DOL moves to undo stricter independence test for brokers

The definition of an “independent contractor” — long a political ping-pong ball — could bounce back in brokerage firms’ direction under a new federal proposal put forward this week.

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Broker-dealers and groups representing them expressed tentative praise for a Department of Labor proposal that would simplify the criteria firms must use when determining if a particular associate should be classified as a direct employee or an independent contractor. The rule, if adopted, would essentially return the standards to what they were before a stricter test was adopted under the Biden administration.

Brokerage industry representatives generally welcomed the new proposal. Mark Quinn, the director of regulatory affairs at the independent broker-dealer Cetera Financial Group, said the proposal at first blush appears to be a step toward something likely to be much more accommodating of wealth managers’ business models.

Quinn said there was widespread concern that standards proposed under President Joe Biden would force many advisors to abandon their status as independent contractors.

“They don’t want to be employees,” Quinn said. “If you told them they had to be employees, they would have to rethink their whole arrangement with us. It would cause some really substantial upheaval.”

The Financial Services Institute, which sued the Department of Labor in 2024 shortly before the stricter Biden administration rule was to take effect, also offered tentative praise.

“Our members have chosen the independent contractor model — many making the switch from an employee model — so that they can build their own businesses and better serve their clients,” FSI President and CEO Dale Brown said in a statement.

READ MORE: Lawsuit challenges DOL’s ‘independent contractor’ rule days before it takes effect

Impact on the brokerage model

Although much of the opposition to the Biden administration rules came from the financial services industry, workers in the brokerage and advisory industries weren’t the targets of the stricter standards. Rather, Labor officials were concerned primarily about people ranging from Uber and truck drivers to construction workers. Improperly labeling those workers as “independent contractors” could deprive them of benefits like overtime pay and federally guaranteed minimum wages.

FSI and other groups saw the Biden administration’s tougher standards as a direct threat to the business models of many firms they represent. The Securities Industry and Financial Markets Association, a trade association for broker-dealers, has estimated that around 150,000 of the more than 600,000 brokers in the industry are independent contractors. 

Many of them moved to independent broker-dealers like Cetera, LPL Financial, Ameriprise, Raymond James and Osaic after working as direct employees of a large Wall Street or regional firm. For advisors, the trade-off usually involves accepting more of the costs and day-to-day burdens of running a business in return for being able to keep more of the revenue generated and exercise a greater degree of control.

Independent broker-dealers like Cetera worried the loss of independent contractor status for their advisors would mean they would have to “revisit our entire business model,” Quinn said.

“We would have to have withholdings for Social Security and unemployment compensation and state welfare,” he said. “Now we are paying advisors around 90% of their gross revenue. If we had to pay all those additional costs, there is no way we could do that.” 

READ MORE: DOL: Contrary to warnings, contractor rule won’t undermine independent advisors

The ‘economic reality test’

The Department of Labor’s new proposed rule would rely on an “economic reality test” to decide if a worker is “in business for himself or herself as an independent contractor or is an employee economically dependent on an employer for work.” The test would look primarily at two criteria to make a determination on independent contractor status: 

the nature of a person’s work and the degree of control he or she exercises over it; andthat person’s opportunity for profit or loss as a result of his or her initiative and investments.

The proposal, put forward by the DOL’s Wage and Hour Division, is expected to lead to an increase in the number of workers classified as independent contractors.

“The rule we are proposing today is not only based on long-standing legal principles used in federal courts across the country but also is aimed at ensuring that workers and employers know how to apply those principles predictably,” Andrew Rogers, the administrator of the Wage and Hour Division, said in a statement.

The Biden administration standards it would replace call for a more-complicated test looking at the “totality of the circumstances” of a person’s employment. Employers are required to take into account considerations like the amount of skill required for a certain type of work, the permanence of a given working relationship and whether the work being performed is just one part of providing a particular product or service.

The Biden administration rule also raised the possibility that workers would have to be classified as direct employees if they came under the direct control of a centralized office. Many in the brokerage industry worried that, under that provision, firms could put the independent contractor status of brokers in jeopardy merely by insisting that they follow state and federal securities laws.

READ MORE: Advisors’ status as independent contractors likely to come down to questions of control

DOL seeks brokers’ comments on the proposal

Not everyone is convinced the newly proposed rule will provide needed clarity. Sander Ressler, a regulatory consultant and the co-owner of Essential Edge Compliance Outsourcing Services, said he’s not convinced employers will know how to classify certain workers under the new proposal.

He said he hopes the industry will submit recommendations for improvements. The Department of Labor has said it is accepting comments on the rule proposal until April 28.

Ressler said new rules are usually implemented in one of two ways. Either they are carefully devised before taking effect to be clear and leave little room for misinterpretation. Or they come out in a vague form that only becomes clear following heaps of regulatory actions and lawsuits.

“I would rather them do the first than the last,” Ressler said. “The last always hurts people, and it hurts businesses, because everybody’s playing a guessing game. And you only really know where you are based upon any type of enforcement action.”

Bigger regulatory problems loom for brokerages

As for the current rules adopted under Biden, they were never really in effect. First they were halted by various court challenges, then later officially put on pause last May by the Trump administration.

Quinn said that for broker-dealers, state regulation is a more pressing concern than federal rules these days. New Jersey lawmakers, for instance, are now debating legislation that would have all workers considered direct employees by default unless they can prove they meet three specific criteria for independent contractors.

“The bigger problem for us has not been what’s going on at the DOL,” Quinn said. “It’s what’s going on in New Jersey and other states.”