DOL Must Preserve the Independent Contactor Model for Financial Advice

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. by providing investment education and guidance. Many clients are modest to middle-income investors seeking advice on retirement planning, educational funding, and other life events. Many of these FAs offer or provide additional services to protect their clients’ financial well-being, such as insurance solutions and tax planning advice.

For FAs that choose this independent contractor route instead of being an employee of a broker-dealer, the independent contractor status allows them to own and operate their own small business, while also controlling the manner and means of its operation. These FAs are entrepreneurs who assume the risks and seek out the rewards of entrepreneurship. They control their own profit or loss. Operating as an independent contractor encompasses the flexibility that these entrepreneurs seek to be successful.

Recently, the Department of Labor’s Wage and Hour Division has announced an intention to look at worker classification and independent contractor status under the Fair Labor Standards Act (FLSA). We are actively working to ensure any proposed rulemaking does not negatively impact the traditional independent contractor model utilized by our independent broker-dealer members and their financial advisors.  This is a byproduct of the attention focused on the gig economy’s new app-based industries that almost exclusively utilize independent contractors.

Efforts, particularly in Congress, to address worker classification in the new gig economy have focused on the relatively new and restrictive three-pronged test, known as the “ABC test.” The ABC test – which we are optimistic the DOL will not take up and are urging them accordingly – mistakenly presumes that all workers are employees and are only independent contractors if all three prongs are met. The rigidity of the ‘ABC test’ in the proposed bill and legal uncertainty surrounding it could result in the reclassification of independent FAs as employees or require them to build out services that they more efficiently lease from other broker-dealers.

California recognized this problem when it adopted the ABC test for its wage and hour law and it specifically exempted several industries, including ours, allowing such exempted industries to continue to rely on a multifactor test. Thus, protecting the historic business model and allowing those FAs who choose to operate and control their small businesses in the securities industry to do so.

Over 30 years ago, Congress specifically recognized the unique status of worker classification in the securities industry when in 1997 it passed a “duty to supervise” safe harbor for broker-dealers under the tax laws. Financial advisors work in a highly regulated industry, overseen by the Securities and Exchange Committee (SEC), the Financial Industry Regulatory Authority (FINRA) and State securities regulators.

By clarifying the federal standard to address employee status, the Department provided certainty to hiring firms and individuals working in an independent capacity. This is particularly important for our members who operate nationally, as well as those independent contractors who may move from one state to another.

By having a uniform set of rules to follow, both employees and independent contractors will understand the rules that apply in their case. The benefits of government providing uniformity on employment laws are substantial. This is important for ensuring there are not overlapping or conflicting regimes, which make compliance more complicated.

As an industry, we look forward to working with the Department as they carefully consider changes to the FLSA that preserve an important facet of the securities industry and continue to make financial advice avaialble to everyday Americans.

Lisa Bleier is Managing Director and Associate General Counsel, Federal Government Relations at SIFMA. In this capacity, she supervises and coordinates SIFMA’s outreach to members of Congress and government regulators on retirement and senior investor matters.