The U.S. Department of Labor has proposed a rule that would make it more difficult for independent broker-dealers (IBDs), insurers and other companies to treat professionals who want to hang out their own shingles as independent contractors.

The proposal would require that workers be considered a company’s employees, who are entitled to more benefits and legal protections than contractors, when they are “economically dependent” on the firm. The new rule, which will take at least several months to finalize, would replace a Trump-era regulation that says workers who own their own businesses or have the ability to work for competing companies can be treated as contractors.

Back in the 1990s, the independent broker-dealer industry fought a similar battle with the Internal Revenue Service, and it eventually prevailed. Since then, a number of independent B-Ds, like LPL Financial and Raymond James, have created a separate employee model for wirehouse reps who want to leave their firms but remain employees at another B-D with corporate benefits and expenses like rent paid for by the B-D.

U.S. Labor Secretary Marty Walsh in a statement said businesses often misclassify vulnerable workers as independent contractors. “Misclassification deprives workers of their federal labor protections, including their right to be paid their full, legally-earned wages,” Walsh said.

The Trump-era rule clarified independent financial advisors’ independent contractor status under the Fair Labor Standards Act. The Financial Services Institute (FSI), which represents the independent broker-dealer industry, sued the DOL and won in May, preventing the agency from revoking the 2021 rule. The DOL appealed the lawsuit, but then decided that proposing a new rule was a better legal workaround.

The DOL said it will consider workers’ opportunity for profit or loss, how permanent their jobs are and the degree of control a company exercises over a worker, among other factors when making classification determinations.

The DOL proposal “could result in a return to the confusing and conflicting interpretations by the courts prior to the 2021 rule, causing independent financial advisors and firms to divert time and resources to defending their independent contractor classification,” FSI spokeswoman Allison Kuehner Mutschler told Financial Advisor magazine.

FSI President and CEO Dale Brown said in a statement that the trade association is “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.”

Brown said that while the FSI stands ready to work with DOL staff, “the limited time between the DOL’s town halls, when it filed the rule with the Office of Management and Budget, and today's release raises concerns about how much consideration, if any, the department gave to the feedback it received from American workers and employers.”

The new proposal adopts a broader definition of who counts as an employee, mirroring Obama-era guidance that was withdrawn by the DOL under former President Donald Trump.

Nearly 60 million people, or one-third of all workers, performed some form of freelance work in the past 12 months, according to an Upwork survey.