California Court Rules That Brokers Are Independent Contractors, Not Employees

Friday, August 24, 2012 08:01
California Court Rules That Brokers Are Independent Contractors, Not Employees

Tags: Advisor businesses | broker-dealers | FINRA | sec

In a landmark case, a California court has declared that brokers are independent contractors of a firm; they are not employees.


The case is a far-reaching one for broker-dealers because the plaintiffs—two former Waddell & Reed brokers—in the case emphasized that the firm was bound by SEC and FINRA regulations to govern brokers’ advertising, use of business cards, and use of email and other online communications.

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The comparison that resulted in the court’s awarding the firm with the two summary judgments it sought had to do with an insurance agent. The defense legal team said that a financial advisor is like an insurance agent. They solicit clients, sell their own products, and are not subject to the dictates of the insurance company as to how the conduct their business.
The court also said that a new California act having to do with the misclassification of independent contractors is retroactive, making it would apply to this case. The victory was considered a win by the Financial Services Institute (FSI) which filed an amicus brief supporting Waddell & Reed.
California is considered a bell weather state that sets trends for the rest of the industry. The brokers’ argument was that carrying out FINRA and SEC rules makes their broker-dealer an employer.
The brokers were trying to make the case that the broker-dealer was governing their behavior. If the courts had decided otherwise, it would open broker-dealers to the requirement to provide unemployment insurance and overtime pay and also open them to discrimination claims.
The defending legal team described the plaintiffs as failed financial advisors who had only earned from $7000 to $9000 and were looking for a payout from the firm.

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