Independent financial advisors in New Jersey may soon face a serious threat to their autonomy. According to Financial Advisor News, state regulators have introduced a proposal that would reclassify many independent contractors as employees of their broker-dealers — a move that could fundamentally reshape how advisory firms operate within the state.
During a recent public hearing, the Financial Services Institute ("FSI") voiced strong opposition to the proposal, warning that the rule could force independent advisors into employee status. This change would trigger obligations related to payroll taxes, employee benefits compliance, and heightened supervisory requirements, disrupting the long-standing independent contractor model on which many financial professionals rely.
At the core of the proposal is the adoption of an "ABC test" to determine worker classification. Under this standard, a financial advisor must meet all three of the following conditions to avoid classification as an employee:
- They must remain free from control and direction by the broker-dealer, both in contractual language and in practice.
- Their services must either fall outside the usual course of the broker-dealer's business or take place outside its business premises.
- They must operate an independently established business that offers the same services.
According to Financial Advisor News, FSI and industry attorneys argue this test conflicts with existing SEC and FINRA frameworks, which often recognize financial advisors and RIAs as independent contractors under federal securities laws. The proposed standard would also impose a greater burden of proof on firms to demonstrate the absence of control and the independent nature of the advisor's business.
The proposal comes as the U.S. Department of Labor moves away from its own stricter independent contractor regulation in favor of an "economic reality" test, which generally favors contractor classification by evaluating financial dependence and operational autonomy. New Jersey's move to codify a more rigid standard would reverse that flexibility, making it considerably harder for firms to classify workers as independent contractors.
According to legal analysis from Lindabury, McCormick, Estabrook & Cooper attorneys Joshua Weiner and Lisa Gingeleskie, the proposed rule would not only require firms to avoid exercising control over contractors but also prohibit them from retaining the right to control, even if unused. Additionally, the rule would consider services performed remotely or at client locations as potentially "within the usual course of business," further complicating contractor status claims.
Employers would also need to demonstrate the existence of a viable independent business, factoring in client lists, capital investment, and consistent marketing efforts. Industry attorneys caution that this broad and prescriptive interpretation of the ABC test will make it increasingly difficult for advisory firms to justify independent contractor classifications without risking regulatory action.
New Jersey Labor Commissioner Robert Asaro-Angelo defended the proposal, stating that it would offer clarity to employers and protect workers from illegal misclassification. However, while intended to provide guidance, the financial services industry warns that the rule could disrupt established business models and prompt some firms to reevaluate their presence in New Jersey altogether.
Financial Advisor Transitions consults advisors nationwide to explore employment transition options and to preserve and protect their practice in any transition that they make.
