require every independent contractor—including independent registered representatives and securities and insurance brokers—to be classified as employees.

A joint lobbying campaign by eight of the largest financial services trade groups, including the American Council of Life Insurers, the Financial Services Institute and SIFMA, failed to derail the legislation, which cleared the House largely along party lines Thursday. The bill was introduced in May by Bobby Scott, (D., Va.), chairman of the House Committee on Education and Labor.

A group of financial services trade group executives, including Dale Brown, president of the FSI, sent a letter before the vote to Speaker of the House Nancy Pelosi (D., Calif.), and Kevin McCarthy (R., Calif.) the House minority leader.

“This legislation seeks to change the definition of ‘independent contractor’ in a way that would cause significant disruption to the independent financial services industry and the consumers we serve,” the industry leaders wrote.

The legislation would force broker-dealers, insurers and others to use California’s controversial “ABC test” to determine who is and who isn’t an independent contractor. The test requires that all three of these factors are met:

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The worker performs work that is outside the usual course of the hiring entity's business.
  3. The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed.

The letter from the trade group said that “affiliated financial advisors have a long history of appropriate classification as independent contractors and are not involved in the worker classification problems found in other industries. They are not employees for purposes of determining applicability of federal (ERISA and EEO-1) reporting requirements and state wage and benefit provisions.”  

Compensation practices in the securities industry are carefully recorded using IRS Form 1099, the trade groups said. “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. Furthermore, the insurance and independent broker-dealer business models reflect the reality that these financial services professionals are primarily engaged in sales activities, often sell products of multiple companies, and are not subject to the right of direction and control characteristic of an employer-employee relationship, the trade groups said.

While the GOP-led Senate is unlikely to take up the legislation, financial services lobbyists aren’t taking any chances. “We continue to educate members of Congress about this important issue,” said Kathleen Coulombe, vice president in the Federal Relations Department at the American Council of Life Insurers.

“As they reconsider the matter in 2021, it is vital that lawmakers understand the valuable role these financial professionals play in safeguarding Americans’ financial security and work to protect the current employment classification designation for our industry,” Coulombe said.