21st Century Worker Act

Bill Number

S. 4010

Origin Chamber

Senate

Congress

119th Congress, Session 2

Policy Area

Labor and Employment

Status

Introduced

Latest Action

2026-03-05: Read twice and referred to the Committee on Finance.

Last Updated

2026-03-24T16:48:21Z

AI-Generated Summary

Purpose

The 21st Century Worker Act aims to create a clear, uniform federal framework for classifying individuals who provide goods or services (called "service provider payees") as either employees or independent contractors. This addresses ambiguities in current law that lead to disputes over worker rights, taxes, and benefits, particularly in modern work arrangements like the gig economy.

Key Provisions

• Definitions (Section 101): Establishes precise terms, such as:
• "Service provider payee": An individual providing goods or services for compensation.
• "Service recipient payor": The person or entity paying for those services (often a business).
• "Substantial economic relationship": A close tie where the worker is paid mostly by time (over 75% of compensation), works full-time (30+ hours/week) for 4+ weeks, and has hours set by the payor—triggering employee status.
• "Employment by agreement": A mutual intent (written or not) to form an employer-employee relationship.
• Other terms like "bona fide sole proprietor" (independent business owner with a non-exclusive contract) and "limited economic relationship" (short-term, non-exclusive work under 30 days/quarter).

• Overall Classification System (Section 102): Uses a "bifurcated" (two-track) approach:
• Payors (businesses) generally determine initial classification upon starting a work relationship.
• Exceptions: Workers self-classify if they qualify as licensed professionals, business entities, sole proprietors, or formal contractors.
• Classifications must be reviewed and updated as needed (see Section 106).

• Mandatory Independent Contractor Classification (Section 103): Applies if the worker does not qualify as a mandatory employee and meets at least one criterion:
• Engaged in a licensed profession (e.g., doctor, lawyer) and offers services to the public.
• Operates as a business entity (e.g., LLC or corporation).
• Has a limited economic relationship (short-term, non-exclusive).
• Is a direct seller (e.g., salesperson compensated by commissions, as defined in tax law).
• Qualifies as a bona fide sole proprietor (written non-employment contract, non-exclusive).
• Meets formal contractor standards (recognized under state law or has a written contract, incurs >5% unreimbursed expenses, non-exclusive, no prior substantial ties).

• Mandatory Employee Classification (Section 104): Applies if there is a substantial economic relationship or an employment by agreement.

• Elective Classification (Section 105): For workers not fitting mandatory categories, they must elect employee or independent contractor status in writing (signed and countersigned by the payor) within 14 days of starting work.
• Records must be kept for 3 years.
• Penalties: Up to $100 for failing to elect or keep records; 15% of compensation for willful/reckless misclassification.
• Default to independent contractor if payor does not countersign timely.
• No obligation to enter any work relationship.

• Changes and Reviews (Section 106):
• Required for "major changes" (e.g., 25%+ shift in hours or pay quarter-over-quarter), effective next month.
• For other changes (e.g., losing a license, ending exclusivity), effective next quarter.
• Annual review by January 31 for ongoing relationships, effective next month if changed.
• Exemption for low-volume work (<100 hours or $10,000/quarter).

• Application to Other Laws (Title II):
• Fair Labor Standards Act (FLSA, Section 201): Updates definitions of "employer," "employee," "employ," and "employment" to match the Act's terms, focusing on substantial economic relationships.
• National Labor Relations Act (NLRA, Section 202): Aligns "employer" and "employee" definitions similarly, excluding government entities and unions (when not acting as employers).
• Tax Classification (Section 203): Amends Internal Revenue Code to use the Act's definitions for "employee," "employer," and "employment"; removes conflicting provisions; applies to tax years after enactment.
• GAO Study (Section 204): Requires a report within 2 years identifying 25+ federal laws (e.g., ADA, Title VII, FMLA, OSHA) using mismatched terms and recommending harmonization.

Significant Changes to Existing Law

• Replaces vague, case-by-case tests (e.g., IRS's common-law factors or DOL's economic reality test) with specific, objective criteria based on contract terms, economic ties, and business structure.
• Integrates classifications across labor (FLSA, NLRA), tax (IRC), and other laws, eliminating inconsistencies that previously allowed different outcomes under each statute.
• Introduces worker elections and self-classification for certain groups, shifting some responsibility from agencies to parties involved.
• Mandates periodic reviews and penalties for misclassification, creating ongoing compliance duties not emphasized in prior law.
• Removes outdated IRC subsections (e.g., on agricultural labor) to streamline tax treatment.

Potential Impacts

• On Government Agencies: Increases enforcement workload for the Department of Labor (DOL, via Secretary of Labor) on classifications and penalties; IRS may see shifts in tax withholding/revenue from reclassifications (e.g., more employees mean higher payroll taxes); GAO must conduct a broad study, potentially leading to further legislative changes.
• On Citizens (Workers and Businesses): Provides clarity to reduce misclassification lawsuits; workers in elective categories gain choice over benefits (e.g., employees get minimum wage, overtime, but lose tax deductions; independents have flexibility but handle their own taxes/insurance). Businesses may face reclassification costs (e.g., benefits for new employees) but benefit from predictable rules for hiring contractors. Gig workers (e.g., drivers, freelancers) could see more independent status if short-term/non-exclusive.
• On International Relations: No direct impact, as the Act focuses on domestic U.S. labor and tax law.

Main Stakeholders Affected

• Workers (Service Provider Payees): Individuals in gig, freelance, or traditional roles, including licensed professionals (e.g., doctors), sole proprietors, direct sellers, and short-term service providers; they gain classification options but face penalties for non-compliance.
• Businesses (Service Recipient Payors): Employers and companies hiring services, from small firms to large corporations; must determine/review classifications, countersign elections, and retain records, potentially increasing administrative burdens or liabilities.
• Government Agencies: DOL (enforcement and penalties), IRS (tax implications), GAO (study on broader laws), and other regulators (e.g., NLRB for union rights).
• Other Groups: Unions (affected via NLRA changes on who can organize); licensed trade associations (easier independent status); low-wage or gig economy participants (clarity on protections).

Notable Legal, Constitutional, or Political Implications

• Legal: Establishes a national standard overriding varying state laws in federal contexts, likely reducing court battles over misclassification (a common source of litigation). Penalties and record-keeping enhance enforceability but could invite challenges on administrative burdens. The GAO study signals intent for future expansions to laws like FMLA or ADA.
• Constitutional: No apparent direct challenges; aligns with Congress's authority over interstate commerce and taxation (Article I, Section 8). May indirectly support equal protection by clarifying rights without favoring one group.
• Political: Modernizes outdated laws for 21st-century work (e.g., app-based jobs), balancing worker protections with business flexibility. Sponsored by Sen. Lee (R-UT), it reflects conservative priorities for deregulation while mandating reviews to prevent abuse; could spark debates on worker rights vs. economic freedom, especially in a divided Congress.

This summary was generated by AI and may contain inaccuracies. Refer to the official source document for the authoritative text.

Sponsor

Sen. Lee, Mike [R-UT]

Cosponsors (1)

Sen. Britt, Katie Boyd [R-AL]

Recent Actions

• 2026-03-05: Read twice and referred to the Committee on Finance.
• 2026-03-05: Introduced in Senate

Bill Versions

• 21st Century Worker Act — issued 2026-03-05 — PDF (28 pages)