The Financial Services Institute, an advocacy group for independent advisors and broker/dealers, is speaking out against a proposed rule by New Jersey’s Labor Department that seeks to revamp the state’s view on independent contractors.
The state proposed a new rule in late April to codify its Labor Department’s interpretation of a test for independent contractor status. The state claims this would safeguard employees wrongly classified as independent contractors while protecting genuine independent contractors.
New Jersey’s proposal follows a similar rule brought up at the federal level during the Biden administration, which President Donald Trump’s Labor Department put on hold earlier this year. The federal rule (and its New Jersey counterpart) could impact some financial advisors, particularly those working with independent broker/dealers.
FSI was an adamant opponent of the Biden-era rule on the federal level, and is making many similar arguments in New Jersey. According to testimony from FSI General Counsel David Bellaire during a Monday hearing on the proposed rule, nine out of 10 advisors the group surveyed would “exit their current business model rather than be forcibly reclassified.”
“These are not gig workers,” Bellaire said. “They are licensed professionals who own and operate small businesses, employ staff, lease office space, select the products and services they provide, and serve their communities with deep personal investment.”
Bellaire detailed results from a 600-advisor survey, indicating that 19% reported they’d retire rather than become employees at their affiliated firm. In comparison, 58% said they’d restructure the business to avoid reclassifying despite less client access and higher costs.
He said 78% of advisors believe they’d need to raise account minimums, while 77% would boost the fees clients pay. Advisors expected they’d stop serving more than three out of 10 existing clients, including middle-income families, younger investors and retirees.
“This proposal can’t be fixed with carve-outs or classifications. When the test forcibly reclassifies licensed, regulated, small-business-owning professionals who cherish their independence, it demonstrates that the framework itself is broken,” and urged the department to “rethink-not revise” the rule.
The Biden-era federal rule followed an attempt during Trump’s first term, passed in early 2021. The FSI supported the Trump-era rule, claiming it provided “uniformity in worker classifications.”
Under Biden, the Department of Labor determined that the Trump rule had run afoul of the Fair Labor Standards Act. The DOL withdrew the Trump rule and introduced a new version in 2022, finalizing an iteration early last year.
In May, Trump’s DOL directed staff not to enforce the Biden-era independent contractor rule, an indication it may rescind it to pass its own version. The DOL noted that the Biden rule is facing ongoing litigation (with the FSI as one of the plaintiffs contesting its legality).
According to the New Jersey Business and Industry Association, the three-pronged “ABC” test to determine whether a worker is a gig worker or employee includes being “free from control and direction by the business,” to be able “to do work outside of a firm’s ‘usual course of business’ and places of business,” and to be “engaged in an independent and established ‘trade, occupation, profession or business.’”
The New Jersey rule entered the state’s register on May 5, with a 60-day comment period to follow.
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