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Standing Up for Advisors' Independent Contractor Status

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What You Need to Know

  • Independent contractor status gives advisors more freedom to work with clients they choose and helps them control costs, FSI CEO Dale Brown writes.
  • The PRO Act, being considered by the U.S. Senate, would impose a stringent worker classification test on indie advisors.
  • FSI is challenging Labor's repeal of its independent contractor rule in court.

Independence is one of the fundamental animating forces in American life, both in our civic interactions and in business. The ability to determine one’s own path and achievements through hard work, talent and ingenuity is a powerful motivator that has driven countless successful companies, created millions of jobs, and which binds us together as part of what we call “the American Dream.”

As we celebrate the Fourth of July holiday, however, we are reminded of a crucial lesson that has been reinforced over and over again throughout our nation’s history: That independence requires constant vigilance. It is not something to be taken for granted, and if we are not continually working to defend it, our independence can be eroded and compromised.

For the thousands of small-business owners across the country who provide critical financial guidance to clients as independent financial advisors, today is a time to stand up and protect that independence.

Benefits of Independent Contractor Status

We have heard from countless advisors about the vital benefits that independent contractor status offers them and the hardworking American clients they serve.

Advisors have shared with us how the independent model has afforded them the freedom to work with clients from a variety of backgrounds, as they are no longer constrained to serve only those who meet high minimum asset requirements.

Other advisors have noted that independence allows them to better meet their clients’ financial needs by giving them access to a larger array of investment options — not just proprietary products.

As an independent contractor, they also have more control over business costs, which ultimately benefits clients, as well.

Converging Threats to Advisor Independence

The PRO Act, which would impose a stringent worker classification test that would almost certainly recategorize many independent advisors as broker-dealer employees under the National Labor Relations Act (NLRA), is still under consideration in the U.S. Senate.

Although its future is uncertain, it is a clear signal that many legislators remain unaware of the significant unintended consequences the PRO Act would have on independent advisors and their Main Street clients.

The PRO Act is not the only threat facing the crucial independent channel of the financial services industry. In May, the Department of Labor (DOL) abruptly repealed a final rule that would have secured advisors’ independent contractor status under the Fair Labor Standards Act (FLSA) by implementing a simple “economic reality test” to distinguish between employees and contractors.

The rule held that if a person was, as a matter of economic reality, in business for themselves — instead of being economically dependent on an employer — they should be considered an independent contractor.

In addition, it clarified that requirements to comply with specific legal obligations, such as the regulatory supervision requirements for independent financial advisors and firms, do not establish an employee-employer relationship.

After decades of being subject to the convoluted case law that has developed around FLSA, the DOL final rule offered hope to advisors that their businesses would no longer be vulnerable to challenges to their independent contractor status that threatened to uproot a key pillar of their businesses.

That hope, unfortunately, was short-lived. In March, the Biden administration’s DOL suddenly announced that it would delay the final rule’s implementation, and on May 6 — one day before the rule’s implementation date — it withdrew the rule entirely.

A Fundamental Element of Independent Advisors’ Businesses

We have no intention of letting these threats to independent advisors’ businesses go unchallenged.

As we did with California’s AB5 — which also jeopardized independent contractor status for advisors in that state — we are working with legislators in the Senate to secure a carveout for members of our industry in the current version of the PRO Act.

We were successful on this point when AB5 was under consideration in the California Legislature, and we are hopeful that we will be able to drive a similar outcome with the PRO Act. If a carveout cannot be secured, however, we will oppose the bill altogether.

Additionally, we recently joined the Associated Builders and Contractors Inc.; the Associated Builders and Contractors of Southeast Texas; and the Coalition for Workforce Innovation in filing an amended complaint against the DOL in the U.S. District Court for the Eastern District of Texas, challenging its delay and eventual withdrawal of its own final independent contractor rule.

As we and our coalition partners assert in our complaint, the DOL failed to meet well-established legal and procedural requirements under the Administrative Procedure Act (APA) in repealing the rule.

In addition to the numerous erroneous statements and assumptions the Department included in its economic analysis on the repeal, the DOL also failed to offer a substantive justification for its delay or a meaningful comment period during which the rule as well as its delay and withdrawal could have been debated. In doing so, the DOL undermined the transparency of its review process and, we believe, violated the APA.

Celebrating Independence

Independent advisors deserve to be celebrated for their passion and dedication to helping their clients achieve their goals. Defending the crucial role they fill in investors’ lives and preserving their ability to function as independent contractors will continue to be an unwavering focus for our team.

Dale E. Brown is President and CEO of the Financial Services Institute.