Advocacy Update: DOL Independent Contractor Rule State of Play

December 19, 2022

In October, the Department of Labor proposed a new independent contractor rule. While not surprised, we were disappointed that it did not offer our members and the broader industry the clarity we all need around this issue.

As a refresher, the previous administration finalized a rule in early 2021 that did precisely that, providing the independent financial services industry the promise of consistency in applying a commonsense economic reality test. Unfortunately, the current administration delayed that rule upon assuming office and, in due course, rescinded it entirely.

At the time, our response was measured but forceful. On behalf of you, our members, we sued the DOL, joining a coalition of partners that spanned multiple industries. A federal court in Texas ultimately ruled in our favor.

A New Proposal, The Same Problems

Though we were delighted with the outcome, we knew the current administration wasn’t likely to let that court decision be the final answer — even as doing so would benefit millions of Americans who rely on our industry to receive much-needed investment advice.

Overall, we have several concerns with the DOL’s new proposal. Broadly, not only does goes against the department’s professed goal of creating regulatory clarity and consistency, but it is it based on the misapplication of existing case law.

Specifically, consider that the proposal treats control measures put in place by a company to comply with “legal obligations…or requirements to meet contractual or quality control obligations” as indicative of a worker being an employee of the company. Given the industry’s expansive federal and state regulatory supervision requirements, it’s easy to appreciate how this language will create problems for our members.

By comparison, the 2021 regulation was more sensible, providing a safe harbor for anyone required to comply with specific legal obligations or to meet certain quality control standards — like the ones inherent to the independent financial adviser model.

Where Do We Go from Here?

We continue to engage with the DOL, stressing that our members do not want to be classified as employees of their broker-dealer. Independent financial advisors have consciously chosen to be an entrepreneur and a small-business owner.

Many of you, in fact, started your career as a W-2 employee with Wall Street-based institutions and willingly left that model to have more freedom and flexibility to run your businesses and serve clients as you see fit. In doing so, you have made a real difference in the lives of millions of American families.

We have also pointed out that if independent advisors were reclassified as employees, it would create significant operational and recordkeeping burdens. Under the Fair Labor Standards Act, an employer must keep a detailed account of how many hours their employees work and what they earn, something independent firms currently do not have to do for their affiliated independent financial advisors.

If the DOL’s proposal gets adopted, these added responsibilities will increase costs for broker-dealers and RIAs, who, in turn, will pass them down to financial advisors and their clients. That’s not a good outcome for anyone.

We recently submitted an extensive comment letter to the DOL outlining the proposal’s flaws and the significant harm it would cause to the independent financial services industry and all the hard-working Americans relying on independent, professional financial advice to achieve their financial goals.

While our advocacy team remains hard at work, we need help to make progress on these issues. Indeed, the DOL and members of Congress must hear from our thousands of independent financial advisor members across the nation about what your independent contractor status means, not just to you but to your clients as well.

Not Backing Down

Advisors being properly classified as independent contractors is a defining characteristic of our industry, which is why this matter has been a leading priority for us for years. We will continue to give this issue our full attention and fight the good fight. We hope you will join us in our efforts in the weeks and months ahead.

FSI Membership