The Department of Labor’s New Independent Contractor Proposal and Its Potential Impact on Independent Financial Advisors

The U.S. Department of Labor has issued a new Notice of Proposed Rulemaking addressing how to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act.[1] The proposal would rescind the Department’s 2024 final rule and largely restore the framework adopted in 2021, with certain modifications.[2]

For the financial services industry, the central issue is whether this proposal preserves the viability of the long-standing independent broker-dealer model in which affiliated financial advisors are treated as independent contractors. The proposal does not create a special exemption for financial professionals. The structure of the new rule, however, and particularly its emphasis on control and opportunity for profit or loss, is generally consistent with the operational realities of many independent advisory practices, meaning most independent advisors likely would continue to be properly classified as independent contractors. At the same time, it places renewed emphasis on actual practice over contractual form, which will require firms and advisors to assess how independence functions in fact, rather than in theory.

I. Overview of the Proposed Rule

The proposal would replace the 2024 rule with a framework that centers on what the Department describes as the “economic reality” test.[3] The ultimate inquiry under that test is whether the worker is economically dependent on the potential employer for work, or instead is in business for himself or herself. Under the proposed framework, two factors typically carry greater weight than others:

1. The nature and degree of the individual’s control over the work.
2. The individual’s opportunity for profit or loss based on initiative or investment.[4]

The proposal also reiterates that the parties’ actual day-to-day practice is more relevant than contractual provisions that reserve rights which are not exercised in reality.[5]

The Department expressly criticizes the 2024 rule as overly complex and potentially restrictive of legitimate independent contractor relationships.[6] It proposes to streamline the analysis and to return to a structure that it believes better reflects Supreme Court precedent and decades of federal appellate decisions.

II. How the Proposal Differs from the 2024 Rule

The 2024 final rule, which took effect on March 11, 2024, adopted a six-factor totality-of-the-circumstances analysis without assigning predetermined weight to any factor.[7] The Department characterized that framework as consistent with longstanding judicial precedent and the statutory text of the FLSA.

The new proposal departs from that approach in two material respects. First, it restores emphasis on two “core” factors, control and opportunity for profit or loss, which it states are typically more probative of whether a worker is economically dependent.[4] While no factor is dispositive, the proposal suggests that when both core factors point in the same direction, that outcome is likely correct.

Second, the proposal narrows certain elements that the Department believes expanded the analysis beyond what Supreme Court precedent requires.[6] The Department contends that the 2024 rule’s articulation of some factors, including investments and permanence, could be viewed as making independent contractor classification more difficult than the law demands.

The practical effect is a shift away from an evenly weighted multi-factor test toward a framework in which entrepreneurial control and business risk receive greater emphasis.

III. Interplay Between the Rule and Firms’ Regulatory Obligations

Independent broker-dealer models continue to be central to the securities industry. These firms, just as traditional employee-based models, are highly regulated and have obligations that may exceed those of a traditional independent contractor relationship. FINRA Rule 3110, for example, requires member firms to maintain a supervisory system to ensure compliance with applicable securities laws and FINRA rules.[8] That supervisory obligation often includes review of communications, product oversight, outside business activity approval, recordkeeping, and surveillance.

A recurring question in classification disputes is whether regulatory supervision constitutes “control” indicative of employee status. The proposed rule’s renewed emphasis on the nature and degree of control invites careful analysis in this context. The proposal makes clear the relevant inquiry concerns control over the manner and means of the work as part of an economic relationship. Regulatory compliance measures that arise from statutory or self-regulatory requirements do not automatically establish an employment relationship. The focus remains on whether the advisor is operating an independent business or functioning as a worker dependent on the firm for work.

IV. Why Many Independent Advisor Models May Align with the Proposal

Many independent advisory practices exhibit characteristics that align with the proposal’s core factors.

A. Opportunity for Profit or Loss

First, under the proposal, meaningful opportunity for profit or loss based on initiative and investment is central.[4] Advisors who control marketing strategy, client acquisition, staffing decisions, office expenses, and growth planning often have genuine entrepreneurial upside and downside. Where income depends on production, client retention, and cost management, the advisor’s economic outcome is tied to business decisions rather than fixed compensation.

If an advisor can increase profitability through managerial skill and can incur losses through business expenditures, those facts tend to support independent contractor classification under the proposed framework.

