Registered Reps Are Not Employees Under California Law



By Brandon S. Reif, Esq.  & Timothy W. Fredricks, Esq. of Winget, Spadafora & Schwartzberg, LLP

      In a potentially game changing decision for independent broker-dealers, the U.S. District Court for the Southern District of California ruled for the first time that registered representatives are not employees under California law. The District Court granted summary judgment in favor of Waddell & Reed, upholding the firm’s classification of its registered representatives as independent contractors and not employees.
    Plaintiffs, two of Waddell & Reed’s registered representatives, filed suit against the firm for a number of wage and hour claims based on the firm’s alleged violation of the Fair Labor Standards Act ("FLSA"), the California Labor Code, and California’s Unfair Competition Law ("UCL"). The firm filed a motion for summary judgment, arguing that Plaintiffs’ claims should be barred because they were independent contractors and not employees.
      In support of its argument, the firm relied on a California case, Arnold v. Mut. of Omaha Ins. Co., 202 Cal. App. 4th 580, 584 (2011), in which the Court of Appeal held that insurance agents were independent contractors. The firm reasoned that registered representatives should be viewed similarly under the law. Plaintiffs, on the other hand, argued that the circumstances were not analogous because the oversight that broker-dealers are required to provide for registered representatives under various FINRA and SEC regulations amounts to the sort of control that is the hallmark of an employer-employee relationship.
      Applying the Borrello factors (California’s common law test for determining worker status), the District Court determined that Plaintiffs were not employees under California law. Among other things, the Court found that (1) Plaintiffs believed they were creating, and intended to create, an independent contractor relationship as evidenced by the contract they signed with Waddell & Reed; (2) Plaintiffs’ sales business was a "distinct business" that required licenses and skill to operate; (3) Plaintiffs paid their own business expenses, chose their own work location and were paid solely by commission; (4) Waddell & Reed had no legally significant right to control the manner and means of Plaintiffs’ business; and (5) Plaintiffs reported their earnings using IRS Form 1099s.
      The Court also found the Arnold case persuasive, noting that the firm’s "relationship with [Plaintiffs] shares many of the characteristics of Mutual of Omaha’s relationship with its insurance agents." The Court was unmoved by Plaintiffs argument about control, stating, "terms of a putative ’employment’ relationship imposed by legal requirements [SEC and FINRA regulations] do not suggest control by Waddell & Reed…. [C]ompliance with legal requirements is not indicative of control for purposes of establishing an employer-employee relationship."
      The Court’s statement on this issue is critical to the independent broker-dealer community because the level of supervision that a broker-dealer exercises over a registered representative is significantly higher than an insurance company exercises over its agents. The Court, however, determined that that fact was not significant because those supervisory functions are required by law. In essence, the Court found that registered representatives are essentially the same as insurance agents as far the employment relationship is concerned: they have their own clients, the broker-dealer cannot control the practice of their business, and they recommend a wide variety of products to their customers.
      This decision could have a far reaching impact because it provides some measure of comfort for independent broker-dealers everywhere that California law (famously protective of employees) will not disturb the broker-dealer model that has been in place for some time.
      The opinion can be found at Taylor, et al. v. Waddell & Reed, Inc., No. 09-cv-2909 (S.D. Cal., Aug. 20, 2012) (Order granting summary judgment). 
If you have any questions or would like to discuss this issue, please contact: 
Brandon S. Reif, Esq. (310) 836-4800 –
Timothy W. Fredricks, Esq. (310) 836-4800 or
This document has been provided for informational purposes only and is not intended and should not be construed as legal advice.  Please consult with counsel in connection with any specific inquiry arising under federal or the applicable state or local laws that may apply to you and your company.
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