How does Georgia Employment Law dictate whether workers should be classified as employees or independent contractors?
With tax money on the line, the Georgia Department of Labor and IRS pay close attention to the classification of workers. There are several considerations which must be met in order to establish independent contractor status in Georgia.
Labeled human resources, talent, assets or any number of other titles, people are often the most valuable part of any business or organization. The performance and management of workers is critical to overall success. There are two primary classifications of worker:
Employee (part-time or full-time)
Independent Contractor (IC)
The implications of these statuses are primarily related to federal and state taxation as well as how businesses and their workers interact with one another. Because of the tax implications, the Internal Revenue Service (IRS) and Georgia Department of Labor (GDOL) try to prevent the misclassification of employees and contractors.
Three characteristics are used to determine the relationship between businesses and workers.
Relationship of the Parties
Each characteristic has several components and must be reviewed in totality. In other word, no single fact provides the answer to proper classification. Information below regarding these characteristics is from the viewpoint of the worker and is sourced from the official IRS publication on the topic. More IRS information including “Employee vs. Independent Contractor – Seven Tips for Business Owners” can be found here.
These facts show whether there is a right to direct or control how the worker does the work. A worker is an employee when the business has the right to direct and control the worker. The business does not have to actually direct or control the way the work is done as long as the employer has the right to direct and control the work. For example:
Instructions – if you receive extensive instructions on how work is to be done, this suggests that you are an employee. Instructions can cover a wide range of topics, for example:
how, when, or where to do the work
what tools or equipment to use
what assistants to hire to help with the work
where to purchase supplies and services
If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor. For instance, instructions about time and place may be less important than directions on how the work is performed.
Training – if the business provides you with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that you may be an employee.
These facts show whether there is a right to direct or control the business part of the work. For example:
Significant Investment – if you have a significant investment in your work, you may be an independent contractor. While there is no precise dollar test, the investment must have substance. However, a significant investment is not necessary to be an independent contractor.
Expenses – if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.
Opportunity for Profit or Loss – if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.
Relationship of the Parties
These are facts that illustrate how the business and the worker perceive their relationship. For example:
Employee Benefits – if you receive benefits, such as insurance, pension, or paid leave, this is an indication that you may be an employee. If you do not receive benefits, however, you could be either an employee or an independent contractor.
Written Contracts – a written contract may show what both you and the business intend. This may be very significant if it is difficult, if not impossible, to determine status based on other facts.
Establishing Independent Contractor Status in Georgia
There are typically two ways for an employer to establish that a worker is an independent contractor in Georgia.
(1) Demonstrate that the worker has been and will continue to be free from control or direction over the performance of his work AND is customarily engaged in an independently established trade, occupation, profession, or business.
(2) Show that the IRS found that the worker wasn’t an employee through an SS-8 determination.
Because many Georgia employers haven’t received determinations from the IRS before a GDOL audit, they are often faced with demonstrating an independent contractor relationship through the two-factor test. For the first prong of the test, Georgia courts have traditionally found that the following factors demonstrate that an individual is free from significant control or direction:
There are no territorial or geographic restrictions placed on the worker.
The worker isn’t prohibited from working for other companies or holding other employment contemporaneously.
The worker has no prescribed minimum hours to work or orders to obtain.
The worker is free to accept or reject work without consequence.
The worker has the discretion to set his own schedule.
Your ability to demonstrate that you don’t control or direct the worker doesn’t end the inquiry into independent contractor status. You must also demonstrate that the worker was customarily engaged in an independently established trade (the second prong of the test).
While you need not show that a worker is providing services for another company, you will need to establish that they could work for others. For example, you likely would be able to satisfy the second factor by demonstrating that a worker has an established business or an employer identification number (EIN) and receives checks in the name of their business. Evidence that a worker has an independent business card and advertises their services is another good way to prove to the GDOL that they are an independent contractor.
