The independent b/d industry successfully lobbied to amend a bill recently introduced in California that would prohibit the “willful” misclassification of independent contractors who fit the definition of an employee.
The Financial Services Institute, the industry’s trade group, did not get an industry exemption into the bill as it initially hoped, but it did manage to convince the sponsor to amend the bill, removing the record keeping and “notice” requirements.
With the amendments to the bill, FSI has now changed its position to “neutral,” said Matt Schwartz, FSI’s government affairs counsel. The record keeping and notice provisions were the part of the bill FSI was most opposed to, having argued that the requirements would add unnecessary costs and increase compliance burdens for independent broker/dealers.
“The California Legislature should rather focus on how to cut the paperwork and regulatory burden that hinder economic activity at this time when we are recovering from a severe economic slump,” FSI wrote in an Aug. 9 letter to Senator Ellen Corbett, sponsor of the bill.
Schwartz speculates that word of FSI’s efforts—which included 500 comment letters sent to assemblymen, 25 member face-to-face meetings with assemblymen, and the Aug. 9 letter— made their way to Corbett. While FSI was previously pushing for an exemption, the group shifted its focus to amending the record keeping and notice requirements once it found out state legislators weren’t willing to exempt individual industries. In the Aug. 9 letter, FSI said that if those changes were made to the bill, the group would change its position to “neutral.”
Under the amendments to California Senate Bill 459, any company found to have violated the law by engaging in willful misclassification of independent contractors will have to post a “notice” on its website or in its office so that employees can see it. If applicable, the notice must say that the employer has violated the law, that the firm has changed its business practices to avoid committing further violations, and that employees who feel they are being misclassified should contact the Division of Labor Standards Enforcement, the Employment Development Department, or the Franchise Tax Board.
Schwartz said the law as written now will no longer affect broker/dealers because, he believes, independent FAs are properly classified. In a letter to the California State Assembly, SIFMA outlined the characteristics of independent b/d reps that distinguish them from other independent contractors, saying that reps are sophisticated, highly educated entrepreneurs who operate as small independent businesses with their own offices, staff and operational expenses.
Still, under the common law definition, independent b/d advisors could qualify as employees. To figure out which bucket a worker falls into, you must ask three questions, according to the IRS. The first is behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? The second is financial: Are the business aspects of the workers' jobs controlled by the payer? These include things like how the worker is paid, whether expenses are reimbursed, who provides tools and supplies. And the third is what type of relationship the individual has with the firm: Are there written contracts or employee-type benefits? Will the relationship continue and is the work performed a key aspect of the business?
When describing the relationship between advisors and b/ds, the answer to some of these questions might be yes. For example, b/ds are responsible for supervising their independent reps' activities, control certain ways in which the workers are paid and what expenses are reimbursed, and their relationships are governed by written contracts.
Willful Misclassification
SIFMA was also pleased with the amendments. “We have always said that willful misclassification was not an issue for our industry,” said Kim Chamberlain, managing director and counsel, state government affairs for SIFMA. “Our primary concern was the additional administrative burdens and those have been eliminated.”
Before the amendments, the industry was concerned that if the bill was passed, other states might follow suit with extra paperwork and compliance burdens related to independent contractor status. In its previous form, the bill required that firms submit additional disclosures to independent contractors about their independent contractor status, and it required the maintenance of records of independent contractors for at least two years. Now, Schwartz said, if the issue comes up in another state, FSI can point to the California bill—if it passes, that is.
The California Appropriations Committee will hold a hearing Wednesday, and Schwartz expects the bill to be placed in “suspense file,” meaning it will be reviewed for fiscal implications to the state. If the bill goes through the Committee, it then has to be passed by the Assembly and then signed by the governor.