Cambridge Investment Research’s 1,600 financial advisors are independent contractors who run their own businesses nationwide, but legislation introduced in both the House and Senate has threatened that business model.

The legislation titled the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 would remove the safe harbor provision in Section 530 of the Revenue Act of 1978, which could force independent broker-dealers to reclassify independent financial advisors as employees, subjecting the firms to back taxes, penalties and interest. The bill was introduced to the Senate on Dec. 14, and President Obama used similar language in his proposed budget, but no action has been taken, leaving independent contractors in limbo.

Eric Schwartz, Cambridge’s chairman  and chief executive officer, said one his successful financial advisors has 13 of his own employees and $800,000 in overhead. “He runs his own office,” Schwartz said in an interview. “We don’t tell him when to show up, who to hire, who not to hire and so on. If this legislation barred us from using independent contractors, does that mean we need to make this advisor an employee? Then what happens to his employees? Do we have to pay his overhead? Our role with him completely changes.”

Schwartz said he understands the reasons behind the legislation, which was introduced to the House in late July by Rep. Jim McDermott (D-Wash.) and introduced to the Senate in December by Sen. John Kerry, and was meant to curb abuses in some industries where employees are being classified as independent contractors to save on health insurance, workers’ compensation, Social Security, Medicare, overtime, and unemployment compensation.

But financial advisors working for Cambridge average $200,000 annually, Schwartz said. “They are not making a decision to be an independent contractor because they have no choice,” he said. “Anyone of our financial advisors that wanted to could work for a wirehouse that would make them employees, but they want to own their own businesses.”

One of Schwartz’s top advisors had revenues of $1.3 million and could sell the business for approximately $2.5 million. As an independent contractor he could build his business and when he is ready to retire he could benefit. As an employee he is working for someone else.

“The legislation wasn’t targeting those in the independent broker-dealer space,” Schwartz said. “They were targeting certain industries that are exploiting employees and avoiding paying taxes. In our case every independent broker dealer, like a bank, is highly regulated and not allowed to take cash so it’s a different circumstance.”

Dan Barry, a government relations director of the Financial Planning Association, said in a phone interview that there is nothing to suggest there has been abuses with the independent contractor model in the financial services sector. In fact the FPA’s 25,000 members find the model productive, he said.

“We are concerned that the IRS with a sweeping brush could eliminate a legitimate and effective business model,” Barry said. “The fact that Senator Kerry introduced the legislation to the Senate side gives it all the more urgency and seriousness because we know it’s not going to be a one House proposal. It’s something we need to keep a close eye on and advocate strongly on.”

But Ed Shelleby, the communications director for Rep. McDermott, said there is nothing to worry about for businesses, including independent broker-dealers, that follow the rules.

“Rep. McDermott is continuing to work with Treasury officials and the Senate on the legislation so that worker rights are protected and there aren’t any unintended consequences for businesses, including independent broker-dealers,” Shelleby said. “No businesses that reasonably pass the current 20-point test should be concerned about being negatively affected by this bill. It will be crafted to catch the real problems in the labor market and create a path for those who are abusing the loophole to come clean in a way that makes sense.”