FSI seeks to reboot suit to stop DOL independent contractor rule

One of the leading opponents of a Department of Labor rule that could affect the employment status of independent financial advisors is attempting to reboot a lawsuit to stop the regulation.

The Financial Services Institute, which represents independent broker-dealers and financial advisors, joined three other trade associations last Thursday in filing a motion in the 5th Circuit Court of Appeals asking the court to send a lawsuit against DOL that has been on hold there to the U.S. District Court for the Eastern District of Texas.

The lawsuit centers on DOL action in early 2021 to delay and then withdraw an independent-contractor rule promulgated by the Trump administration on January 7, 2021. When the Biden administration took office, it removed the regulation with the intention of proposing its own regulation designed to stop companies from inappropriately deeming employees as independent contractors.

The trade groups filed a lawsuit in March 2022 in a Texas federal district court challenging the delay and withdrawal of the Trump contractor rule, whose test for independent contractor status they support. The groups claimed that the Biden administration’s scuttling of the rule violated federal rulemaking law, the Administrative Procedure Act.

The district court vacated the delay and withdrawal rules. But the DOL appealed that ruling to the 5th Circuit in May 2022 and then released a new proposal in October 2022. The 5^th Circuit decided to stay the lawsuit until completion of the rulemaking.

Last week, the DOL released the final independent contractor rule, which replaces the Trump regulation. The trade groups’ motion asks the 5^th Circuit to send its suit back to the district court so that the lower court can determine whether the final rule complies with the APA.

In their motion, the groups say the final rule rescinds the Trump rule “for essentially the same reasons that the District Court found to be insufficient.”

The final DOL rule establishes a six-part analysis – called “economic reality factors” – for determining whether a worker is an employee under the Fair Labor Standards Act. The agency is targeting situations where workers are misclassified as independent contractors and deprived of certain rights and protections – such as a minimum wage and overtime – that employers must grant to employees. 

Independent financial advisors are worried that the final DOL rule will change their status as independent contractors when they affiliate with brokerages and registered investment advisors for some services.

“In contrast to the clarity provided by the 2021 independent contractor rule, the final rule adopts a standard that is so vague, amorphous, and context-dependent, it provides virtually no certainty or assurance that any given worker is classified correctly as an employee or contractor,” the trade groups’ motion states.

The 2021 rule gave independent financial advisors “a sense of certainty” that they could continue to operate in that status under federal law, FSI CEO Dale Brown said in a statement.

“Now, in light of the DOL’s new independent contractor rule, that certainty has been erased and replaced by unnecessary risk and ambiguity,” Brown said in the statement. “Independent financial advisors rely on their independent contractor classification as they build their businesses within their communities, pay their own taxes and expenses, hire staff and serve the interests of their Main Street clients.”

The final DOL rule is set to go into effect on March 11.