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Contract Sales People and Supervision

Friday, September 18, 2015

In the business world it is common practice for companies to hire 1099 contract labor instead of hiring employees of the company. In most cases employers hire 1099 contract labor individuals since they are considered to be self-employed and not “employees” of the company, and this allows the company to fill key positions without being subject to added benefit costs.

In the financial services industry 1099 contract labor is also quite common, most notably to fill the sales representative position. It allows the firm to employ sales representatives without having to pay for office space, benefits, or other costs that come with hiring traditional “employees”.

It is true that 1099 individuals are considered contract labor and not employees of the employer and the labor laws concerning the two differ. However, the biggest difference between the financial services industry and the rest of corporate America is the fact that the financial services industry does not have the ability to maintain an arm’s length separation between itself and 1099 individuals like other employers.

For example, say an individual owns a transportation company, and that person contracts with an independent truck owner as a 1099 contract labor driver to pick up and deliver a load of computer parts. While transporting the computer parts the truck overturns and shuts the freeway down and causes damage or harm to another individuals and their property. That truck will, in most cases, be branded with the driver’s company name, not the company for whom it is carrying the load, and have its own insurance policies, and therefore, that truck driver, not the company that contracted with him or her to haul the computer parts, will be responsible for the incident.

With the financial services industry this is not true. As an example in this case, say ABC Securities (“Firm”) hires John Smith to sell products offered through the Firm. The Firm is going to bring John on as a 1099 contract labor sales person. John operates under the doing business name of John Smith Advisers (“JSA”). In order to sell the products offered through the Firm, John is going to have to register with the appropriate jurisdictions as a representative of the Firm. John’s registration is approved and he has an office in a separate city and state from that of the Firm. His office window reads John Smith Advisers. However, the sign on John’s office window also states securities are offered through the Firm. John comes across a product being offered by a group of individuals which pays a nice commission. He decides to participate in the selling of the offering. Sometime later the Firm comes to visit John’s office and sees that he is selling this product. Nothing is said because the product is being sold through JSA and not the Firm. Sometime after that it is found that the product that John has been selling was fraudulent and all of his investors have been harmed. In this case both John and the Firm are going to be the subject of an investigation by one or more regulatory bodies, which will in most cases result in administrative actions and civil suits being filed against both the Firm and John.

Many readers may be questioning the facts outlined in this blog posting. Please click here to read all the details relating to these facts.

In addition, readers should refer to the United States Department of Labor’s factors in determining what actually constitutes contract labor. Please click here to read a more about Independent Contractors. Red Oak is here to help you with all your questions regarding supervision and your compliance responsibilities.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is the global advertising review software of choice in the financial services industry. It is a comprehensive suite of SEC 17A-4 compliant features that are 100% books and records compliant and provides clients with 35% faster approvals and 70% fewer touches or better. We also offer Smart Review(SM), which solves for the storage and maintenance of disclosures, helping firms reduce risk, decrease review times, and increase the speed of distribution of marketing materials. Smart Registration(SM) automates the licensing and registration management process to help reduce regulatory risk and time spent on manual processes. Overall, Red Oak allows firms to minimize risk, reduce costs, and increase compliance review process effectiveness and efficiencies.

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