Financial services and insurance industry employers regularly classify service providers, including financial advisors and independent insurance agents, as independent contractors, especially if such individuals cultivate and service their own clientele with a high degree of autonomy. Despite that autonomy, knowledgeable industry professionals and their counsel are aware of the legal risks associated with the independent contractor classification. In a recent decision applying California law to a case in which several independent contractors asserted a variety of wage-hour claims based on their alleged status as “employees,” one judge upheld the propriety of the classification with respect to the defendant’s financial advisors. Taylor v. Waddell & Reed, Inc., 2012 U.S. Dist. LEXIS 117258 (S.D. Cal. Aug. 20, 2012).

The independent financial advisors in Taylor provided financial advisory services to clients pursuant to their Professional Career Agreement with the Defendant. They alleged that the control exerted by Waddell & Reed over the arrangement made them employees entitled to the protections of the California Labor Code. In rejecting their claims, Judge Anthony J. Battaglia of the Southern District of California utilized the independent contractor test set forth by the California Supreme Court (see S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 341 (1989)) and relied heavily on a recent California Court of Appeal decision regarding the contractor status of insurance agents (see Arnold v. Mut. of Omaha Ins. Co., 202 Cal. App. 4th 580 (Cal. Ct. App. 2011). Applying Borello and Arnold, Judge Battaglia found that the advisors did have the hallmarks of true independent contractors, in that they:

  • believed they were creating, and intended to create, an independent contractor relationship (as evidenced by the Professional Career Agreement);
  • reported their earnings based on IRS Form 1099;
  • ran their own businesses providing financial planning services, investment products, and insurance, which required independent skill and planning, as well as state licensure;
  • paid their own business expenses, could hire assistants, chose their own work location (frequently away from the office), and were paid solely on a commission basis; and
  • were not subject to any legally significant right of Defendant to control the manner and means by which they conducted their sales business.

Observing that, under California law, “[e]ven if one or two of the individual factors might suggest an employment relationship, summary judgment is nevertheless proper when . . . all the factors weighed and considered as a whole establish that [plaintiff] was an independent contractor and not an employee," based on the facts before it, the Court granted summary judgment.

Extensive use of independent contractors, particularly where the body of contractors consists entirely or predominately of sole proprietors who are individual providers of services, leads to a higher probability of a claim alleging misclassification and denial of employee classification. Contractor classification decisions should only be made after consultation with counsel and an analysis of appropriate risk management strategies and the economic viability of the alternative employee classification.