Guide to Hiring Contractors in Georgia

# Guide to Hiring Contractors in Georgia With its attractive tax regime, technological thriving, and high rate of English speakers among the professionals, Georgia has quickly become an attractive choice in attracting companies interested in hiring independent contractors and remote workers. It is important to know the intricacies of contractor hiring in Georgia, especially to small enterprises, as well as big companies that are hoping to increase the number of contingent workers to remain successful and comply with the law. The comprehensive guide is aimed at employers, HR managers, and executives who aim at successfully and legally going through the procedure of recruiting independent contractors in Georgia, considering local laws and market peculiarities. You would like to understand what is the right employment category, laws and regulations, and effective recruitment practices. ## Understanding Independent Contractors At this point, before getting down to the details of the Georgian market, it is necessary to clarify the terms of an independent contractor and an employee since misclassification can be a deadly lawsuit in any country, and Georgia is not an exception. ### Definition of Independent Contractors An independent contractor (more commonly known as a service provider or self-employed person) is a person or a company that signs a civil service contract (a B2B relationship) with another to offer certain services or accomplish a set amount of work. The Labor Code of Georgia does not view them as employees. ### Key Features of Independent Contractors The fundamental distinction lies in the nature of the working relationship. Independent contractors generally exhibit the following characteristics: | Feature | Independent Contractor (B2B) | Employee (Labor Code) | | --- | --- | --- | | Control | Determines their own working methods, schedule, and location (within the contract scope). | Subject to the employer's direct control and supervision over daily tasks and hours. | | Integration | Provides services that are supplementary or peripheral to the core business of the client. | Integrated into the core operations and organizational structure of the client. | | Tools/Equipment | Typically uses their own tools, equipment, or resources. | Provided with necessary tools, equipment, and resources by the employer. | | Risk | Bears the financial risk for profit or loss on the project. | No financial risk; receives a fixed wage/salary. | | Contract | Governed by a civil service contract or agreement. | Governed by an employment contract under the Labor Code of Georgia. | ### ## Hiring Process for Independent Contractors in Georgia Hiring of independent contractors in Georgia considers three basic structural strategies applied by the foreign company: direct involvement, through an intermediary, or through local presence. ### Steps to Hire Independent Contractors * Define the Scope of Work (SOW): Clearly articulate the project goals, deliverables, timelines, and payment structure. The contract has to be results-based and not task-based. * Sourcing and Vetting: Utilize local job boards, professional networks, or international platforms to find qualified talent. Check on their professional status (whether they are registered as a Sole Proprietor/Individual Entrepreneur or a limited liability company). * Draft a Civil Service Contract: This is the most important step. It should be clearly mentioned in the contract that it is a B2B relationship and not an employment relationship. It should cover: * Specific services to be rendered. * Remuneration, invoicing, and payment terms (e.g., payment upon milestone completion). * Duration and termination clauses. * Confidentiality and Intellectual Property (IP) assignment clauses. * A declaration acknowledging the contractor is responsible for their own taxes and social contributions. * Onboarding and Verification: Make sure that the contractor is registered (usually an Individual Entrepreneur status to tax benefits) and knows what their taxes will entail. * Payment: Under normal conditions, payment is done through bank transfer to the business bank account of the contractor on presentation of a legal invoice. ### Using an Employer of Record (EOR) Although this is a key role of an EOR in hiring employees, there are companies that have Global Employment Organizations (GEOs) that provide Contractor Management Services to manage the payment and compliance of independent contractors. * Role: The service provider serves as a focal point to control the contracts, check the compliance, currency conversion, and payment processes. * Benefit: This approach will reduce the complexity of global contractor management and make sure that the B2B relationship is recorded properly, which will reduce the risk of misclassification. It is an effective way of doing business by companies that do not wish to establish a local company, yet wish to concentrate on their main business. ### Setting Up a Local Entity In the long-term, with high dependence on the Georgian contingent workforce, a foreign firm could look at establishing a local legal body (e.g., LLC or a Foreign Enterprise Branch) in Georgia. * Role: The local entity itself agrees directly with the civil service with the independent contractors. * Benefit: It offers optimum legal clarity and it enables the company to contract the contractors under the same area of jurisdiction making it easier to report the taxes on behalf of the client company (but the contractor still has to pay taxes). ## Legal Considerations The most important aspect of contractor hiring in Georgia is legal compliance. The most important is to understand local laws in order to escape the expensive penalties. ### Labor and Employment Laws in Georgia The deal with an independent contractor is governed by the Civil Code of Georgia, rather than the Labor Code of Georgia. The Labor Code solely regulates employment relationships whereby there are rules on: * Working hours and rest periods. * Paid vacation and sick leave. * Minimum wage requirements (currently not strictly enforced but defined). * Severance pay and termination procedures. Importantly, all these provisions of labor laws are not applicable to independent contractors. Its misapplication, even unintentionally (e.g. requiring fixed working hours, paid leave), is one of the key determinants of misclassification. ### Misclassification Risks and How to Avoid Them Misclassification is the wrong treatment of an independent contractor so that the employment relationship is functionally similar to that of the contractor. The relationship can be audited through the Revenue Service (Georgian authorities) in terms of the substance rather than the form of the contract. How to Minimize Misclassification Risk: * Contractual Clarity: The contract must clearly indicate that it is a service agreement and the contractor is liable to pay his own taxes and benefits only. * No Direct Supervision: Do not establish set hours of work, do not micromanage, do not dictate how the work should be done. Focus on deliverables. * Invoice Requirement: It will always be necessary to insist on an official invoice of the registered business entity of the contractor to pay. * No Employee Benefits: Do not provide employee traditional benefits, bonuses or pay time off. * Right of Substitution: The right of substitution is not always practical but the contract should preferably give the contractor the right to replace another qualified person to perform the service. ### Tax Obligations for Independent Contractors A simplified tax system, especially the Small Business Status (also known as the Micro Business or Small Status with regards to Individual Entrepreneurs) is one of the key elements that attract foreign companies and contractors in Georgia. * General Rule (Non-Resident Client): When a foreign company (not a resident of Georgia) engages a Georgian independent contractor and remits the payments outside of Georgia the foreign company is not subject to withholding tax in Georgia. * Contractor’s Obligation (Small Business Status): A lot of Georgian contractors are registered under the Small Business Status as Individual Entrepreneurs (IEs). * Those whose turnover does not exceed 500,000 GEL a year are paid a preferential taxation of 1 percent of the gross revenue, on condition they are paid directly to their Georgian bank account and registered at the Georgian Revenue Service. * This tax rate is very favorable and therefore, Georgian contractors are very attractive and cost effective. * Contractor’s Obligation (General Status): Contractors who are not the Small Business Status, are taxed at the personal income tax rate of 20 percent on their net profit. Employers must be vigilant to ensure the contractor is managing their tax affairs correctly and should request documentation confirming their registration status. ## Benefits of Hiring Independent Contractors in Georgia Georgia is an attractive location to companies that may want to expand their remote or contingent workforce: ### Cost-Effectiveness * Favorable Tax Regime: The 1% rate of Small Business Status IEs implies that the contractor is left with a larger portion of their income, which makes the rates very favorable in the market of the world at the same time providing the contractor with a significant net income. * Lower Overheads: By hiring independent contractors in Georgia, companies avoid mandatory employer contributions (social security, pension, health insurance) that are typically required for employees. It is paid a contract fee only agreed upon by the company. ### Flexibility and Access to Skilled Workforce * Talent Pool: Georgia has a highly professional pool of talent that has been on the increase and is especially in the fields of IT, design, marketing and finance. * Time Zone Proximity: Georgia is situated close to Central and Eastern Europe and Middle East, which allows many foreign companies to have a favorable time zone. * Scalability: B2B model provides a company with the possibility to expand or reduce its scale at a short time, depending on the project demand without going through complicated labor regulations regarding termination or redundancy. ## Managing Independent Contractors Managing the relationship is the key to the project success and non-employment classification. ### Onboarding Process The contractor onboarding process is supposed to be aimed at engaging into the project, not organization: * Contract Finalization: Execute the civil service agreement and IP assignment documents. * Compliance Check: Assure of the registration of the contractor (IE, LLC) and tax number. * Project Access: Only allow access to the tools, communication mediums and project repositories that are necessary. Do not provide access to generic employee-only content (e.g. employee benefit portals, company intranet). * Define Communication: Have clear expectations regarding milestones of reporting and communication channels of choice. ### Communication and Project Management Successful management of contractors implies the change of emphasis on the matter of how they are working to what they introduce. * Focus on Deliverables: The whole communication of the management must revolve around the SOW, milestones, and the final output. * Use Project Management Tools: Use the tools that enable the contractor to report progress on their own, like Jira, Asana, or Trello, and make sure that time tracking is not forced down, but rather self-reported and tied to specific deliverables, rather than to hours. * Maintain Professional Distance: The relationship should be a client-vendor bond. Communication should be done using formal communications (emails or status meetings with the project) and not informal employee-like conversations. Hiring contractors in Georgia offers a competitive edge to international firms who are after inexpensive, talented and versatile employees. The attractive tax structure in the country coupled with the legal difference between employment and service contracts contributes to the market being attractive. Nonetheless, the success will solely depend on the strict compliance with the principle of the misclassification avoidance and the fact that the contractor relation should be regarded as a B2B one. In the case of companies where speed and compliance are priorities, using global contractor management service can make the verification and payment process much easier, and you are able to onboard highly qualified Georgian professionals in a short period of time without the hassles of setting up a presence locally.