Employee or Contractor? - What an Employer Truly Needs

Nowadays, we frequently encounter situations in the labor market where the same work within companies is performed on the basis of different types of contracts. Specifically, in most common practices, companies execute service agreements instead of employment contracts to avoid a range of legal obligations and administrative costs. However, when determining the type of contract, they fail to consider a whole range of legal, organizational, and financial risks they might face.

How to Determine the Type of Contract?

In practice, the question often arises — when is it appropriate to execute an employment contract and when can a service agreement be utilized? Although these two legal instruments exhibit certain similarities, their legal nature, purpose, and the rights and obligations inherent to the Relationship between the parties differ substantially.

The nature of a legal relationship is evaluated by both the LEPL Labor Inspection Service and the courts, not merely by the title of the contract; essential significance is attributed to the actual content of the relationship. Consequently, when selecting the type of contract, a company must assess its actual organizational needs, the nature of the work to be performed, the form of its execution, and the necessity of company involvement/control during the work performance process.

Key Characteristics of an Employment Relationship

• Parties to an Employment Relationship

The parties to an employment relationship are the employer and the employee. An employee can only be an individual who, within the scope of the employer's organizational control, performs work in exchange for monthly remuneration.

• Organizational Order

Organizational order is one of the primary and essential defining criteria of employment relationships. The employer is responsible for the organizational structuring of the employment relationship and the complete administration of the process. The employer establishes systems, rules, internal regulations, and policies that the employee is mandatorily guided by when performing the obligations stipulated in the employment contract. It is precisely the organizational order and the strictly defined system of internal regulations that place the employee under the subordination of the employer, imparting a specific, subordinating nature to this relationship that distinguishes it from other civil relations.

• Subordination

The employment relationship, as a form of civil-legal relationship, is based on the principle of equality of the parties and the free expression of will. However, given the specifics of this relationship, when signing an employment contract, the employee voluntarily becomes part of the subordinating system inherent to an employment relationship.

Without the element of subordination, the organizational management of the employment relationship would be impossible; however, this principle does not imply a breach of the principle of equality of the parties or the employee's compliance with arbitrary, subjective decisions of the employer. The principle of subordination implies the performance of work by the employee within the established organizational system and rules of the employer. Adherence to these rules should not be perceived solely as the employee's obligation, as its enforcement is also the responsibility of the employer.

The employee is under no obligation, by reference to the principle of subordination, to comply with and execute instructions of the employer that are unlawful and/or deviate from the company's internal regulations and rules.

• Strictly Established Work Regime

Employment relationships are characterized by a precisely and strictly defined work schedule. This principle is part of the organizational structure of employment relations, establishing a specific time frame during which the employee remains at the disposal of the employer. Furthermore, being at the employer's disposal during working hours underscores the significance of the actual process of performing work and the employer's supervision and control over it, rather than focusing solely on the result. For instance, in the case of hotline operators, it is crucially important that, by agreement of the parties, the employee remains at the employer's disposal during a specific time frame, and such activity cannot be directed solely toward a result. The same can be said for individuals employed in record-keeping profiles.

• Monthly Remuneration and Its Relation to the Work Process

An essential characteristic of an employment relationship is the regular, monthly, and equal payment of remuneration (in the case of fixed salaries). However, this principle can also characterize work performed under a service agreement. In this context, it is crucial to emphasize that an employee receives monthly remuneration (in the case of a fixed salary) in exchange for being at the employer's disposal/working within the working hours, and it is not directly tied to the volume or outcome of the work performed. This rule stems from the principle of organizational order in employment relationships, under which the volume of work to be performed within the work schedule can be set in varying amounts by the employer, which should not constitute a risk for the employee. For example, by instruction of the employer, an employed lawyer drafted 5 lawsuits in the current month, unlike other months when, on average, based on the company's legal disputes, the lawyer had to draft 10 lawsuits. Despite the relatively small number of drafted lawsuits, the lawyer will receive the fixed salary agreed upon in the contract for the current reporting month, and its amount will not be reduced, because the employee did not violate the work schedule and remained at work within the agreed working hours during the month at the employer's disposal.

