Industry groups eye New Jersey independent contractor rule warily

Life insurance trade groups are taking their battle to preserve the traditional “independent contractor” definition to New Jersey.

That’s where the state Department of Labor and Workforce Development officials are reviving the “ABC Test” for independent contractor status. The New Jersey rule, as proposed, could result in independent advisors and agents being forced to classify as employees.

It would upend many industry financial advice and sales models, lobbyists claim.

The change would cause advisors to lose flexibility in the products and services they provide independently, said David Bellaire, executive vice president and general counsel for the Financial Services Institute.

Bellaire testified Monday at a public hearing on the rule. Nine in 10 independent financial advisors would exit their current business model rather than be forcibly reclassified, Bellaire told DLWD officials.

Agents could lose the ability to represent multiple carriers and the rule would likely reduce consumer choice in critical areas like life insurance and retirement planning, said Kevin Mayeux, CEO of the National Association of Insurance and Financial Advisors.

NAIFA-New Jersey Trustee Dennis Cuccinelli testified Monday and urged New Jersey to follow California’s lead in granting exemptions to licensed professionals. Ninety-five percent of NAIFA members operating as independent contractors wish to retain that status, Cuccinelli said.

Three-prong test

New Jersey published notice of the new rule May 5 and followed with a 60-day comment period. The state activity follows several years of back and forth at the federal Department of Labor level under the Obama, Trump and Biden administrations.

Who is considered a company's employee, who is entitled to various legal protections, and who is an independent contractor has shifted over the last decade. Workers are increasingly turning to the courts, claiming they were misclassified.

Soon after taking office, New Jersey Gov. Phil Murphy, D, created the Task Force on Misclassification, which released a comprehensive report with recommendations. Among the highlights, a first-of-its-kind misclassification penalty has assessed more than $10.6 million to be paid directly to over 12,500 misclassified workers since its implementation in September 2021.

The state’s independent contractor rule follows the Biden administration’s proposal relying on the “ABC Test.” The test presumes a worker to be an employee unless the hiring entity can prove all three of the following conditions:

A – The worker is free from the control and direction of the hiring entity in performing the work, both under the contract and in fact.

B – The worker performs work that is outside the usual course of the hiring entity’s business.

C – The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

“This rule proposal is a critical step in providing clear, reliable guidance to employers to help them comply with the law and prevent the illegal misclassification of employees,” said Labor Commissioner Robert Asaro-Angelo. The new rules “would also ensure that bona fide independent contractors understand what makes them independent contractors, rather than employees, so that they can continue to operate with autonomy.”

A different tack

In contrast, the first Trump administration pursued a regulation allowing workers who own businesses or can work for competing companies, such as a driver who works for Uber and Lyft, to be treated as contractors.

The ABC framework is just too “sweeping” for the financial services industry, Bellaire said, and it “disregards legitimate independent work.”

Ultimately, the rule will harm investors by shutting out ordinary people from the advice they need to plan for retirement, save for their kids’ education, or care for aging loved ones, he told DLWD officials.

Independent advisors say they would need to raise account minimums, increase the fees their clients pay, and stop serving some of their existing clients – including middle-income families, young investors, or retirees with modest portfolios, FSI reported.

“When the test forcibly reclassifies licensed, regulated, small-business-owning professionals who cherish their independence, it demonstrates that the framework itself is broken,” Bellaire testified. “When a test steals the equity advisors have built in their businesses, it is a tragedy. When it harms investors, it is a horrible mistake.”

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InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at john.hilton@innfeedback.com. Follow him on Twitter @INNJohnH.