Surely it is prudent to properly classify your current workers but there are a variety of benefits and potential drawbacks that should be considered when determining how you want to manage your business going forward as well.
Benefits Of Using Independent Contractors
There are several reasons business owners may choose to work with independent contractors (also referred to as freelancers, consultants, etc.) rather than hiring people as part-time or full-time employees:
Money Savings – while you may have to pay ICs a higher hourly amount than employees, you can avoid certain expenses such as taxes (Social Security and Medicare), insurance (state unemployment compensation and worker’s compensation) and employer-provided benefits such as medical and dental insurance, retirement savings programs, paid time off, etc. There may also be cost savings with regards to office space and equipment that would normally be provided to employees. In total, these cost savings can add up to 20-30% or more.
Staffing Flexibility – hiring, firing and training of employees can be costly, time consuming and arduous. If an IC doesn’t meet your needs, you have no obligation to keep working with them. As the needs of your business change, you can bring in ICs with the specific skillsets needed.
Reduce Lawsuit Exposure – employees have many rights under federal and state laws (i.e. minimum wage, overtime, various discrimination protections, union formation, time to care for sick family members or bonding with a new child, wrongful termination, etc.). ICs acting as independent businesspeople are not protected by many of these laws.
Disadvantages of Using Independent Contractors
With so many benefits of hiring ICs, it can be tempting to utilize them in a greater extent than you may be already. That said, there are potential drawbacks which should be seriously factored in.
Less Control – unlike employees, whom you can closely supervise and monitor, independent contractors enjoy a certain autonomy to decide how best to do the task for which you hired them.
Continuous Change – constant coming and going of workers can be disruptive and inconvenient, and quality of work may be less consistent.
Importance of Written Contracts – expectations of performance (quality, timeframe, cost, etc) should be explicitly stated in written contracts for every project for which an IC is hired. Ambiguity in the contract can quickly result in disputes and (unlike an employee who can be asked to redo something) an IC will most likely demand payment for work done and additional compensation for any further revisions needed if clear expectations were not provided.
Injury Liability – while employees injured on the job are typically covered by workers’ comp insurance (and often forgo their right to sue their employer in exchange for benefits), ICs are not covered by workers’ comp and may be able to sue to recover damages.
Intellectual Property Ownership – depending on the project and written agreement, ICs may retain ownership of intellectual property that they produce (such as copyrights).
Government Audits – hiring ICs puts you at greater risk for both federal (IRS, Department of Labor, National Labor Relations Board, Occupational Health and Safety Administration) and state government audits.
Withhold income tax and employee’s portion of social security and Medicare taxes.
Pay social security, Medicare, and unemployment (FUTA) taxes on your wages.
Give employee a Form W-2, Wage and Tax Statement, showing the amount of taxes withheld from employee’s pay.
Deduct unreimbursed employee business expenses on Schedule A of their income tax return, only if their deductions are itemized and total more than two percent of their adjusted gross income.
Businesses may be required to give ICs a Form 1099- MISC, Miscellaneous Income, to report what it has paid.
Businesses do not withhold taxes from IC pay.
ICs are responsible for paying their own income tax and self-employment tax (Self-Employment Contributions Act – SECA). They may need to make estimated tax payments during the year to cover their tax liabilities.
ICs may deduct business expenses on Schedule C of their income tax return.
There are legitimate reasons to hire workers as independent contractors but misclassifying them for tax purposes or as a way to avoid offering benefits is likely to get you in hot water with the government and can negatively impact your business overall. The IRS and GDOL are cracking down on companies that are misclassifying employees as contractors in an effort to collect additional taxes and protect employee rights. It is challenging enough to run a successful business without being fined and employing disgruntled workers who feel they should be receiving benefits. In most cases, if someone is working for you on a routine basis, you set their schedule, oversee how they complete work and/or provide materials such as computers or tools, they are an employee. Click here for a great infographic cheat sheet.