This article originally appeared on Law360
By Meredith Caiafa and Kelli Church
Law360 (June 21, 2022, 5:35 PM EDT) -- Proper classification of independent contractors is an important issue that can have consequences for employers under numerous laws and regulations, including under federal wage laws, tax laws and, as discussed here, state unemployment law.
Debates over the proper test for classifying independent contractors versus employees have continued for years, and due to the impact on businesses, interest groups and politicians often take an interest in this issue.
Both federal and state courts have developed tests through case law with varying factors, and the IRS has published its own test for determining which workers must be considered employees for taxation purposes.
As a practical matter, if an individual meets the definition of employee under any applicable legal standard, employers should classify that person as an employee for all purposes.
Georgia has now taken a step to both amend the definition of employment and except two new categories of service providers from that definition for unemployment compensation purposes.
On May 2, Gov. Brian Kemp signed a bill, H.B. 389, providing guidance that is more detailed for Georgia employers regarding how to classify employees versus independent contractors for purposes of contributions to unemployment.
Although H.B. 389 is limited to the Georgia unemployment context and is generally consistent with other applicable standards, it is important for employers to be aware of this issue broadly and to ensure all workers are properly classified
In addition, while consistent with the factors Georgia courts have previously considered when determining whether an individual is properly classified, H.B. 389 is notable as the Georgia Legislature has now enumerated specific factors with respect to the control or direction inquiry.
Specifically, H.B. 389 amends the definition of employment, stating that unless an exception applies, services performed by an individual for wages are deemed employment unless the individual is free from control or direction over performance of such services.
The amendment adds seven factors for determining whether an individual is free from control or direction, which generally look to whether the individual can work for other companies, can accept or reject work, can set their own schedule, and receives minimal instruction and no direct oversight or supervision.[1]
It is unclear whether all seven factors must be met in order for the individual to be considered an independent contractor, or whether the factors should be weighed in a balancing test.
If all factors must be met, this puts a much higher burden on companies to establish independent contractor status for unemployment compensation purposes. A balancing test would mean that not all factors have to be met as long as, on balance, the relationship supports the independent contractor classification.
H.B. 389 also adds two exceptions to the definition of employment for two categories of service providers.
First exempted from the definition are music industry professionals who provide services under a contract that states the individual can set his or her own hours and work schedule as long as completion dates are met, and that the individual shall not be treated as an employee for federal and state tax purposes.
Additionally, to fit within the exception, the music industry professional must perform the services using discretion and independent judgment. The amendment also adds a definition of "music industry professional."
The second exception relates to services performed or facilitated through a network company, defined as a ride-sharing network service or a business entity that maintains an online enabled application or platform used to facilitate delivery services in Georgia.
The exception applies when the network company has a written contract with the service provider that states the network company shall not prescribe specific dates, time or hours; require the individual to accept a specific service or delivery request; or prohibit the individual from working for other businesses, including other network companies.
Companies that misclassify employees as independent contractors — and therefore do not contribute to unemployment for those individuals — may receive a fine for each misclassified individual ranging from up to $2,500 if the employer has under 100 employees to $7,500 if the employer has 100 or more employees.
Overall, the companies that are likely to feel the biggest impact from H.B. 389 are companies that engage music industry professionals and technology companies that meet the definition of network company and engage workers in Georgia — for example, ride-sharing or other delivery services.
Companies that engage these types of service providers and properly draft contracts to comply with the above requirements will not need to contribute to Georgia unemployment for these individuals, which will save them money.
Further, technology companies may consider this exception a positive development for the industry, albeit in a relatively limited area, as it is a step toward solidifying that ride-sharing or other delivery drivers are independent contractors, at least in Georgia.
However, to benefit from the exceptions described above, such companies need to ensure any contracts and relationships they have with independent contractors in Georgia comply with the requirements of H.B. 389.
Moreover, practically speaking, when evaluating an independent contractor relationship, courts look beyond independent contractor agreements to the economic realities of the relationship. While ensuring agreements comply with the requirements in H.B. 389 is the first step to take advantage of the exception, companies need to make sure that in practice, the day-to-day relationship matches the agreement.
H.B. 389 will take effect on July 1.
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Meredith Caiafa is a partner and Kelli Church is an associate at Morris Manning & Martin LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
[1] The specific text of the amendment, including the new seven factors can be found here: https://legiscan.com/GA/text/HB389/2021.
