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Regulation and Compliance > Litigation

FSI Sues DOL for Nixing Independent Contractor Rule

By Melanie Waddell

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What You Need to Know

  • FSI says the delay and withdrawal of the rule violates the Administrative Procedures Act.
  • The rule provided independent advisors with certainty regarding their classification status.
  • FSI says rule must be restored.

The Financial Services Institute filed a lawsuit late Thursday against the Labor Department for withdrawing its final independent contractor rule.

Labor repealed the rule on May 6, one day before its delayed effective date.

“The DOL’s independent contractor rule codified the long-standing ‘economic reality’ test for determining worker classification,” Dale Brown, FSI’s president and CEO, said Friday in a statement. “It provided our independent financial advisor members with much-needed certainty regarding their classification status, only for it to be arbitrarily revoked shortly before going into effect.”

A complaint was filed in March by the Coalition for Workforce Innovation, Associated Builders and Contractors of Southeast Texas, and Associated Builders and Contractors Inc., challenging the rule’s delay.

Labor issued its final independent contractor rule on Jan. 6, and it was set to become effective on March 7. Labor then delayed the effective date until May 7, and issued the withdrawal on May 6.

FSI joined those groups Thursday in filing an amended complaint challenging the rule’s withdrawal.

“Independent financial advisors choose to be independent contractors — many of them voluntarily switching from an employee advisor model — so that they can operate their own business and better serve their clients,” Brown said. “Inspired by the entrepreneurial spirit, independent advisors 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.”

The independent contractor rule clarified the standard for employee versus independent contractor under the Fair Labor Standards Act, and reaffirmed an “economic reality” test to determine whether an individual is in business for him or herself (independent contractor) or is economically dependent on a potential employer for work (FLSA employee).

Brown argued that Labor’s ”hasty and arbitrary delay and subsequent withdrawal of its well-reasoned independent contractor rule puts it in violation of the Administrative Procedures Act,” and that the rule “must be restored so that independent financial advisors and other independent workers can operate confidently knowing their independent contractor status is secure.”

FSI and the groups state in their lawsuit that Labor “has arbitrarily and capriciously purported to overturn its previously published Independent Contractor Rule, which had provided much needed guidance and clarification of an issue that the Department itself acknowledged to have become fraught with litigation and inconsistent application of classification standards under the FLSA.”

Labor said on May 5 that it was withdrawing the rule for several reasons, including:

  • The independent contractor rule was in tension with the FLSA’s text and purpose, as well as relevant judicial precedent.
  • The rule’s prioritization of two “core factors” for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic reality test and court decisions requiring a review of the totality of the circumstances related to the employment relationship.
  • The rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

“By withdrawing the Independent Contractor Rule, we will help preserve essential worker rights and stop the erosion of worker protections that would have occurred had the rule gone into effect,” Labor Secretary Marty Walsh said in a statement.

“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 stated. “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.”

Pictured: FSI President and CEO Dale Brown

Melanie Waddell

@Think_MelanieW

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