Advisors and broker-dealers are among the many groups and individuals calling for changes to a proposed independent contractor rule that they argue could undermine their long-established business models.
The U.S. Department of Labor has been flooded with roughly
Mark Quinn, the director of regulatory affairs at the brokerage-support firm Cetera Financial Group, said the scale of the response to the DOL's proposal is almost unprecedented in his experience.
"The presumption seems to be that there are all these people being exploited and who need protection," Quinn said. "That's not what's going on in our business. Most of them started as employees and found that model didn't work for them and chose to go independent."
The DOL's proposed worker-classification regulations would abandon looser standards adopted under the Trump administration. Critics of those standards have complained that they place too much emphasis on two factors: How much control workers exercise over their own work and how much they stand to profit or lose from their own activities and decisions.
The new rule would instead call on federal regulators to look at the "totality of the circumstances" when deciding if someone has been properly classified as an independent contractor. Other factors that should be considered, according to the DOL, include the amount of skill required for a given type of work, the permanence of a working relationship and whether the work being performed is just one part of providing a particular product or service.
The Financial Services Institute, a trade group and lobby for independent advisors, contends in a
Among other things, the Financial Services Institute warns that the DOL's proposal would undermine the "clarity and consistency" the industry has come to expect from regulators. The resulting uncertainty, the institute warns, will lead both to unnecessary compliance costs and — most likely — litigation.
"Financial advisors benefit from their status as independent contractors, which allows them the flexibility to manage their own businesses, set their own hours, offer their preferred products and services, and enjoy a healthy work-life balance," according to the institute's letter.
Concerns over the misclassification of independent contractors are far more common in industries like construction and trucking. Labor advocates have long worried that workers in these industries are being deprived of benefits like a federally guaranteed minimum wage and overtime pay because they are not being classified as direct workers. Companies with independent contractors also don't owe payroll taxes, which help support government programs like Social Security and unemployment insurance.
Gig-economy companies have resisted attempts to have their workers designated as direct employees. In 2020, the ride-sharing firms Uber and Lyft and similar companies waged an extremely expensive ballot campaign to overturn California law that would have ended their drivers' classification as independent contractors.
Quinn said one big concern for Cetera — which provides services ranging from technology support to marketing to more than 8,000 independent advisors — is that the new rule could mean companies are exerting control over employees even if all they are doing is reminding them of their obligation to follow state and federal laws. That control, in turn, could be enough to trigger a "direct employee" designation.
LPL Financial, which also provides various sorts of support to independent advisors, made a similar point in its
"Independent financial professionals do not have to meet any productivity goals set by LPL as a broker-dealer, and they do not have to adhere to a specific schedule beyond the schedules for trading set by exchanges," LPL wrote. "Therefore, LPL believes that the regulatory control it is obligated to undertake over a financial professional because of state and federal financial industry regulatory requirements should not be considered probative of control."
On the other hand, Quinn said the DOL's proposed criteria related to profit and loss could go in independent advisors' favor. If anyone is directly responsible for how much they make and how much business they generate in a given year, he said, it's independent advisors.
"It really depends on how hard you work," Quinn said.
The final date to comment on the DOL proposal was Dec. 13. Quinn estimated the agency will now need months to go through the tens of thousands of responses it received. But he does expect the DOL to take some action in 2023.
"From a political perspective, they're probably going to want to do something this controversial early in the election cycle," Quinn said. "I don't think they'll want this hanging around until 2024, which is an election year."
