What You Need to Know
- The Labor Department plans to propose new rules on classifying workers.
- It's unknown, for now, whether the rules will affect financial professionals, so stay alert.
- Democrats' proposed ABC test for independent contractors could create more questions for advisors than it would answer.
The Labor Department recently published a notice of its intent to propose new regulations regarding classification of workers. The notice did not provide detail about what the regulations would contain, but this is another installment in a long-running debate about whether workers should be deemed employees or independent contractors (ICs).
The percentage of IC representatives registered with the Financial Industry Regulatory Authority has increased considerably over the past 10 years, so this is an issue of some importance to financial professionals. Contrary to popular belief, workers are not necessarily free to determine whether they are employees or ICs. That question is answered by applicable law and regulations.
Worker classification affects both workers and employers. Employers are required to track the working hours and conditions for employees, pay overtime wages in some cases, and make contributions to Social Security and other worker benefit funds such as unemployment and workers’ compensation funds on their employees’ behalf.
In many cases, employees are also entitled to employer-paid health insurance and to participate in employer-sponsored retirement savings plans. But worker classification is not just an economic issue. Employees are often subject to restrictions on how, when and where they perform their work. They owe their primary loyalty to their employer and may be prohibited from contracting with more than one employer at a time.
How does a financial professional square this with their desire to give clients the best and most comprehensive advice?
Worker classification is covered by many laws and regulations at both the state and federal level. A primary source is the Fair Labor Standards Act, which was adopted by Congress in 1938 as part of the New Deal. FLSA was intended to protect workers and established standards for wages, overtime and other working conditions. FLSA, however, generally applies only to employees, and includes provisions to determine if individual workers are employees or ICs.
This has evolved into what is called the “Economic Realities” test, which consists of five elements.
In 2020, the Department of Labor adopted amendments to the Economic Realities test to place greater weight on two of the five factors:
- The worker’s opportunity for profit and loss based on their own efforts.
- The degree of control that the employer exercises over the performance of the work.
Most independent financial professionals work where, when and how they wish. They find and develop their own client relationships, offer the products and services they choose, and have the ability to establish relationships with multiple providers of products and services to create the best solutions for their clients.