One of the more complex and often overlooked regulatory tensions in the financial services industry lies in the conflict between securities law requirements and labor law guidance issued by the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD). This issue most often arises when firms classify financial professionals as an independent contractor in order to provide flexibility in compensation cost structure and operational autonomy. While commercially rational, this classification becomes problematic due to the fundamentally opposing standards imposed by securities regulators and WHD authorities.
Background
In January 2021, the DOL issued a rule (2021 Rule) under the Fair Labor Standards Act (FLSA) that simplified the test for independent contractor status. The 2021 Rule focused primarily on two core factors: 1) the degree of control exercised by the employer, and 2) the worker’s opportunity for profit or loss. The DOL’s stated goal was to provide greater clarity and predictability in determining independent contractor status.
However, following the change in administration, the DOL delayed, and ultimately withdrew the 2021 Rule, asserting that it conflicted with the FLSA’s underlying purpose and could lead to inconsistent applications. In January 2024, the DOL replaced it with a new six-factor “economic reality” test (2024 Rule) which evaluates the totality of circumstances. This revised test considers the worker’s skill level, investment, the permanence of the relationship, and whether the work performed is integral to the employer’s business.
The DOL maintained that broader standard aligned more closely with judicial precedent and reduced the risk of worker misclassification. However, industry trade groups, including the Financial Services Institute, challenged the 2024 Rule in federal court. A Texas federal court held that Texas sided with the plaintiffs, finding that the withdrawal of the 2021 Rule violated the Administrative Procedure Act. As of this writing, litigation over the enforceability of the 2024 Rule remains pending before the federal appellate courts.
Interim Guidance – 2008 Fact Sheet #13 (“2008 Fact Sheet”)
In response to the ongoing legal uncertainty, the WHD issued Field Assistance Bulletin No. 2025-1 in May 2025. The Bulletin paused the enforcement of the 2024 Rule, reinstated the WHD’s longstanding “economic reality” test as outlined in the 2008 Fact Sheet and reaffirmed it in Opinion Letter FLSA2019-6.
Under this framework, job titles or contractual labels are irrelevant. Instead, WHD analyzes the actual nature of the working relationship, focusing on six key factors:
- Employer Control. Does the employer direct how the work is performed?
- Opportunity for Profit or Loss. Is compensation tied to the worker’s own business decisions and initiative?
- Worker’s Investment. Has the worker invested in their own tools, equipment, or workspace?
- Skill and Initiative. Is the workers’ role dependent om specialized skills and independent judgment?
- Permanency of the Relationship. Is the arrangement indefinite, which is indicative of an employment relationship, or project-based, which is indicative of an independent contracting relationship?
- Integration into the Business. Is the work essential to the core business?
Finally, it should be noted that a finding of economic dependence typically results in a determination of employee status, regardless of contractual intent.
Securities Regulations
While these factors guide enforcement under the FLSA, they do not alter a financial firm’s obligations under securities laws and regulations. In the financial services sector, individuals classified as independent contractors for labor or tax purposes remain subject to the requirements imposed by the SEC, FINRA and applicable state regulators. Pursuant to FINRA Rule 1210, SEC Rule 15(b), and related guidance (including NASD Notice to Members 86-65), such individuals are considered “associated persons” of a broker-dealer or a “supervised person” of an investment adviser, and must be supervised accordingly.
This means that regardless of their classification for employment law purposes, firms must ensure that registered representatives, supervised persons and associated persons:
- Are properly licensed and registered through the firm.
- Comply with the broker-dealers Written Supervisory Procedures (WSPs) or the investment advisors Compliance Manual.
- Obtain prior approval for any outside business activities (OBAs) or private securities transactions (PSTs).
- Participate in annual compliance training and certification programs.
- Submit to firm oversight of advertising, communications and to recordkeeping,
- Undergo periodic branch inspections and audits.
This oversight is non-negotiable and imposed by securities law to protect investors and the integrity of the markets.
The Regulatory Conflict
This creates a regulatory contradiction in that the same control that securities laws require, such as monitoring of communications, performance oversight, and mandatory compliance protocols, can be used by the WHD as evidence that the individual is an employee under the FLSA. Firms that fully comply with FINRA and SEC requirements may thus be inadvertently triggering misclassification exposure under labor law.
How Financial Firms Can Mitigate the Conflict
To reduce exposure to WHD enforcement, financial firms need to balance the necessary supervisory control over registered representatives and supervised persons as required by SEC, FINRA and state regulatory requirements, while also demonstrating sufficient independence to support classification as independent contractors under the FLSA. To achieve this goal, financial firms should adopt a proactive, multi-layered approach, which includes:
- Draft Clear Independent Contractor Agreements. The agreements should acknowledge that the representative is an independent contractor and expressly state that (i) the contractor is free to set their own schedule; (ii) the contractor retains control over the manner and means of performing sales-related activities (subject to securities law requirements); and (iii) the firm’s compliance obligations do not create an employment relationship, but are imposed by federal securities regulations.
- Limit Control to Regulatory Requirements. Firms should ensure that any oversight or direction given to the representative is clearly tied to regulatory obligations, such as (i) supervising communications to comply with FINRA Rule 2210; (ii) enforcing WSPs under FINRA Rule 3110, and (iii) approving outside business activities or private securities transactions. Additionally, it is important to avoid imposing non-regulatory controls that may resemble employment terms, such as dictating office hours or setting mandatory production quotas.
- Document the Basis for Classification. Maintain clear internal documentation explaining the rationale for independent contractor classification, including (i) the representative’s ability to operate with business autonomy; (ii) the absence of employee-style benefits; and (iii) the contractor’s investment in their own equipment, marketing, or administrative support.
- Update Supervisory Procedures. Ensure that broker-dealers Written Supervisory Procedures (WSPs) and investment advisers Compliance Manuals reflect the firm’s dual obligation to comply with SEC, FINRA or state oversight requirements, and also respect independent contractor status under labor law to the extent permissible.
- Train Supervisors and Compliance Personnel. Managers and compliance staff should be trained to avoid language or practices that could suggest an employment relationship, especially in correspondence, performance reviews, or expectations for availability.
Summary
While independent contractor classification remains a common and viable model in the financial services industry, the regulatory landscape is increasingly complex. Firms must remain vigilant in balancing the demands of federal securities oversight with the interpretation of labor standards under FLSA.
Misclassification carries significant risk, ranging from back wages and tax penalties, to DOL or IRS enforcement. These risks are further heightened by state-specific laws, many of which impose more stringent standards than the federal economic reality test.
By carefully drafting independent contractor agreements, tailoring compliance oversight to regulatory mandates, and avoiding unnecessary control over day-to-day activities, financial firms can preserve the flexibility of the independent contractor relationships while protecting themselves from unintended labor law liability.