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Regulation and Compliance > Federal Regulation > DOL

Worker Classification for Independent Financial Professionals: Big Changes Ahead? 

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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. 

They hire and pay for their own staff and facilities, and the profit or loss they derive from their business is primarily determined by their skill and industriousness. Most of the financial professionals affiliated with Cetera are independent, and they appreciate the flexibility this gives them to serve their clients and structure their businesses as they see fit. 

ABC Test

Shortly after President Joe Biden was sworn in, the Labor Department withdrew the 2020 amendments and stated its intent to take another look at worker classification. Until the new regulations are published, we will not know what they contain.

One approach that both President Biden and congressional Democrats have suggested is the so-called “ABC” test, which establishes a presumption that all workers are employees unless the employer can show three things. The work is: (A) done without the direction and control of the employer, (B) performed outside the usual course of the employer’s business, and (C) done by someone who has their own independent business or trade. 

Applying the ABC test would likely result in many more workers being classified as employees. California residents may remember a state law referred to as “AB-5,” which adopted the ABC test for workers in California in 2018. AB-5 was ultimately invalidated in a ballot initiative sponsored by the ride-hailing companies Uber and Lyft, but if it had survived it would have had dramatic effects. 

Incorporating the ABC test in federal law has been a policy goal of the Democratic Party for many years, and many arguments have been made in favor of it. However, the three prongs of the ABC test appear to ask more questions than they answer.

For example, the securities industry is highly regulated. Does requiring IC representatives to follow company policies designed to satisfy the securities laws create a degree of control that is inconsistent with IC status? What is an independent trade or business, and are financial professionals engaged in it? What business is the employer engaged in? These are but a few of the questions that will arise, and whatever the outcome, litigation and uncertainty are sure to ensue. 

There is an adage about investing. It states that markets can handle good certainty or bad certainty, but they cannot handle uncertainty. The Economic Realities test has been around for a long time and is well known and understood. Applying the ABC test will create a highly uncertain environment for independent financial professionals trying to meet the needs of their clients while successfully managing their own businesses. 

The effects of any new regulations on independent financial professionals could be far-ranging and dramatic. We encourage everyone to join in the debate as we wait to hear more from the Labor Department and monitor for any further developments at both the state and federal level.


Mark Quinn is director of regulatory affairs at Cetera Financial Group,