20 CFR 404.1004(c)

SSR 72-58

An investment brokerage concern engaged in the purchase and sale of stocks and bonds over-the-counter and on various national and regional stock exchanges as part of its operation employed securities salesmen to purchase and sell such stocks. It paid all license and registration fees for the salesmen, furnished each with office space, a desk, and telephone service and followed regulatory requirements providing that each salesman devote full time to his work, perform services personally, and not hold himself out as being available to perform similar services for anyone else. Each salesman was required to (1) keep the office informed of his whereabouts, (2) secure approval of the broker on all new accounts (as provided by stock exchange rules), (3) have all correspondence reviewed by broker prior to mailing, and (4) submit all of his transactions to detailed review by the broker on a daily, weekly, and monthly basis (as provided by stock exchange rules.) Each salesman was paid on commission basis, was entitled to a minimum monthly draw, could be discharged at any time (upon appropriate notice) if he did not meet broker's expectations, and was covered by broker under its workmen's compensation insurance program. Held, an employer-employee relationship exists in which the securities salesmen are employees of broker for purposes of coverage under title II of Social Security Act, not just because of regulatory requirements but because the broker had a right to (and did, in fact) exercise substantial control over its salesmen.

A question has been raised as to the status of securities salesmen (also referred to as registered representatives or customers-men) engaged in sales activities for the X Brokerage Company, i.e., whether for social security purposes they may be considered employees or independent contractors.

From 1966 through 1969 the X Brokerage Company (hereinafter referred to as X) operated as an investment broker in the purchase and sale of stocks and bonds over-the-counter and on various exchanges, including the New York and American Exchanges. During this period X employed several hundred securities salesmen to solicit business in buying and selling stocks and bonds. X considered these salesmen to be independent contractors. The salesmen were under oral agreements with X to perform services for it after they were licensed by the exchanges and the various States. The agreements under which they were hired could be terminated at any time.

Each salesman was furnished with office space, a desk, and telephone service but toll call charges were shared. X paid all license and registration fees except those charged by a State located more than 150 miles from a salesman's office. X also provided direct wire service, various forms of securities quotations, all necessary accounting records to reflect transactions made by the salesmen, sales confirmations, and commission information.

The salesmen were not required to follow prescribed work schedules or routines; nevertheless (as provided by stock exchange rules) they were required to devote full time to their work. They were also required to perform their services personally, keep the office informed of their whereabouts, and were not permitted to do the same or similar work for other brokers. (This was likewise required by stock exchange rules). They were not restricted to any specific geographical area other than the States in which they were licensed. Each salesman developed his own leads and clientele except for customers referred to them by X on a rotating basis. Travel, entertainment, and some telephone expenses were paid by each salesman. They were accountable to X for any errors and were charged with any company losses incurred as a result of the salesman's transactions, e.g., executing a "buy" order when the customer directed a "sell". However, salesmen were not credited with any gain realized by X as a result of their errors.

The salesmen had to secure approval by X on all new accounts. X also reviewed all of their correspondence prior to mailing, as well as all transactions on a daily, weekly, and monthly basis. (This was provided by stock exchange rules.) Salesmen were not required by X to prepare or submit written reports though they were required to maintain an up-to-date portfolio record book of each client's holdings. Compensation was on a commission basis and each salesman was entitled to a minimum monthly draw of $435 and while the salesmen were employed it operated as a form of guaranteed minimum salary. This "guaranteed" salary was considered acceptable by the Department of Labor as meeting minimum wage requirements under the Fair Labor Standards Act. This amount was applied against commissions earned and if a salesman did not, in X's opinion, meet desired production standards (usually equal to the monthly draw), his services were generally terminated. Where a salesman's "draw" exceeded his commissions, the company had a legal right to recover the balance but chose, as a matter of policy, not to do so.

