New Threats Against Independent FAS

Recent legislative and regulatory moves endanger 1099 contractor status for independent financial advisors

“Why can’t legislators
and regulators
recognize the facts?”

Financial advisors’ independent contractor status is under threat from multiple directions.  Unfortunately, many legislators and regulators continue to erroneously assume that independent contractors are always and everywhere misclassified employees who should be afforded added protections and benefits from their ‘employers.’ 

This misconception ignores the foundational importance of independent contractor status to the vast, highly effective and indispensable community of independent financial advisors who provide crucial guidance to Main Street American investors every day.

House and DOL Actions

Let’s start with what’s happening in the US House of Representatives.  On March 9, the House passed the Protecting the Right to Organize (PRO) Act, which would amend the National Labor Relations Act (NLRA) to mandate a more stringent worker classification test for independent contractors and likely re-categorize many advisors as employees of their broker-dealers. The legislation is now under Senate consideration.

Then, on March 11, the Department of Labor (DOL) proposed the withdrawal of a recently adopted final rule under the Fair Labor Standards Act (FLSA) that clarified requirements for independent contractor status based on a common-sense ‘economic reality’ test. Under that rule, a worker who is, as a matter of economic reality, in business for themselves – as opposed to being economically dependent on an employer – would be considered an independent contractor.

This federal-level rule had provided much-needed clarity for advisors – as well as to other regulators and legislators – across the country. Repealing the rule would mean a reinstatement of the FLSA’s more complex and ambiguous multi-factor test, which has historically left advisors vulnerable to threats to their independent contractor status, especially from various state-level legislative proposals.

Independent Contractor Status – A Vital Choice for Financial Advisors

In its proposal to withdraw the final rule, the DOL states that the FLSA’s definition of ‘employee’ “stretches the meaning of ‘employee’” and imposes an “inquiry of economic dependence [that] establishes a broader scope of employment than that which exists under the common law of agency.”

Ubers and Lyfts
“Don’t confuse us with
independent financial
advisors, please.”

In plain terms, the current DOL seems to believe that economic dependence is a presumption in any relationship between a larger organization and a worker it pays or distributes revenue to, rather than a question.

As independent financial advisors know, this simply isn’t the case in our industry.

The relationship between independent advisors and the wealth management firms that support them is, essentially, a supervisory one, developed primarily to ensure that advisors comply with securities regulations, rather than to exert control over advisors’ business models, client service approaches, or other key elements of their businesses.

Independent advisors choose to operate under this model in order to build their own technology platforms; determine how they work with clients, and under what compensation model; and exercise greater control over the products they offer to their clients.

It also offers them the ability to hire their own teams, control their own costs and tap into the entrepreneurial spirit that has powered so many successful American businesses and communities.

Protecting Financial Advisors, Their Clients and Their Businesses

For all the reasons above, FSI is staunchly opposed to the PRO Act in its current form. We are also fully engaged in standing up to the DOL’s efforts to repeal its rule clarifying independent contractor status under the FLSA.  Here’s what we have underway:

“We sure hope the
carveout happens!”
  • Carveout for financial advisors.  In our advocacy efforts on the PRO Act, we are working to secure a carveout for financial advisors similar to the one we successfully pushed for in California’s AB 5. That bill, which came before the state’s legislature in 2019, implemented a strict independent contractor classification test. Fortunately, however, lawmakers saw the benefits of exempting businesses in the independent financial services industry. “We sure hope the
    carveout happens!”
  • If the carveout isn’t possible…  We will work to oppose the passage of the PRO Act altogether. Given that parts of the Senate’s Democratic caucus appear not to favor the legislation in its current form – and the fact that 60 votes would be needed to overcome a filibuster – we are hopeful that passage is not a foregone conclusion, despite the Democrats holding the tie-breaking vote in the chamber.
  • About the DOL rule’s potential repeal…  We recently submitted a comment letter articulating our opposition to this move. Beyond re-introducing substantial ambiguity into the determination and application of independent contractor status for thousands of advisors under the FLSA, our letter points out that the DOL’s economic analysis of its proposed repeal contained numerous erroneous statements and assumptions. It also failed to consider important aspects of its own final rule.  Additionally, the Department’s stated justifications for withdrawing its rule are not based on law or adequate fact-finding.

As we have for the better part of two decades, we will vigorously defend financial advisors’ independent contractor status against these current threats – and from any others that may emerge on the horizon.

Dale E. Brown is President and CEO of the Financial Services Institute, the leading advocacy and industry association for independent wealth management firms and their affiliated financial advisors

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