Contractor or Employee in Georgia: Where the Line Is and What Crossing It Costs

A Georgian company that needs work done has two lawful routes: an employment contract, or a service agreement with someone who runs their own business, usually as an individual entrepreneur. The contract's title does not choose between them. The Labour Code of Georgia defines an employment relationship by what happens: work performed for an employer, under organised labour conditions, for pay. If a person keeps your hours, sits in your team and takes instructions from your manager, the relationship is employment in substance whatever was signed, and the company answers for the tax it did not withhold, the pension contributions it did not make and the labour rights it did not give. This article is about the country of Georgia; the worker's home country may have rules of its own.

What makes a relationship employment under the Labour Code

The Code's definition has three parts: work is performed by an employee for an employer, under organised labour conditions, in exchange for remuneration. The middle part does the work. In practice it is read as the employer deciding when, where and how the work is done and fitting the person into its own structure. The Code adds that an employee performs the work personally and that the relationship begins when work actually starts, unless the contract says otherwise. A written contract is required once the relationship lasts longer than one month, and the lack of one does not turn the relationship into something else.

In practice the following facts are weighed together. None is decisive alone, and three or four pointing the same way usually are.

• Time and place: fixed hours and a required presence, in the office or online, against freedom to choose when and where the work is done.
• Direction: tasks handed out day by day by a manager, against a deliverable agreed in advance.
• Integration: a job title, a company email address, a place in the team chart, leave that someone approves.
• Tools: the company's equipment, accounts and licences, against the person's own.
• Pay: the same sum every month whatever was delivered, against a price per project, milestone or invoice.
• Exclusivity: one client, no time or permission for another, and no right to send a substitute.
• Risk: the company absorbs the cost of defective work, against a contractor who must put it right at their own expense.

How tax and pension contributions differ

The withholding rule is narrower than founders assume. The company is the tax agent for every salary: it withholds the 20%, enters the employee in the Revenue Service's register of hired persons and files the monthly return, due by the 15th of the following month at the time of writing. When it pays an individual for services, it must also withhold at source unless that individual is registered as an individual entrepreneur or holds one of the few statuses the Code excepts, such as micro business status. So an ordinary unregistered freelancer saves the company nothing, and a registered entrepreneur takes the income tax onto their own return. The director is a separate case: the Tax Code treats holding the office of director as hired work, so a director's pay is salary for tax purposes however the agreement is titled.

Who checks, and how the question comes up

• The Revenue Service. The Tax Code lets the tax authority reclassify a transaction by its substance where the form does not match it, and Small Business Status does not cover salary income. An entrepreneur with one payer, month after month, is the pattern an audit of either side notices.
• The Labour Inspection Service. It inspects on a complaint or on its own initiative, may enter a workplace without notice, interview the people working there and request documents, and can respond with a warning, a fine or a suspension of work.
• The person. In practice the question is most often raised by the individual, usually when the agreement is ended: a claim that the relationship was employment, with unpaid leave and an unlawful dismissal attached. A court decides it on the facts.
• The immigration file. Since 1 March 2026 a foreign employee and a self-employed foreigner each need a right-to-work authorisation, unless an exemption applies, and they obtain it by different routes, so a wrong label also puts the wrong authorisation on record. Our article on the 2026 rule covers it.

What reclassification costs the company

• Income tax. A payer that failed to withhold transfers the tax that was not withheld, calculated on what was actually paid, together with the related penalties.
• Pension contributions for the whole period, where the scheme applies to the person: both the employer's 2% and the employee's 2%. Under amendments to the pension law in force from 15 October 2026, a missed contribution is paid entirely at the employer's expense, together with a GEL 300 fine, which is cancelled if the arrears are paid within 10 working days of its imposition, and a daily charge credited to the employee's pension account; confirm the text in force.
• The individual's own position. Income that was really salary is outside Small Business Status, so the 1% treatment falls away for those periods, and the correction is retrospective.
• Labour rights with a back date: paid leave of at least 24 working days a year, pay for overtime, and protection against termination. Ending the service agreement becomes a dismissal that needs a listed ground, notice and severance, with reinstatement and lost earnings as the remedies if it had none.
• Sanctions for what an inspection finds along the way, such as a missing written contract or missing working-time records: a warning or a fine from GEL 200 to GEL 1,000 per violation depending on the employer's category at the time of writing, doubled for a repeat within a year.

Who owns the work product

Under the Law on Copyright and Related Rights the economic rights in a work created by an employee in connection with their duties, or by a contractor carrying out an order, belong to the employer or the client unless the agreement says otherwise, and an agreement to create a work must be in writing. The default is the same for both; its edges are not. For an employee the question is whether the work fell within the duties, so the job description matters. For a contractor it is whether the work fell within the order, so the scope clause matters, and anything the contractor brought along, such as earlier code, templates or tools, stays theirs unless it is assigned. The author's personal rights remain with the author in both cases. Write an express assignment clause either way; inventions, trademarks and open-source components need their own treatment.

When a contractor is the honest answer

• The work is a project or a deliverable with a price, an acceptance step and an end, not an open-ended role.
• The contractor decides when, where and with what tools, and may use helpers or subcontract with your consent.
• They have other clients, or are free to, and present themselves to the market as a business.
• They are registered, as an individual entrepreneur or a company, issue invoices and file their own returns; keep their registration extract and Small Business certificate with the contract.
• They carry their own risk: defects are fixed at their cost, and the agreement, not a salary, defines what they earn.
• They work for a Georgian company from another country. Georgian withholding then generally does not arise where the service is performed abroad, as our article on tax treaties explains, but their own country may treat them as your employee there, and its rules decide that.

How to review the people you pay outside payroll

1. 1

   List every individual the company pays who is not on payroll, with the monthly amounts and how long each arrangement has run.

2. 2

   Test each one against the indicators above, on the facts, not on the agreement's wording.

3. 3

   Where the facts say employment, sign an employment contract, register the person in payroll from now, and take advice on the past period before anyone asks about it.

4. 4

   Where the facts say contractor, make the paper match: deliverables, acceptance, price, an assignment of rights, no working hours, and the contractor's registration documents on file.

5. 5

   For a foreign national, check that the right-to-work authorisation on file matches the real status.

6. 6

   Repeat the review once a year. Relationships drift toward employment long before anyone renames them.

What this article does not answer

It does not decide any particular case: classification turns on facts that only the parties know. It does not cover engaging people through an employer of record or a staffing company, workers who sit abroad under another country's labour law, or the contractor's own tax planning, which our articles on the 1% regime for freelancers and for developers address. Nor does it put a number on penalties, which depend on the periods and on the Tax Code in force. We draft and review the contracts and advise on the classification; we do not represent clients in court, and a dispute is referred to an advocate.