The potential economic disruption of President Biden’s independent contractor proposal came under the microscope during a House panel hearing Wednesday.

Rep. Kevin Kiley (R-Calif.), chair of the Subcommittee on Workforce Protections, minced few words during his hearing, which he titled "Examining Biden’s War on Independent Contractors."

Kiley said his constituents and the state of California itself have suffered irreparable damage from Assembly Bill (AB 5) which went into effect on January 20 in an attempt by the state to turn gig industry contractors into full-time employees. 

The Biden Administration has weighed in on the debate, arguing that the gig economy costs workers benefits and the IRS tax revenues.

The Financial Services Institute, which represents the bulk of independent advisor representatives and has long battled any DOL rule that would take away contractors’ choices, also submitted testimony at the hearing, outlining the economic devastation it believes the rule would wreak.

The timing of the hearing is critical as President Biden works overtime to get the votes needed to confirm former California Labor Secretary Julie Su, his pick to be Labor Secretary, ahead of her confirmation hearing on Thursday. With several Democrats still holding out, she faces an uphill battle in the Senate. 

“Julie Su didn’t want an economy in California where you can pursue your calling, support your family on your own terms, and thrive. She doesn’t want this for America, either. That’s why Joe Biden has selected her for Labor Secretary: to wage his war on independent contractors,” Chairman Kiley said at the hearing.

“Our committee has a very different vision for the American workforce. We believe in promoting work and supporting workers. We believe independent contractors are critical to the 21st century economy. We will protect the freedom of Americans to earn a living as they choose and will fight every effort to take that right away,” Kiley continued.

While Su has denied she had anything to do with California’s independent contractor rule, which has lost numerous legal challenges, including one that allows Lyft and Uber to continue to treat their drivers as independent contractors, Su is having a hard time disowning her words.

“We will be doing investigations and audits…threatening fines and penalties, so that those who want to comply with the need to reclassify can do so and those who don’t will understand that’s not the kind of economy we want in California,” Su said during a speech in 2020.

A “rigid national rule modeled after California’s” would cost the full-time or part-time jobs of between 3.2 and 3.8 million independent contractors – equivalent to roughly half the jobs lost in the Great Recession, according to the Chamber of Progress, Kiley said.

“Even where it is possible to convert independent contractors into employees by legal command, it’s not what they want. Seventy-nine percent of independent contractors prefer their current worker status. It lets them set their own schedules and be their own boss,” Kiley said.

The DOL announced its proposal in October, seeking to reverse a Trump-era independent contractor rule which is more favorable to independent advisors because it reduces the criteria for classifying a worker as an independent contractor to two metrics—control over work and opportunity for profit. 

The new DOL proposal largely returns to an earlier “economic realities” test and uses six factors to determine a worker’s “economic dependence,” including the opportunity for profit and loss and the degree of permanence of the work relationship. 

The proposal would devastate the independent investment advisor and insurance broker industries, according to a study commissioned by FSI. 

“These financial advisors are self-employed independent contractors, rather than employees of independent financial services firms. They own and operate approximately 130,000 financial advisory and insurance brokerage firms, employing approximately 330,000 people and accounting for 27 percent ($47 billion) of the output of the financial-advisory and insurance-brokerage industry,” FSI said in its testimony.

Between 2015 and 2019, independent contractors in the financial services sector created approximately 54,000 new businesses and 174,000 new jobs, the trade group added.

“We would certainly prefer for the DOL to withdraw its most recent rule proposal on independent contract status,” the FSI’s David Bellaire said in an earlier interview.

“What’s most important here is our members don’t want to be employees of a broker-dealer. Most of them left the broker-dealer model because they wanted to be independent and control their own destiny,” Bellaire said.

“Having said all that, when it comes to preserving our members' independent contractor status, we’re going to keep all of the tools of advocacy at our disposal,” he added, when asked if the association would pursue a lawsuit.

Two years ago, the institute successfully sued the Department of Labor, forcing the agency to reinstate its Trump-era independent contractor rule. Under Biden, the agency then withdrew that rule one day before its effective date, May 6, 2021.

In its decision, the U.S. District Court for the Eastern District of Texas ruled that the DOL’s delay and withdrawal of its independent contractor rule violated the Administrative Procedure Act.

“The rule provided our independent financial advisor members with much-needed certainty regarding their classification status, only for it to be arbitrarily revoked shortly before going into effect,” Dale Brown, FSI’s president and CEO, said at the time.

If the FSI pursues a new legal challenge, the trade group could again charge the agency with violations of the administrative act again and with being “arbitrary and capricious” in proposing a completely different rule to the one that was just adopted in 2021, without showing that industry practices have changed “to merit the flip-flop,” one industry attorney who works on DOL issues said.

The DOL did not immediately reply to a request for comment on the agency’s time line for completing deliberation of the rule.

There was so much interest in the proposal that the DOL extended the comment period to November. The agency has received 54,000 letters it is supposed to consider before modifying, withdrawing or finalizing the rule. 

The agency said in the proposal it wants to decrease the chance that employees will be wrongly considered independent contractors.