In a win for independent financial advisors, a federal district court has ordered the reinstatement of a Trump-era rule on independent contractors, ruling that the Biden-led Department of Labor failed to properly follow the Administrative Procedure Act when it withdrew the rule.
The March 14 ruling (Coalition for Workforce Innovation v. Walsh) by the U.S. District Court for the Eastern District of Texas vacates two rules issued by the DOL: one issued in February 2021 that delayed implementation of the independent contractor rule and a second issued in May 2021 that withdrew it, finding that it was arbitrary and capricious.
The decision by U.S. District Judge Marcia A. Crone also directed that the independent contractor rule, which was issued in January 2021, to be reinstated effective as of March 8, 2021—the rule’s original effective date. “Despite the DOL’s purported desire to provide clarity, the Department did not address the inconsistencies and lack of coherence in the manner in which the economic realities test was applied across the country prior to the Independent Contractor Rule,” Judge Crone wrote. “Nor did the DOL contemplate a solution for that problem—as previously identified by the Department. Rather, the DOL merely stated that the economic realities test was more intelligible before the promulgation of the Independent Contractor Rule.”
Judge Crone further noted that, although “as a matter of general principle, uniformity in the application of federal statutory law is desired and required,” the withdrawal of the Independent Contractor Rule left regulated parties without consistent guidance regarding the proper classification of workers under the Fair Labor Standards Act (FLSA).
Co-plaintiffs challenging the DOL’s delay and withdrawal of the rule included the Financial Services Institute (FSI); the Associated Builders and Contractors; the Associated Builders and Contractors of Southeast Texas; and the Coalition for Workforce Innovation.
FSI argued, among other things, that the withdrawal of the rule created uncertainty for independent financial advisors who choose to be independent contractors. “Restoring the DOL’s independent contractor rule provides clarity and certainty for independent financial advisors and independent financial services firms,” FSI President and CEO Dale Brown said in a statement following the ruling. “Our members can now operate their businesses and serve their Main Street clients confidently knowing that their choice to be independent is secure under FLSA.”
The Reinstated Rule
The newly reinstated rule, which applies to financial advisors operating as independent contractors, clarifies a long-standing “economic reality test” to determine whether a worker is an employee or independent contractor under the FLSA by addressing the distinction of whether a worker is dependent on a particular individual, business or organization for work or is in business for him- or herself and, is thus, an independent contractor.
The rule sharpens this inquiry into five distinct factors, instead of the five or more overlapping factors used by most courts and previously the DOL. The final rule explains, among other things, that two of those factors—the nature and degree of the worker’s control over the work and the worker’s opportunity for profit or loss—are more probative of the question of economic dependence or lack thereof than other factors, and thus, typically carry greater weight.
According to SIFMA, nearly 160,000 individuals affiliate with independent broker-dealers (BDs) as independent financial advisors.
What’s Next?
It’s not clear at this point whether the DOL will appeal the ruling or seek to reopen the guidance in order to propose new standards. According to a Bloomberg report, the DOL apparently is evaluating all options, including the potential need for rulemaking. “The district court decision is both surprising and disappointing. When employers misclassify workers as independent contractors, workers lose key rights and protections, hurting labor standards across the board and making it harder for law-abiding employers to compete on an even playing field,” Bloomberg quoted Solicitor of Labor Seema Nanda as saying in a statement.
Meanwhile, the House of Representatives in March 2021 passed the PRO Act (Protecting the Right to Organize Act of 2021, H.R. 842) that would not only make it easier for workers to unionize, but also reclassify independent advisors and brokers as employees under the National Labor Relations Act. While the Senate Health, Education, Labor and Pensions Committee held a hearing on the legislation, it has not moved forward in the Senate.