X covered all salesmen under its workmen's compensation insurance program and offered a group life, health, and accident insurance program, for which premiums were shared half and half. The salesmen were not eligible to participate in X's employees profit sharing plan.

Section 210(j)(2) of the Social Security Act provides that "the usual common law rules" are applicable in determining who are employees for social security and Federal employment tax purposes. These rules provide, in part, that generally an employer-employee relationship exists when the person for whom the services are performed has the right to control and direct the person who performs the services, not merely as to the result to be accomplished but also as to the details and means by which that result is accomplished.

In determining whether X's salesmen were employees or independent contractors, all the incidents of the relationship must be assessed and weighed with no single factor being decisive. N.L.R.B. v. United Insurance Co. of America, 390 U.S. 254, 258 (1968); Titanium Ores Corp. v. U.S., 205 F.Supp. 606, 610 (D. Md., 1962). See also M.F.A. Mutual Ins. Co. v. U.S., 314 F.Supp. 590 (W.D. Mo., 1970).

It has been the position of the Social Security Administration that real estate and securities salesmen who perform services under circumstances and conditions such as those in Dimmitt-Rickhoff-Bayer Real Estate Co. v. Finnegan, 179 F.2d 882 (8 Cir., 1950); cert. den. 340 U.S. 823 (1950) are not employees for purposes of the Federal Insurance Contributions Act in the absence of other substantial evidence of an employer-employee relationship.

In Dimmitt, supra, the court held that real estate salesmen there involved were not employees under the usual common law rules. The salesmen were not required to keep fixed hours or to report at the office daily, or to attend weekly sales meetings, but could work such hours as they determined were required by the business. They purchased their own licenses and paid all membership dues and fees, as well as all expenses incurred in soliciting business. Sales commissions were paid monthly solely on an earned basis; there was no drawing account or guaranteed minimum amount of compensation.

The present case, on the other hand, clearly supports a finding of an employer-employee relationship (even though legal regulations of the whole securities industry to protect the public appear to be the basis for much of X's control of the salesmen's manner and means of performance of services). The requirements that salesmen secure approval by X of all new accounts, submit to X all correspondence for review prior to mailing, have their transactions reviewed daily, weekly and monthly by X and perform services personally on a full time basis were considered in realistically assessing the extent of X's right to control the performance of services by its salesmen notwithstanding the fact that the extent of such control may have been strongly influenced by stock exchange and other external rules. See M.F.A. Mutual Ins. Co. v. U.S., supra; California Employment Stabilization Comm. v. Morris, 172 P.2d 497 (Cal., 1946).

Licensing statutes of the type here involved are intended to assure legal and ethical conduct by salesmen to protect the public against fraudulent dealing. Calif. Employment Stabilization Comm v. Morris, supra. The court in Morris, supra, declared that such statutes do not by themselves give a broker the degree of control over a salesman's performance which is necessary to make the salesman an employee but such control (even though statutory) should be considered along with other evidence in each case to determine whether the requisites of an employer-employee relationship exist.

The employer's right to control is further discussed in Titanium Ores Corp., supra, in which the court stated that the company's right to supervise the securities salesman's performance and to discharge him at any time were factors indicating that the company was an employer.

In the present case, X had the right not only to determine what its salesmen were to do but how it was to be done. The fact that X had such authority because the stock exchange and other rules required it to have such authority does not negate the right to control, the dispositive factor in the common law test. See Singer Mfg. Co. v. Rahn, 132 U.S. 518 (1889); Ewing v. Vaughan, 169 F.2d 837, 839 (4 Cir., 1948). Further, to a significant extent, X exercised the right of control over its salesmen in the day-to-day conduct of their jobs, e.g., X did, in fact, approve all new accounts and, on a daily, weekly, and monthly basis, review all business transactions of individual salesmen and all correspondence prior to mailing.

Accordingly, it is held that there is sufficient evidence to warrant a finding of an employer-employee relationship between the X Brokerage Company and each of its securities salesmen.

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