The ability of more than 300,000 financial advisors to continue working as independent contractors under a proposed Labor Department rule will hinge upon how much control they can prove they have over their day-to-day business decisions.
The agency issued a
In general, the proposed worker-classification rule would replace looser standards adopted under the Trump administration with criteria that many think will make it harder for a worker to be classified as an independent contractor. Companies don't have to pay benefits or payroll taxes for independent contractors, because they're not technically employees. Being a so-called "direct employee" instead entitles a person to protections and benefits including the federally guaranteed minimum wage and overtime; it also obliges an employer to pay taxes into Social Security and unemployment insurance.
Independent contractors, which many broker-dealers become after starting their careers as employees at wirehouses and other firms, are exempt from all of that. Some 64% of all registered representatives, meaning brokers and advisors who work for broker-dealers, operate as self-employed independent contractors,
Mark Quinn, the director of regulatory affairs at the brokerage-support firm Cetera Financial Group, said that one of the biggest questions for anyone claiming to be an independent contractor has to do with control. For most of the important decisions that come with running an independent brokerage, it's pretty clear that advisors are the ones calling the shots.
"They set up their own offices, they hire their own staff," Quinn said. "They come and go as they please. And they focus on the projects they think are best for them."
The questions only start to creep in when it becomes a matter of complying with federal and state securities and finance rules. Quinn said Cetera Financial Group, which provides services ranging from technology support to marketing to more than 8,000 independent advisors, directs anyone operating under its banner to abide by Securities and Exchange Commission, FINRA and state regulations. One concern, Quinn said, is that such direction could be taken under the proposed DOL rule as amounting to the sort of control an employer exerts over employees.
"We're worried that, because we say you have to follow these regulations, that will suddenly equal control," Quinn said.
Concern has long raged in industries like construction and trucking that workers are being misclassified as independent contractors and thus being deprived of things like minimum wages and overtime pay. Such anxieties have also spilled over into the so-called "gig economy"; 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 classified their drivers as employees.
Quinn said the financial planning space has at least one important distinction from those industries. By and large, he said, planners choose to become independent contractors after working as employees of large firms and building up a big enough client book to go solo.
"This isn't typically people who are new to the business," Quinn said.
In putting forward its new rule, the Labor Department said it's trying to frame the central question around whether someone is dependent on someone or something else for work.
The Trump administration's rule that's up for replacement, the department said in its proposed rule, places too much emphasis on two considerations: how much control a person exercises over her work and how much a person stands to profit or lose from her own activities and decisions. In doing so, the existing rule downplayed other factors, such as the amount of skill required for a certain type of work, the permanence of a given working relationship and whether whatever work is being performed is just one part of providing a particular product or service.
The agency is instead calling for reliance on what it deems a "totality of the circumstances" analysis giving equal weight to all those factors. In the main, the proposal would revert U.S. labor law to the system that was in place before the Trump administration. But it would also seek to provide further clarification for independent workers.
On the standard pertaining to control, for instance, the agency suggested that requirements that someone abide by federal laws or regulations should at least be taken into account. According to its proposed rule, "certain instances of control should not be excluded as irrelevant to the economic reality analysis only because they are required by business needs, contractual requirements, quality control standards, or legal obligations."
Quinn said such language is too vague to know whether formal adoption of the proposed rule would lead to the immediate disruption of advisors' business models. As has been in the case in many questions over employment status, the final word will most likely fall to the courts.
The financial services industry has stood up to court challenges over the status of independent contractors in the past. In 2012, the
Allison Mutschler, a spokesperson for the Financial Services Institute, said the 2012 decision was a step forward for the industry because it "brought clarity and the promise of consistency in the application of the economic realities test to our members' business." Still, that court victory entailed expending a significant outlay of resources; and the industry isn't necessarily eager to take up a similar fight again.
Mutschler praised the Trump administration's employment rule for bringing further clarity.
"So the concern is that this new rule will undo the clarity and consistency of the previous rule, and that we'll be reverting to confusing and conflicting interpretations," she said.
Like many groups raising concerns, the Financial Services Institute says the DOL's 184-page rule is too wide-sweeping to reach firm conclusions about.
"We are thoroughly reviewing the proposed rule as it is imperative to preserve independent financial advisors' ability to choose to be independent contractors and provide the same level of certainty and clarity the existing rule provides independent advisors," Dale Brown, the president and CEO of the group, said in a statement. "We look forward to constructively engaging with DOL staff to ensure advisors' independent contractor status is protected."
The Financial Services Institute and other critics of the proposal have until Nov. 28 to submit
"Now this new proposal is going back to the totality of the circumstances, none of which is dispositive or has more weight than the others," Coleman said. "It's going to make the outcomes more arguable. And anything that is more arguable tends to lead to more litigation."
