When companies first start up, it’s common, and often efficient, for them to rely on independent contractors. Contractors bring flexibility, lower overhead, and minimal compliance burdens. That works when you’re small. But when contractors end up working exclusively for your company, with you deciding what they do, when they work, and how they operate, you’re risking misclassification, and that opens a legal can of worms. Here are the differences between employment and contractor classifications and what to look for when transitioning someone from contractor to full-time employee.
Employees vs. Contractors
Under Georgia and Federal law, the distinction between an employee and an independent contractor hinges primarily on the degree of control a business exerts over the worker and the nature of the working relationship. Employees typically operate under the direct supervision of their employer, follow set schedules, and perform tasks integral to the business’s core functions
In contrast, independent contractors are considered separate business entities who offer services to clients. Applicable laws outline multi-factor tests to determine whether someone is a contractor. No one factor is dispositive. Instead, courts and regulators weigh the totality of the circumstances. Generally, to be classified as an independent contractor, among other things, a person must:
- Be free from control in both contract and practice;
- Set their own schedules and work locations;
- Have the opportunity for profit and loss;
- Work for multiple clients;
- Have freedom to reject assignments;
- Receive minimal supervision;
- Perform skilled work; and
- Perform work that is not integral to the business.
Why Classification Matters
Unemployment Claims
If a contractor is terminated and files for unemployment, they may list your company as their most recent former employer. When they do that, it can trigger an audit of your contractor’s activity by the Georgia Department of Labor (GDOL). Under O.C.G.A. § 34-8-35(f), a worker is presumed to be an employee unless certain criteria are met. If the GDOL determines the contractor was actually functioning as an employee, your company may be held liable for their unemployment benefits. This initial claim can trigger a broader audit of your classification practices, potentially exposing other misclassified workers and leading to further liabilities.
Back Taxes & Penalties
Misclassification doesn’t just affect unemployment insurance—it can also lead to audits by the Georgia Department of Revenue and the IRS. If these agencies determine that a contractor should have been classified as an employee, your company may owe back payroll taxes, including:
- Federal and state income tax withholdings;
- Social Security and Medicare contributions; and
- Federal and state unemployment insurance taxes;
In addition to back taxes, Georgia imposes civil penalties for misclassification, with fines reaching up to $7,500 per misclassified worker for employers with over 100 employees
Wage & Hour Exposure
Contractors aren’t owed overtime, but if they perform duties like non‑exempt employees, you may owe up to three years of back overtime wages, plus attorneys’ fees. Companies can be subject to civil lawsuits by the contractors or investigations by the Department of Labor.
When to Transition a Contractor to Full-Time
Transitioning contractors to employees makes sense when:
- They are integral to your business;
- They work regularly, 30+ hours a week, for your company;
- You set their schedule and workflow;
- They rely on your tools, systems, or resources; or
- You intend long-term engagement beyond a narrow project.
Transitioning reduces compliance risk and supports retention, morale, and access to benefits like health insurance and paid leave, which are vital for building a stable workforce.
How to Transition Contractors the Right Way
- Classification Audit – Evaluate your current contractors using IRS and DOL criteria. If there’s uncertainty, seek legal guidance.
- Determine Exempt vs. Non‑Exempt Status – If the role doesn’t meet criteria for salaried employees, prepare to track hours and manage overtime. If it meets the test, confirm the salary level is compliant.
- Formalize the Offer – Create an offer letter and employment agreement outlining duties, compensation, benefit eligibility, classification, and employment terms.
- Onboard Professionally – Give new hires proper orientation, training, benefits enrollment, and integration into team culture. Treat them as valued employees and not extended contractors.
Continued Risks When Contracts End
Ending a contract doesn’t erase exposure. If a former contractor files for unemployment or consults an attorney, your company could become exposed to regulatory or civil liability. Suddenly, what you saw as temporary engagement looks like years of misclassified employment, and your company becomes liable.
Building Compliance & Confidence
Proper classification, proactive transitions, and smart documentation protect your business. Baker Jenner helps companies align labor structure with operational strategy. Call us at (404) 400‑5955 if you’d like to review contractor relationships or transition plans. We’ll guide your structure so you can grow and comply confidently.
Baker Jenner LLLP
