The U.S. Department of Labor has proposed a new rule on classifying employees and independent contractors that seeks to return to a previous interpretation, which may impact independent financial advisors.
The Notice of Proposed Rulemaking (NPRM) released Oct. 11 would modify Wage and Hour Division regulations to revise its analysis for determining whether a person should be classified as an employee or independent contractor under the Fair Labor Standards Act (FLSA). According to the DOL, the department’s approach seeks to be more consistent with the courts’ FLSA interpretation and the Act’s text and purpose, contending that the proposal would “preserve essential worker rights and provide consistency for regulated entities.”
It also would rescind and replace the existing 2021 test used to determine worker classification as either an independent contractor or an employee that was finalized under the then-Trump administration.
According to the DOL, the proposed rule would:
- Restore the “multifactor, totality-of-the-circumstances analysis” to determine whether a worker is an employee or an independent contractor under the FLSA.
- Ensure that all factors are analyzed without assigning a predetermined weight to a particular factor or set of factors.
- Revert to the interpretation of the economic reality factors, which include the investment, control and opportunity for profit or loss factors, and the integral factor, which considers whether the work is integral to the employer’s business.
The DOL explains in the preamble that, after further consideration, it believes that the 2021 rule “does not fully comport” with the FLSA’s text and purpose as interpreted by courts and departs from decades of case law applying the economic reality test.
The DOL emphasizes that it is not proposing the use of “core factors” but instead proposes to return to a “totality-of-the-circumstances” analysis of the economic reality test in which the factors do not have a predetermined weight and are considered in view of the economic reality of the whole activity.
The department notes that the 2021 rule included provisions that “are in tension with this case law—such as designating two factors as most probative and predetermining that they carry greater weight in the analysis, considering investment and initiative only in the opportunity for profit or loss factor, and excluding consideration of whether the work performed is central or important to the employer’s business.”
As such, the DOL contends that these provisions narrow the economic reality test by limiting the facts that may be considered as part of the test—facts that the department believes are relevant in determining whether a worker is economically dependent on the employer for work or in business for themself.
The DOL further notes that it considered waiting for a longer period of time in order to monitor the effects of the 2021 rule, but decided “it is appropriate to move forward” with the proposed regulation, believing that retaining the 2021 rule would have a “confusing and disruptive effect” on workers and businesses alike due to its departure from case law describing and applying the multifactor economic reality test as a totality-of-the-circumstances test.
Back to the Future
The DOL had previously tried to delay and rescind the Trump-era rule on independent contractors, but a March 2022 ruling by the U.S. District Court for the Eastern District of Texas ordered the reinstatement of the 2021 rule, holding that the Biden-led DOL failed to properly follow the Administrative Procedure Act when it withdrew the rule.
Co-plaintiffs that had challenged 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.
The existing 2021 rule, which applies to financial advisors operating as independent contractors, had clarified the “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, thus, is an independent contractor. The rule had sharpened this inquiry into five distinct factors, instead of the five or more overlapping factors used by most courts and previously the DOL.
“We are thoroughly reviewing the proposed rule as it is imperative to preserve independent financial advisors’ ability to choose to be independent contractors and provide the same level of certainty and clarity the existing rule provides independent advisors,” FSI President & CEO Dale Brown said in a statement. “We look forward to constructively engaging with DOL staff to ensure advisors’ independent contractor status is protected.”
The proposal is scheduled to be published in the Federal Register on Oct. 13. Comments must be submitted to the DOL by Nov. 28, 2022.
