The Financial Services Institute has joined a coalition of trade groups suing the Department of Labor in federal court in hopes of tossing a new rule that would restrict those who call themselves independent contractors. The department is hoping to classify more workers as employees to guarantee them protections, but the financial services industry, particularly independent advisors and broker-dealers, believes this would force many advisors to become employees of their companies and disrupt their business models.
More specifically, the trade groups want to maintain the 2021 version of the independent contractor rule, which would be replaced by the DOL’s 2024 version.
The amended complaint, filed in the U.S. District Court for the Eastern District of Texas, asks the court to declare the department’s 2024 rule invalid, prohibit its implementation and order the 2021 rule to remain in effect.
The plaintiffs joining FSI in the lawsuit are the Associated Builders and Contractors, the American Trucking Association, the Coalition for Workforce Innovation, the National Retail Federation, the National Federation of Independent Business and the U.S. Chamber of Commerce.
“Our members should not have to risk losing their independent contractor status because, for example, they are complying with federal and state securities rules,” said Dale Brown, president and CEO of FSI, in a statement.
Brown said the 2021 rule offered “much-needed certainty and clarity regarding our financial advisor members’ classification as independent contractors.” The 2024 version, he said, again throws advisors’ status into doubt, “creating burdens for advisors and firms which ultimately increases costs and limits Main Street Americans’ access to professional financial advice, products and services.”
The 2021 rule offered guidance that gave greater weight to the idea that an independent contractor’s status was based on how much control they had over their work and how much they were invested in an employer. It was considered a departure from previous tests. It was published in January 2021, in the last days of the Trump administration—but then at the beginning of the Biden administration, the DOL delayed the rule’s March 2021 implementation date and then yanked the rule in May of that year. The department said the rule would have a “confusing and disruptive effect” on workers and business.
FSI and other plaintiffs sued the DOL and were successful in getting the 2021 rule reinstated, but the DOL appealed to the Fifth Circuit in 2022. The appeals court agreed to a stay so that the DOL could hammer out a new version of the rule.
In October of that year, the agency proposed a new version that officials said would cut down on employers’ ability to misclassify employees, which they said led to lower wages and less federal labor protections. It was released in January of this year. When adopted, the rule would replace the 2021 rule.
But that has teed up another dispute with the trade groups.
The latest lawsuit, started in the same U.S. District Court in Texas where the previous case began, states: “Less than two years ago, this court vacated the attempt by the Department of Labor to delay and withdraw its rules on independent contractors. Among other things, this court found the department’s purported withdrawal of the 2021 rule to be arbitrary and capricious because it ‘left regulated parties without consistent guidance regarding the proper classification of workers under the Fair Labor Standards Act.’
“In response to that decision, the department has now issued a new rule on independent contractors which rescinds the 2021 independent contractor rule again and replaces it with a rule that replicates the fatal flaws of its previously invalidated rulemaking. Like its predecessor, the 2024 rule fails to address and will only add to the confusion over the proper classification of independent contractors, and will irreparably harm not just companies employing independent contractors nationwide, but the workers themselves. The 2024 rule should likewise be enjoined,” the FSI’s lawsuit argues.
In the latest spate of legal proceedings, the FSI was successful in its order asking the Fifth Circuit to lift its stay, arguing that the new rule “adopts a standard that is so vague, amorphous and context-dependent” it eradicates any certainty that a worker is classified correctly for DOL and IRS purposes.
That means the suit goes back to the Texas Eastern District, the same court that ruled in 2022 that the DOL was “arbitrary and capricious” in withdrawing the 2021 rule. The decision to lift the stay paved the way for the FSI and co-plaintiffs to proceed with their new lawsuit.
“Independent financial advisors choose to be independent so that they can operate their own businesses and better serve their clients,” Brown said today. “We remain committed to ensuring our members maintain that choice and have security in their classification status.”