Additionally, it is important to note that in employment relationships, along with a fixed salary, there may exist an additional compensation system directly aimed at the volume or quality of work performed (including bonus systems, piecework wages, etc.), which should be regarded as an offer of additional, more decent remuneration for the employee and an improvement in their working conditions.

• Employer's Work Equipment

In employment relationships, the employer is obligated to provide employees with a healthy, safe working environment and appropriate working conditions, which includes providing work inventory, appropriate technology, equipment, etc.

• Social Guarantees of the Employee

An employment relationship establishes corresponding social and legal responsibilities for the employer, which in turn implies the existence of a range of social guarantees for the employee. For instance, only within the framework of employment relationships do social rights arise, such as leave, allowance for temporary disability, maternity leave, etc.

Key Characteristics of a Service / Service-of-Work Contract

• Equal Parties to the Contract - Contractors

Relationships arising from a service contract are regulated solely by the Civil Code, and the Labor Code does not apply to them. Consequently, this relationship, based on contractual agreement, has equal parties: the client and the contractor, and there is no element of subordination characteristic of an employment relationship. Furthermore, the contractor can be either an individual or a legal entity.

• Absence of Organizational Order and Work Schedule

The work to be performed under a service contract does not require organizational ordering; therefore, the contractor is not subject to the regulations and procedures related to the execution of work established by the client. Moreover, a service contract is not characterized by a strictly defined work regime. Consequently, the contractor independently determines/organizes the process of executing the work, the frequency, and the time intervals of performance, in a manner that does not violate the delivery date agreed upon in the contract with the client.

• Result of the Performed Work and Its Relation to Remuneration

The lack of need for organizational order and a work schedule directly indicates that the outcome and quality of the performed work, rather than the work process itself, are of essential importance for a service contract. Consequently, as a rule, remuneration is paid by the client after the delivery of the work, in an equivalent amount corresponding to the completed and delivered work as specified in the acceptance-delivery document.

Furthermore, it should be noted that the parties may agree on any form of remuneration acceptable to them, including installments or monthly payments, which is also an essential characteristic of an employment relationship. In such instances, when evaluating the nature of the legal relationship, it is crucial to focus on the circumstance that, in any case, calculating the amount of compensation under a service contract does not depend on the time spent or the schedule of the contractor in the process of executing the work.

• Execution of Work Using the Contractor's Equipment and Technology

Within the scope of services, work is performed by the contractor using their own inventory and technology. This principle is one of the essential differentiating elements when assessing the nature of an employment versus a service contract and exempts the company from a range of financial and organizational expenses. For example, costs for purchasing, operating, and maintaining equipment and inventory, monitoring equipment operation, etc.

• Absence of Social Guarantees

As noted above, the rights and obligations of the parties under a service contract are defined by the Civil Code of Georgia, and the provisions of the Labor Code of Georgia do not apply. Consequently, the social guarantees that an employee possesses under the Labor Code (for example, leave, monetary allowance for periods of disability) cannot be extended to a contractor. Avoiding these social obligations is the primary reason why employers seek to bypass executing employment contracts and attempt to disguise employment relationships by signing service agreements.

The primary goal of any company is the efficient organization of the work process, as properly planned and administered processes are a crucial guarantee of business success. Consequently, before companies make a decision regarding the execution of an employment or service contract, it is highly important to carefully assess the actual needs of the company's organizational processes and determine:

• Whether there is a necessity for the work to be performed to fall within the scope of organizational order;

• Whether a strictly defined work regime and control over its execution by the company are required to plan an effective work process.

If efficiency in business processes can be achieved without establishing an organizational order and a system of subordination, the company can save significant administrative, human, and financial resources. On the other hand, alongside legal risks and administrative liabilities, the company must comprehend the severity of the reputational damage it will suffer as an bad faith employer if, for the sake of resource-saving, it attempts to disguise actual employment relationships with service agreements and thereby restrict employees from exercising their legally guaranteed social and labor rights.

Author: Keti Mamamtavrishvili

Consultant in Labor Law

and HR Administration Issues

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