A couple of years ago, the Bureau of Labor statistics said between 7.4% and 15% of the U.S. workforce is independent contractors…freelancers, gig workers, and independent consultants. Who knows what the actual statistic is today (I’m guessing it’s higher). Employees enjoy various legal and financial protections: minimum wage and overtime rules, employee benefits (health coverage; retirement savings), unemployment insurance and workers’ compensation, and various anti-discrimination laws. Independent contractors are mostly not covered by these protections. The same is true for other self-employed individuals…sole proprietors, members of limited liability companies, and partners. Still, there are some federal and state laws protecting independent contractors and other self-employed individuals.
We know who a partner is and who an LLC member is, but who are ICs and what are their protections?
What independent contractors (ICs) need to know:
Worker classification
Because legal protections turn on whether a worker is an employee or an independent contractor, making this determination is crucial. Unfortunately, there’s no single rule to apply; it depends on who’s asking…the U.S. Department of Labor, the IRS, a state, or other government entity.
DOL. Under a proposed rule issued on February 27, 2026, there’s an economic reality test to decide whether the worker is in business for himself or herself (an IC) or is economically dependent on the business for which work is performed (an employee). Two core factors are used to make this determination: (1) the nature and degree of control over the work and (2) the worker’s opportunity for profit or loss based on initiative and/or investment. But there are other factors that can be brought into the mix. And this is just a proposed rule; a final rule could be different.
IRS. It uses a 3-prong test for purposes wage withholding, as well as FICA and FUTA taxes:
- Behavioral control
- Financial control
- Relationship of the parties
Worker classification also comes into play for whether workers are entitled to participate in a company’s retirement, and if they are counted for purposes of the employer mandate under ACA for health coverage.
More details are in an earlier blog.
States. States also have various rules protecting employees, so worker classification is important. Many states use an ABC test launched by California for purposes of unemployment insurance, wage orders, workers’ comp and other matters.
Federal protections
Federal protections are largely for employees. So, workers get these protections as long as they’re classified as employees as explained earlier, and not as independent contractors. Again, which test is used depends on the purpose for which classification matters. One law that independent contractors can look to concerns their contract rights. They can’t be discriminated against on the basis of race if it interferes with their right to make or enforce contracts (this federal law does not cover other types of discrimination).
State protections
There has been a growing trend in some states to create certain protections specifically for independent contractors.
Freelance payment laws. Where applicable, these laws require timely payment and remedies for nonpayment where there are written contracts. Currently, states with freelance payment laws include California, Illinois, and New York, and similar laws are in some localities (Los Angeles; Minneapolis; Seattle). Check your location using the map at FreelanceUnion.org.
Even without a freelance payment law, any person can seek to enforce a written contract. Often, small claims court can be used for this purpose.
Workers’ compensation. While most states require businesses to have this coverage for employees, as a rule, self-employed individuals do not. But general contractors and subcontractors may be able to opt in if their contracts require it. Other self-employed individuals may choose to get coverage. Forbes lists the best workers compensation insurance for freelancers in 2026.
State disability. ICs are not automatically covered by state disability insurance as employees are, but there are some protections to consider. For example, California allows independent contractors to pay for coverage. It’s called disability insurance elective coverage (DIEC). Or you can buy private disability insurance. And remember, as an IC if you become disabled, you may qualify for Social Security disability payments (a federal benefit).
Final thought
“Independent contractors—a rapidly growing piece of the workforce—can often achieve the best quality of life. They can choose where they work, whom they work for and for how long.” ~ Maynard Webb, former chairman of the board of Yahoo!, author, and early-stage business investor
That’s well and good, but if you’re an IC, don’t count on the government to be of much help. For the most part, you’re on your own.
Additional information concerning independent contractors can be found in this list of blogs here.
