The Department of Labor is withdrawing a Trump administration rule that an industry advocacy group argues would have solidified the independent contractor status for independent broker/dealer advisors under the Fair Labor Standards Act (FLSA).
While DOL Secretary Marty Walsh argued that withdrawing the rule would stop the “erosion of worker protections” that would have unfolded if it took effect, Dale Brown, CEO and president of the Financial Services Institute (FSI), argued the rule “provided much-needed clarity and certainty” for both independent financial advisors and firms, as well as for clients.
FSI argued that the rule would have boosted clarity about whether independent advisors were independent contractors by adopting an "economic reality" test to classify employees versus independent contractors under the FLSA. The rule would assess the person's "nature and degree of control over the work," as well as their "opportunity for profit or loss based on initiative and/or investment."
Without the new rule, Brown worried the industry would suffer from instances of what he described as "confusing and conflicted interpretations” about employee vs. independent contractor classifications.
“The uncertainty created by this rule’s withdrawal prevents independent financial advisors and firms from operating confidently knowing their independent contractor status is secure,” he said. “Ultimately, this will lead to our members having to divert time and resources to defending their independent contractor status from inaccurate challenges rather than helping their clients achieve their financial goals.”
The final rule was originally announced on Jan. 6. While the rule was set to take effect on March 8, when President Joe Biden was inaugurated, the DOL moved to delay its effective date, and on March 12, it proposed to withdraw the rule. The DOL argued the rule was inconsistent with the FLSA, and would have a “confusing and disruptive effect” on workers and businesses.
“Legitimate business owners play an important role in our economy but, too often, workers lose important wage and related protections when employers misclassify them as independent contractors,” Walsh said. “We remain committed to ensuring that employees are recognized clearly and correctly when they are, in fact, employees so that they receive the protections the Fair Labor Standards Act provides.”
The FSI submitted a comment letter last month in support of the rule and opposing its withdrawal, and Brown asserted that many financial advisors chose to move toward an independent model as a way to operate their own business, with many leaving roles and businesses where they were classified as employees.
“Independent financial advisors are small business owners who, inspired by the entrepreneurial spirit, build their businesses within their communities, develop their own books of business, pay their own taxes, hire their own staff and rely on their business’ success,” he said. “Despite this, too often, their independence has been threatened.”
But critics of the rule argued that the regulation could make it more difficult for gig and contract workers to make the argument that they should receive minimum wage earnings and overtime protections, The Washington Post reported.
There is also movement on the legislative front; in his recent address to Congress, President Joe Biden urged the Senate to pass the PRO Act, which passed in the House of Representatives in March, according to The Hill. That bill, among other things, could change the independent contractor status of advisors affiliated with independent broker/dealers and insurance companies; the House also passed the bill last February, but it stalled in the Senate.