Workforce Over the Horizon · Independent work

Clearer Rules for Independent Work: A Path to Common Ground

By Michael Taylor, Managing Partner, Diakon Partners

Worker classification should be a question people and businesses can answer before work begins. When the answer remains uncertain until an audit or dispute, the consequences can include legal expenses, retroactive tax exposure, and hesitation to enter otherwise sound commercial relationships.

Misclassification creates a different set of harms. Employees can lose applicable minimum wage, overtime, and unemployment insurance protections. Government Accountability Office (GAO) testimony has also identified adverse effects on Social Security and unemployment tax collections. These consequences depend on the law and circumstances involved, but they establish why effective enforcement matters.^[2]

A better framework should reduce uncertainty for legitimate independent businesses and make improper arrangements easier to identify. Those goals provide a practical basis for bridging the political divide.

Start with the evidence

Independent contracting is an established part of the economy. The Bureau of Labor Statistics counted 11.9 million independent contractors in their sole or main job in July 2023, representing 7.4 percent of employment, compared with 6.9 percent in May 2017. Among those contractors, 80.3 percent preferred their arrangement; 8.3 percent preferred traditional employment. And 70.7 percent worked full time.^[3]

These figures cover independent contracting as a main job, rather than everyone who occasionally earns freelance income. They show that independent work is both substantial and preferred by many who pursue it.

Industry research provides additional evidence. MBO Partners’ 2024 survey found that 84 percent of full-time independents said they were happier working on their own. That is a self-reported finding from a company serving the independent workforce, rather than proof that independence causes greater well-being.^[4]

Preference does not determine legal status. But policy should recognize that legitimate independent work is a choice many people value, while addressing arrangements that improperly deny employee protections.

Account for how businesses operate

For federal employment tax purposes, the Internal Revenue Service (IRS) considers behavioral control, financial control, and the relationship between the parties. Its guidance explains that no single factor determines classification and that relevant factors vary by circumstance.^[5]

That flexibility accommodates different businesses. It also requires parties to weigh factors that may point in different directions.

Consider an illustrative logistics arrangement: an independent transportation business agrees to move a shipment within a coordinated delivery network. The contract specifies delivery windows, insurance, cargo security, tracking, and proof of delivery.

These requirements may establish legal compliance, define the purchased service, or coordinate separate businesses. They should not automatically establish employment control. The question is whether they specify the result or direct the particular methods and manner of performing the work.

That distinction matters beyond logistics. Independent consultants, contractors, and technology professionals also work to deadlines and customer specifications. At the same time, requirements described as service standards deserve scrutiny when they actually dictate how someone must perform the work.

Make enforcement more direct

Clearer requirements could give enforcement agencies a more concrete basis for investigation.

Who furnishes the primary equipment? Can the provider serve other customers? Does the provider bear financial risk? Who directs the methods of performance? Do agreements, payment records, and tax reporting match actual practices?

The proposed Freelancer Expense and Tax Relief Act (FLEX Act)^[1] would require parties claiming its federal employment tax safe harbor to meet defined eligibility conditions. Its reporting provisions would identify payments for which safe harbor treatment is claimed, and payors would have to retain the commercial agreement for at least three years following final payment.

Those records could give investigators a starting point for checking eligibility and identifying inconsistencies. A contract label or business identifier would be insufficient if the actual arrangement failed the substantive requirements.

There is documented support for the value of better reporting. In a 2020 platform-work study, GAO found that missing earnings information created compliance challenges for workers and enforcement challenges for the IRS. It concluded that additional reporting could improve both. That finding concerns income reporting; it does not establish that the FLEX Act would reduce misclassification by a particular percentage.^[6]

The enforcement argument is nevertheless clear: defined conditions, retained records, and identifiable claims of safe harbor treatment would give agencies evidence to test. Anti-avoidance authority and a fraud exception would preserve tools for addressing abuse.

Clearer requirements and reliable records could help enforcement agencies identify noncompliance more directly. Improved enforcement is an intended benefit that should be tested after implementation, including whether the framework reduces avoidable disputes and helps investigators identify abuse.

Connect certainty with accountability

The FLEX Act would establish a federal employment tax safe harbor based on written agreements, business identification, primary tools or equipment, non-exclusivity, financial risk, and the absence of direction over specific methods of performance. It would distinguish specified legal compliance and contractual service requirements from behavioral control.

Proposed limits on retroactive assessments would depend on substantive eligibility and specified documentation and reporting conditions. Fraud or willful misrepresentation would remain grounds for retroactive assessments.

The proposal also includes an additional income tax deduction equal to 50 percent of self-employment taxes attributable to qualifying earnings, subject to eligibility and income limits. Illustratively, $10,000 in qualifying self-employment tax would produce a $5,000 additional deduction before applicable limitations. At a 24 percent marginal income tax rate, that could reduce federal income tax by $1,200. It would not reduce the self-employment tax itself.

The safe harbor would address federal employment taxes, rather than resolve classification under every employment law. It would preserve state worker classification laws and applicable worker protections. Separate state unemployment tax conformity provisions require their own consideration. Failing the safe harbor would leave otherwise applicable classification rules in place.

A practical basis for agreement

Reform should be judged by whether people can understand the requirements, document compliance, and have violations addressed consistently. The strongest basis for a broader coalition is a shared understanding of the problem and practical standards for addressing it.

The evidence supports taking independent workers’ preferences seriously. The harms of misclassification support maintaining meaningful enforcement. The FLEX Act proposal brings those interests into one discussion: clearer requirements for legitimate arrangements, a stronger evidence trail, and consequences for abuse.

A practical standard for reform is clear: protect legitimate independent work, preserve applicable worker protections, and give enforcement agencies reliable evidence to identify abuse.

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