A hotshot computer consultant in Pennsylvania hung out her “shingle” on LinkedIn in 2011 in hopes of attracting business. A technology referral firm, impressed with her profile, asked her to join their roster of talent available for assignments. Soon the firm connected her with a client. She delivered what was needed. She billed the middleman for her time. The firm in turn billed the client.

Everyone was happy: The client got great advice; the hotshot was paid well; the referral company earned a commission. What’s not to like? A lot, according to the Pennsylvania Labor Department, which two years later was chasing the referral firm for what it says were unpaid unemployment insurance taxes, plus penalties and interest. The referral firm’s alleged crime? Not treating the hotshot as an employee in order to avoid paying employment taxes.

Welcome to the arcane but consequential fight over who is an “independent contractor” and who is an “employee”—a collision between Depression-era labor laws and Internet age professionals that’s throwing a wrench into the way millions of talented Americans want to work. There’s nearly nothing companies fear more than regulatory uncertainty that could result in unexpected tax bills down the road, so the crusade to reclassify consultants as “employees” means that now independent professionals often don’t get hired in the first place. And with 50 states applying their own subjective standards and definitions for these categories, this uncertainty is only compounded, to the point where its hard for even diligent companies to be confident their arrangements won’t be questioned after the fact. On the talent side, moreover, independent contractors who end up being recast against their will as employees risk having their own tax planning and business expenses (for things like home offices, for example) disrupted. (Disclosure: One of us co-founded and is CEO of a firm which works with independent talent interested in project-based work; the other is a lawyer focusing on helping businesses properly engage talent.)

To be sure, there’s some abuse of the rules governing what qualifies as freelance work, particularly at the low-paid end of the labor market; powerless workers (landscapers are one example) are sometimes taken advantage of by companies or staffing firms who hide behind “independent contractor” status to avoid extending basic protections for injury or pay, or against discrimination. But by interfering in the relationship between professionals who want to work independently and companies who want to tap their talents, governments are unwittingly hurting growth, incomes, and innovation. Fixing this will require policymakers to update the mental model of work that informs our antiquated labor laws.

Seeing why requires a little history. Prior to the 1900s, the question of who was an employee and who an independent contractor wasn’t really important. There were no taxes to be withheld from “wages,” no Social Security, Medicare, or unemployment benefits to be paid by the government, and no protections for “employees” such as the minimum wage or worker’s compensation. All this changed when landmark laws such as the Social Security Act and Fair Labor Standards Act were first enacted in the 1930s. But the definition of “employee” was murky. In one famous early case, for example, the Supreme Court explained, “The word [employee] is not treated by Congress as a word of art having a definite meaning. Rather it takes color from its surroundings in the statute where it appears … which must be read in the light of the mischief to be corrected and the end to be attained.”