New DOL rule could undermine financial advisors’ independent contractor status

The U.S. Department of Labor’s new rule to determine whether a worker is an employee or independent contractor includes a six-factor test of the “economic reality” of the relationship between workers and employers. Financial industry advocates fear the rule may undermine advisor’s independent contractor status.

Among other things, the test asks whether the worker depends on the potential employer for continued employment or is operating an independent business.

The result determines coverage under federal wage-and-hour laws and has been a sticking point for years for employers, labor organizations, and financial institutions, many of which criticized the DOL’s new rule, despite it being generally seen to benefit workers. They said the new rule could threaten the classification of many financial advisors and cause a reduction in the number of advisors serving consumers.

“We fear the DOL’s final rule will undermine our financial advisor members’ independent contractor status,” said Dale Brown, president and CEO of the Financial Services Institute, which advocates of behalf of independent financial advisors and independent financial services firms.  “Independent financial advisors are entrepreneurs who have built a strong presence in their communities, own their own businesses, pay business taxes and hire their own staff. If they are forced to be employees, this could adversely harm Main Street Americans’ access to their local trusted financial advisor.”

NAIFA concerned about impact

The National Association of Insurance and Financial Advisors, which provided  testimony to the DOL before the rule’s release, said it is still reviewing the new rule but was concerned it would reduce the number of independent contractors.

“Many financial advisors operate locally as small business owners, employing others on their staff and serving the members of their communities,” said Kevin Mayeux, CEO of NAIFA. “Reclassifying them as employees rather than independent contractors could threaten the ability of advisors to best serve their clients and to ensure that their small businesses can operate efficiently.”

In October, the DOL published a preliminary rule that included the six-factor test to determine a workers’ status. They included:

The worker’s opportunity for profit or loss;
Investments by the worker and potential employer;
Degree of permanence of the relationship;
Nature and degree of the potential employer’s control over the work;
Extent to which the work is “integral” to the potential employer’s business; and
Worker’s skill or initiative.

The final independent contractor rule, which becomes effective March 11, retained the six factors with some adjustments, involving relative investments, tools and equipment, and whether a worker could earn more by working more.

“One significant change that directly applies to sales agents is that if a worker can make more money by working more, that worker would likely be considered independent contractor by the court,” said Amy Williamson, employment and litigation counsel and managing partner at Williamson Law LLC, in Pittsburgh. “It’s hard to predict to what extent this will affect our cases but the new rule is considered more favorable to workers than employers generally speaking so it’s good news for us.”

Independent contractor confusion cited

But some labor organizations said the new DOL rule brought more confusion to the issue and was a step down from the more streamlined rule initiated during the Trump Administration.

“Instead of promoting much-needed economic growth and protecting legitimate independent contractors, the final rule will result in more confusion and expensive, time-consuming, unnecessary and often frivolous litigation, as both employers and workers will not understand who qualifies as an independent contractor,” said Ben Brubeck, aVP of regulatory, labor and state affairs for the Associated Builders and Contractors. “Regrettably, the confusion and uncertainty resulting from the final rule will cause workers who have long been properly classified as independent contractors in the construction industry to lose opportunities for work.”

Until 2021, the DOL had never defined “independent contractor” through its regulations. Instead, it offered only informal guidance. In 2020, it proposed a new rule that included the five-factor test. The Department finalized the rule in January 2021 but then sought to delay its implementation when the new administration was ushered in, and later moved to withdraw the rule entirely.

After business groups challenged the delay and the withdrawal, a federal district court held that both actions violated the Administrative Procedure Act. The court vacated the attempted delay and the withdrawal. It also held that the 2021 rule was still in effect.

Rather than simply withdrawing the rule again, the DOL issued a new one that rescinded the 2021 rule and, in its place, adopted the new six-factor test. However, the lawsuit is still pending.

“Despite the lawsuit, Department investigators may treat the new final rule as the controlling standard for audits and other compliance actions,” wrote attorneys at Littler Mendelson PC, a San Francisco-based labor law firm. “Employers should therefore review it carefully and evaluate their classification policies and practices. When in doubt, employers should work with experienced counsel.”

Doug Bailey is a journalist and freelance writer who lives outside of Boston. He can be reached at doug.bailey@innfeedback.com.

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