The Labor Department Just Freed Contractors—Again. Congress Still Needs To Act.

The debate over independent contractors is taking off again. In recent weeks, the Department of Labor issued its long-awaited independent contractor rule. The new directive reverses a Biden-era anti-contractor rule and thereby returns federal law to a more contractor-friendly posture. But as this federal regulatory seesaw plays out, state governments—and even Congress—provide the best hope for long-term change.

The debate over how to classify independent contractors dates far back in time. A 1947 U.S. Supreme Court case, Rutherford Food Corp. v. McComb, grappled with the issue of whether slaughterhouse workers were employees or contractors, and in the nearly 80 years since, the debate has never fully resolved. But in 2018, it received renewed attention in the aftermath of a decision by the California Supreme Court that created a new stringent three-part test that made it extremely difficult for workers to be classified as contractors.

This state court decision was eventually expanded through the now-notorious A.B. 5 law in California, which was a thinly-veiled attempt to prevent gig companies from classifying their drivers and deliverers as independent contractors. The argument in favor of worker reclassification is that independent contractors lack employment benefits such as health insurance, paid sick time, and more. California voters rejected the effort to reclassify gig workers as full-scale employees in a 2020 ballot referendum, but by that point independent contractor reclassification had already become a cause célèbre for the modern political left, with numerous states seeking to follow California’s lead.

The Labor Department issued anti-contractor guidance during former President Barack Obama’s second term, only to see the first iteration of the Trump administration issue a pro-contractor rulemaking at the very beginning of 2021. Once President Joe Biden took office shortly thereafter, the government suspended the Trump rule and eventually issued its own rulemaking that again had an anti-contractor bent. Now, to complete this bureaucratic whiplash, the Trump 2.0 Department of Labor suspended enforcement of the Biden-era rule last year and has issued a new proposed rule that essentially reinstates the Trump 1.0 rule.

The new rule concentrates on two key factors when it comes to determining whether a worker can be classified as an independent contractor under the Federal Labor Standards Act: first, the nature and degree of control over the work, and second, the worker’s opportunity for profit or loss.

If a worker has substantial control over things like his or her work schedule, selection of projects, and ability to work for competitors, then this would lean toward a contractor-based rather than employee-based relationship. Likewise, if a worker has the opportunity to earn profits or incur losses based on his or her initiative (such as their business acumen and judgment), then this would again militate in favor of a contracting relationship. This type of pro-contractor legal standard would largely shield gig companies from federal attempts to reclassify their workers as full-scale employees.

The importance of maintaining independent contractor flexibility extends far beyond the gig context, too. Everyone from real estate agents to barbers have long operated under contracting models, and attempts to reclassify these workers as employees would create massive disruption across a broad swatch of industries.

One often overlooked example is financial advisors, many of which are independent contractors. Reclassifying them as employees could make these advisors less willing to work with lower-net-worth clients, which in turn would have underappreciated and widespread impacts on the potential retirement savings of millions of Americans

But while the latest rulemaking is sufficiently pro-contractor to protect against such negative impacts—at least at the federal level—it’s worth noting that in our hyper-polarized era, it could well be reversed by subsequent administrations, just like its predecessor rules. The result is more uncertainty and paralysis for businesses and industries, which must endure a substantial rewriting of American labor law every four to eight years.

Fortunately, at the state level, more durable change is happening. Rather than trying to reclassify workers as employees, numerous states have begun experimenting with what’s known as a portable benefits model. Under this framework, independent contractors in the gig economy are given access to SEP IRA–style accounts in which both they and gig companies can contribute. The funds from these accounts follow the contractors from job to job, rather than being tied to a single company, and they can be used for benefits like health insurance, retirement funds, or paid time off.

States as ideologically diverse as Pennsylvania, Utah, and Maryland have pursued this model in recent years, with more states set to join the ranks this year. The idea has even made its way to Congress in the Unlocking Benefits for Independent Workers Act that was introduced last year by Sen. Bill Cassidy (R–La.).

The Department of Labor’s new rule is a boon to independent contractors. But the real change is happening in the states. And, ultimately, it’s up to Congress to step in any prevent this regulatory teeter-totter from becoming fully unhinged.

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