During a recent hearing, the U.S. House Education and the Workforce Committee debated the pros and cons of changing the so-called “independent contractor” rule. This rule dictates how to properly classify workers as employees or independent contractors, a distinction that has grown in importance with the steep increase in the independent workforce in recent years.

The distinction between independent contractors and employees can be crucial for workers and businesses. Independent contractors do not enjoy the same legal rights as employees. For instance, independent contractors are not entitled to overtime pay, minimum wage, workers’ compensation, or unemployment compensation benefits. On the other hand, businesses can save significant funds by utilizing the services of independent contractors as opposed to hiring employees.

Congress is currently considering the PRO Act, which would make it more difficult for employers to classify their workers as independent contractors. The National Labor Relations Act (NLRA) does not cover independent contractors.

Similarly, the U.S. Department of Labor (DOL) issued a proposed rule in October 2022 to clarify the definition of an independent contractor under the Fair Labor Standards Act (FLSA). In doing so, the DOL would rescind a 2021 rule in which two factors, i.e., control over work and opportunity for profit or loss, are given greater weight in determining whether a worker is an employee or independent contractor. Instead, companies would use a “totality-of-the-circumstances” inquiry, where none of the relevant factors have a predetermined weight.

Supporters of tightening the independent contractor rule argue that some unscrupulous employers use the misclassification of workers to cut down on labor costs. Those employers gain an unfair competitive advantage by disregarding their legal responsibilities as employers. Misclassification often occurs in low-wage industries, where workers are forced to accept working conditions imposed on them due to misclassification.

Opponents claim that changes to the independent contractor rule would cause job and income loss for freelancers and independent contractors. They characterize the push to limit or eliminate the “gig economy” as an intrusion on individuals’ rights to choose autonomy and flexibility in their job choices as independent contractors. Furthermore, they point out that many gig workers have full-time jobs elsewhere, so they may not require benefits at their independent contractor job. Freelance or independent contractor opportunities can also be critical for people in an economic downturn or when facing financial hardship, so these jobs often play an important role in helping people face financial challenges.