The California legislature has passed a bill that tightens rules governing independent contractor status and is generally considered a positive development for independent broker/dealers and their advisors. The Financial Services Institute, the IBD trade group, supports the legislation, which prohibits the “willful misclassification” of independent contractors who instead qualify as employees. The FSI initially tried and failed to get an exemption for the independent broker-dealer industry into the bill, but it did manage to convince the sponsor to remove onerous record-keeping and “notice” requirements, citing increased compliance burdens and costs for financial firms. Independent contractor status in the IBD channel and RIA channels are pretty well-established.
Financial services firms in particular have difficulty with the independent contractor issue because, according to the IRS definition, many independent representatives still fall into the employee category when in practice, they are truly independent contractors. In California, at least, the amended legislation is viewed as eliminating the gray area for “misclassifying” employee or contractor status. Pursuant to the new legislation, 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.