Independent Contractor Status Under FLSA, FMLA & MSPA

Summary

SIFMA provided comments on the Department of Labor’s (DOL) notice of proposed rulemaking to revise its interpretation of independent contractor status under the Fair Labor Standards Act (“FLSA”)(the “Proposal”). SIFMA supports the Department’s Proposal to rescind the 2024 rule and readopt the 2021 rule with modifications.”

Excerpt

I. The Value of Independent Contractors in the Securities Industry

Independent contractors have long been an integral part of the securities industry. Independent broker-dealers (“BDs”) and the nearly 160,000 individuals that affiliate with them as independent financial advisors (“FAs”) serve millions of clients across the U.S., with tailored investment advice. Many clients are modest to middle income investors seeking advice on retirement planning, educational funding, and other life events. Many of these FAs engage in outside business activity to protect their clients’ financial well-being by offering insurance
solutions and providing tax planning advice, among other services. For FAs that choose this route instead of being an employee of a BD, independent contractor status allows them to own and operate their own small business (formed as sole proprietorships, professional corporations, franchisees, partnerships, LLCs, or other legal entities) and control the manner and means of its operation. Their business bears the hallmarks of an independent contractor. They benefit from a decentralized business structure, buy or rent their own office space, employ their own staff, select and manage vendors, and are typically responsible for their own expenses and benefits.

These FAs are entrepreneurs who assume the risks and seek out the rewards of entrepreneurship. They control their own profit or loss. Compensation is traditionally based on commissions, fees, or other transaction-based consideration that is carefully recorded on their books and records and reported on the IRS Form 1099. Importantly, FAs own the relationship with their clients – the most valuable asset in the securities industry – and is an important reason that some individuals choose to be an independent contractor. If they wish to affiliate with another broker-dealer, they can take their client base with them.

Notably, FAs work in a highly regulated industry and are required by the securities laws to associate with a BD, which could be a firm that has a fully independent contractor business model or offers a choice between independent contractor or employee status, and be licensed with the Financial Industry Regulatory Authority (“FINRA”). ¹ Association with a BD is ground in important public policy. The BD handles licensing and registration of FAs with FINRA and supervises them for the protection of investors. Independent FAs contract with BDs not only to meet their regulatory obligations, but also to carry out their clients’ goals. For instance, the BD offers custody of client funds, provides trade execution, and takes care of the required reporting so that the FA can focus on their clients. An affiliated FA has a written contract with the BD that clearly details his or her status as an independent contractor and specifies that he or she is not an employee of the BD. There is no potential for misunderstanding each side’s role in the arrangement.