B. Control Over the Business

Advisors who set their own schedules, choose office locations, hire and compensate staff, and manage client relationships typically exercise a degree of autonomy consistent with independent business ownership. The proposed rule directs attention to actual practice, not merely contractual recitations or constraints.[5]

Where firms limit their involvement to regulatory supervision and platform or back-office support, and do not dictate daily work methods, prospecting strategies, or operational management, the control factor may weigh in favor of independent contractor status.

C. Distinguishing Compliance from Employment Control

The existence of FINRA supervision does not eliminate independence.[8] Broker-dealers are required to supervise associated persons. The classification inquiry is whether that supervision extends into employer-like direction over the manner and means of performing the work. Firms that maintain clear boundaries between compliance oversight and business management will be better positioned under the proposed framework.

V. Areas of Heightened Risk

The proposal does not insulate the financial services industry from classification challenges. Several areas present risk.

1. Employer-Like Operational Control

If a firm dictates mandatory hours, assigns territories, prescribes specific marketing methods unrelated to compliance, or otherwise directs the day-to-day conduct of the advisory practice, the control factor may weigh toward employee status.

2. Limited Entrepreneurial Risk

If an advisor’s compensation resembles a wage and the advisor bears little real expense or downside risk, the profit-or-loss factor may weaken. The proposal’s emphasis on entrepreneurial opportunity requires that the opportunity be substantive, not theoretical.

3. Divergence Between Agreement and Reality

The proposal emphasizes that actual practice governs.[5] Firms that rely on carefully drafted independent contractor agreements but manage advisors in a centralized and prescriptive manner may face challenges.

4. Enforcement Volatility

In May 2025, the Wage and Hour Division issued Field Assistance Bulletin 2025-1, stating that it would not apply the 2024 rule’s analysis in investigations while the Department reconsidered that rule.[9] This development illustrates that classification standards may shift with changes in administrative policy. Financial institutions should assume that classification practices will be scrutinized under evolving interpretations.

VI. Practical Considerations for Broker-Dealers and Advisors

Given the proposal’s emphasis on control and entrepreneurial opportunity, firms and advisors should consider the following:

– Maintain documentation demonstrating that advisors bear real business expenses and exercise managerial discretion.
– Clearly separate compliance supervision from directing the day-to-day operations of an independent advisor.
– Align compensation structures with genuine business risk and reward.
– Periodically review practices to confirm that independence is reflected in daily operations.

Firms that operate both employee and independent contractor channels should ensure that operational distinctions are meaningful and consistently applied. The presence of parallel structures heightens the importance of maintaining these distinctions.

Conclusion

The Department of Labor’s proposed rule represents a meaningful recalibration of the federal independent contractor framework. By restoring emphasis on control and opportunity for profit or loss, the proposal aligns more closely with traditional concepts of independent business ownership.

For independent financial advisors, the proposal does not undermine the viability of the independent broker-dealer model. Many advisory practices that function as genuine businesses should continue to support independent contractor classification under the proposed analysis. However, the rule reinforces that independence must be real. Where operational control resembles employment and entrepreneurial risk is minimal, the label of “independent contractor” will not always control the outcome if challenged.

Financial professionals, firms, and counsel should view the proposal as an opportunity to evaluate whether current business structures and procedures reflect the economic reality of true independence.

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes.
We represent many investment advisors, financial professionals, broker-dealers, registered representatives, investors and businesses.
Attorney George C. Miller can be reached in the firm’s San Diego office at (619) 696-9500.

1. U.S. Department of Labor, Notice of Proposed Rulemaking (2026), https://www.federalregister.gov/d/2026-03962 
2. Id. 
3. Id. 
4. Id. 
5. Id. 
6. Id. 
7. U.S. Department of Labor, 89 Fed. Reg. 1638 (Jan. 10, 2024), https://www.federalregister.gov/documents/2024/01/10/2024-00067/employee-or-independent-contractor-classification-under-the-fair-labor-standards-act 
8. FINRA Rule 3110, https://www.finra.org/rules-guidance/rulebooks/finra-rules/3110 
9. U.S. Department of Labor, Field Assistance Bulletin No. 2025-1 (May 1, 2025), https://www.dol.gov/sites/dolgov/files/WHD/fab/fab2025-1.pdf