One California federal district court last year authored an opinion which may be of interest to Ameriprise Financial. The United States District Court for the Southern District of California in Taylor v. Waddell & Reed, Inc., 2010 U.S. Dist. LEXIS 81920 (Aug. 12, 2010), analyzed whether a court should consider a registered broker-dealer’s compliance with FINRA regulations as an indicia of control in determining whether an employer-employee relationship was created with its financial advisors. While the court agreed with the general proposition that compliance with legal requirements is not indicative of control for purposes of establishing an employer-employee relationship, the court found that the financial advisors constituted employees because the broker dealer’s compliance went beyond the general supervision requirements imposed by FINRA.

The Underlying Facts

  This was a proposed wage and hour class action brought by former financial advisors of Waddell & Reed, Inc. (“W&R”), a registered broker-dealer. Plaintiffs claimed they were wrongly classified as independent contractors.

Plaintiffs argued that they should have been classified as employees because, among other things, they could sell only under the name of W&R, could only sell securities authorized by W&R, were assigned clients by W&R and had to surrender all client files, client lists, and client data to W&R upon termination of the working relationship. Plaintiffs were also required to work a specified number of hours and generally adhere to a schedule proposed by W&R, were required to explain any activities conducted outside the office, were required to attend meetings or face disciplinary action, and were subject to periodic performance reviews by W&R.

W&R argued that the plaintiffs’ allegations of control relate to requirements imposed by law, and are therefore irrelevant to the determination of the plaintiffs’ employment classification.

The Court’s Opinion

In determining whether an individual is an employee or an independent contractor, courts apply an “economic realities” test. The test examines a number of factors, such as: (1) the degree of an alleged employer’s right to control the manner in which the work is to be performed; (2) the alleged employee’s opportunity for profit or loss depending on his managerial skill; (3) the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers; (4) whether the service rendered requires a special skill; (5) the degree of permanence of the working relationship; and (6) whether the service rendered is an integral part of the alleged employer’s business. The Waddell & Reed court noted that no one factor is dispositive. Rather, courts evaluate the totality of circumstances in making a determination.

W&R moved to dismiss the complaint for failure to state a claim because wage and hour laws do not apply to employees. W&R argued that the indicia of control mandated by state and federal regulations should not be considered in determining whether the plaintiffs were classified as employees. The court agreed with the general proposition that compliance with legal requirements is not indicative of control for purposes of establishing an employer-employee relationship. The court nevertheless held that the plaintiffs constituted employees. The court explained that because the FINRA regulations relied upon by W&R are of a far more general nature and do not specify how such supervision must be carried out, and because the methods by which W&R controlled the work performed by the plaintiffs went beyond the general supervision requirements of FINRA, the methods by which W&R controlled the work performed by the plaintiffs created an employer-employee relationship.

Specifically, the following factors constituted the more in-depth supervision which created an employer-employee relationship: (1) the financial advisors were assigned clients by W&R and had to surrender all client files, client lists and client data to W&R upon termination of the working relationship; (2) the advisors were required to work a specified number of hours and generally adhere to a schedule proposed by W&R; (3) the advisors were encouraged to work at W&R’s offices and had to explain any activities conducted outside the office; (4) the advisors used telephones, offices, and fax machines provided by W&R; (5) the advisors were required to attend meetings or face disciplinary action and were subject to periodic performance reviews by W&R; (6) W&R set job performance and sales goals for the advisors; and (7) W&R established quotas concerning many aspects of the advisors’ jobs, such as the number of newly scheduled appointments, appointments scheduled in advance, and daily appointments. Fortunately, few of these factors apply to Ameriprise Financial.

Key Takeaway

Waddell & Reed highlights that worker classification, by nature, involves a fact-intensive examination. This opinion, if followed, may make it more difficult to successfully pursue a dispositive motion since it may become a fact issue whether the compliance methods imposed by the broker dealer are beyond what is required by FINRA. In addition, since classification involves a fact-intensive examination, courts may vary on the outcome.