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Amends definitions in section 3 of the Fair Labor Standards Act to replace or revise the definitions of 'employer', 'employee', 'employ', and 'employment' to reference section 101 of this Act and to redefine certain subparts.
Amends definitions in section 2 of the National Labor Relations Act to revise the definition of 'employer', alter paragraph (3) text to insert '21st Century Worker Act', and add a definition of 'employment'.
Amends section 7701(a) to add definitions: the terms 'employee' and 'employer' have the same meaning as in section 101 of this Act.
Amends section 3121(b) of the Internal Revenue Code to define 'employment' as any services performed by an employee for an employer, strikes subsection (d) of section 3121, and makes conforming removals (e.g., striking paragraph (3) of section 3306(a)).
Creates a single federal system for deciding when a worker is an employee or an independent contractor. The law establishes bright-line categories and limited worker choice, assigns responsibility for initial classification and periodic reviews, imposes modest penalties for certain failures or willful misclassification, and directs the Department of Labor to enforce and keep records. Aligns federal labor and tax law language by replacing multiple definitions with one harmonized set that applies across major statutes and the Internal Revenue Code, requires a GAO study to identify other conflicting federal laws, and makes tax-code definition changes effective for the first taxable year beginning after enactment.
The bill brings clarity and uniform worker protections by harmonizing employee/ employer definitions and creating a more structured classification process, but those benefits come with substantial compliance costs, reclassification risks that may reduce contractor flexibility, and new penalties that
Most U.S. workers and employers: federal definitions of 'employee' and 'employer' will be harmonized across the tax code, FLSA, NLRA, and related statutes, reducing legal uncertainty about who is covered.
Workers who clearly meet employee criteria: will receive consistent wage-and-hour, collective-bargaining, and tax-withholding protections across multiple federal laws.
Employers and payors: gain clearer, simpler rules and a defined process for initial classification (including annual and event-triggered reviews), reducing prolonged ambiguity about obligations at the start of a relationship.
Independent contractors who meet bright-line criteria (e.g., licensed professionals, bona fide sole proprietors): can be automatically classified as contractors, preserving contractor status and business flexibility for many self-employed individuals.
Many employers and gig platforms: may face higher payroll-tax and compliance costs if the unified definition increases the number of workers treated as employees.
Independent contractors, freelancers, and gig workers: may lose flexibility tied to contractor status (scheduling, multiple clients, tax treatment) if reclassified as employees.
Employers and small businesses: will incur new administrative burdens and costs to make initial determinations, retain records for 3 years, and perform annual/event-triggered reviews across statutes.
Employers and workers who misclassify willfully or recklessly: face a significant penalty equal to 15% of compensation, creating sizable financial risk for classification errors.
Establishes the official short title of the Act as the "21st Century Worker Act."
Establishes title I heading: "Classification of service provider payees".
Defines key terms used in the title, including bona fide sole proprietor, business entity, compensation (including fair market valuation for non‑cash payments), direct sales service provider payee, elective classification service provider payee, employee, employer, employment by agreement, formal bona fide contractor, independent contractor, licensed profession/trade/occupation, limited economic relationship, money, period of time worked, sales commission, Secretary (Secretary of Labor), service
Defines "substantial economic relationship" (natural person; >75% time‑based compensation; payor sets hours; required to work substantially full‑time for 4+ consecutive weeks) and "substantially full‑time" (average 30+ hours/week).
Establishes a bifurcated classification framework requiring each service provider payee to be classified as either an employee or an independent contractor under this title.
Who is affected and how:
Gig & freelance workers: Directly affected because the law changes how independent contractor status is determined; many workers could gain employee protections (minimum wage, overtime, unemployment eligibility, employer withholding) if reclassified, but some may lose flexibility tied to contractor status.
Small business owners and other employers/payers: Must make initial classifications, keep records, perform periodic and event-triggered reviews, and may face modest penalties for noncompliance or willful misclassification; some businesses may incur higher labor costs and payroll tax obligations if more workers are treated as employees.
Taxpayers and the IRS: Harmonizing definitions in the tax code affects tax withholding, employer payroll taxes, and reporting; tax-definition changes take effect the first taxable year after enactment, creating a clear transition point for tax administration.
Department of Labor and federal enforcement agencies: Will need to implement, monitor, and enforce new rules and maintain records; potential need for guidance, rulemaking, and additional administrative capacity.
Unions and collective bargaining: Changes in employee status definitions could affect who is covered by collective bargaining and representation rights under labor law.
Net effects and tradeoffs:
Benefits: Greater clarity and consistency across laws could reduce litigation and conflicting agency decisions, making status determinations more predictable for courts, agencies, employers, and workers.
Costs/risks: Reclassification can increase labor costs for employers and change tax liabilities for both workers and businesses; administrative burdens for compliance and recordkeeping could be significant, particularly for smaller firms. Some workers may lose contracting flexibility they prefer. Implementation details and regulatory guidance will strongly influence outcomes.
Uncertainties:
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Read twice and referred to the Committee on Finance.
Introduced March 5, 2026 by Mike Lee · Last progress March 5, 2026
Read twice and referred to the Committee on Finance.
Introduced in Senate