DOL Finalizes New Independent Contractor Rule

The Department of Labor released its final rule regarding employee or independent contractor classification under the Fair Labor Standards Act on Tuesday amid continued pushback from the financial industry, which often prefers independent status for advisers.

The rule will modify the definition of independent contractor in a manner expected to make it easier for workers to be classified as employees, rather than freelancers. Employees are entitled under federal law to a range of benefits such as overtime pay, a minimum wage and workplace safety requirements enforced by the Occupational Safety and Health Administration to which independent contractors are not entitled.

According to an estimate from the Securities Industry and Financial Markets Association, 160,000 investment advisers work as independent contractors, causing industry advocates such as the Financial Services Institute to seek a carve-out for financial advisers who prefer the independent setup.

The rule, which the DOL has been advancing in part to provide more protections and services for freelance and gig workers, will require employers to consider six criteria, with equal weighting given to each when assessing if a worker is an employee or not:

• “opportunity for profit or loss depending on managerial skill;”
• “investments by the worker and the potential employer;”
• “the degree of permanence of the work relationship;”
• “the nature and degree of control [over hours and pricing];”
• “the extent to which the work performed is an integral part of the potential employer’s business;” and
• “skill and initiative.”

A worker would likely be classified as an employee if they met a series of criteria, including: their opportunity for profit and loss were small, their capital investment was low, their work relationship was short-lived, they had very little control over their work, their labor was integral for the employer’s business, and little skill and initiative was required for the job.

According to the DOL, the “rule provides guidance on proper classification and seeks to combat employee misclassification, a serious problem that impacts workers’ rights to minimum wage and overtime pay, facilitates wage theft, allows some employers to undercut their law-abiding competition and hurts the economy at-large.”

At the same time, the DOL emphasized in the rule that, “This rule is not intended to disrupt the businesses of independent contractors who are, as a matter of economic reality, in business for themselves.”

This new rule overturns a previous rule finalized in 2021 that made it easier to classify workers and contractors as employees. That rule did not have relative capital investment as a criterion and identified opportunity for profit and loss and degree of control as “core” criteria, to be given greater weight.

In response to comments, the DOL clarified two elements from the proposal. First, when evaluating relative capital investment, an employer may consider if a worker is making capital investments of a similar kind, but on a smaller scale, which suggest independence and entrepreneurship.

The final rule also clarified that costs imposed unilaterally by an employer on a worker, such as requiring them to purchase their own uniform, should not be considered worker investment and therefore an indication of independence.

“While we continue to analyze and review the rule, FSI remains committed to preserving independent financial advisors’ ability to choose to operate as independent contractors,” the FSI wrote in a statement in response to the finalized rule “We fear the DOL’s final rule will undermine our financial advisor members’ independent contractor status, despite thousands of comment letters, multiple hearings and many meetings in which stakeholders, including our members, expressed their desire to remain independent.”

The DC-based group argued that independent financial advisers are entrepreneurs who own their own businesses, pay business taxes and hire their own staff.

“If they are forced to be employees, this could adversely harm Main Street Americans’ access to their local trusted financial advisor,” the institute wrote. “The independent contractor status is vital to our members, and FSI is ready to leverage all our advocacy tools to ensure it remains protected.”