The question of whether someone who works for you is an employee or a contractor is an important one. It’s the difference between someone being your employee or being self-employed. If handled incorrectly, there can be penalties for you as a business owner, as well as the worker.
The Canada Revenue Agency (CRA) provides a very detailed guide on the question: employee vs contractor. We break down the key things you need to consider below.
Employee vs Contractor
You might be wondering what difference it makes. Employee vs contractor, so what?
The main concern is a person’s eligibility for employee benefits like employment insurance (EI) and the Canada Pension Plan (CPP). If the worker is a contractor or self-employed individual, it’s up to them to contribute to these benefits. If, however, the person is an employee, it’s up to you, as the employer, to contribute to these benefits on their behalf.
Where businesses often get into trouble is by trying to save money by classifying all their workers as contractors and not having to pay payroll benefits. The problem with this way of thinking is it goes against what the Income Tax Act states and can result in large penalties and interest for the business. For the employee, it means non-existent coverage when they need it.
Determining Employment Status
To keep your business onside, you must follow the guidelines set out in the Income Tax Act when considering the employee vs contractor question.
In determining employment status, the CRA will first look at the intent of both the worker and the business. Were they expecting to have an employer-employee relationship or a business to business relationship?
Without the existence of a well-written contract, it can be hard to prove what each party intended, because of this, there are a number of additional criteria the CRA looks at.
We touched on these factors when discussing the risk of carrying on a Personal Services Business. Here, we go into more detail, and include examples from the CRA’s guide mentioned above.
The key question here is: how much control do you have over how and when the work gets done? This is easier to determine in some professions than others. Flexible work arrangements can be especially difficult.
Here are some examples from the CRA guide: Employee or Self-Employed.
With regards to control, your worker is likely an employee if you:
- Determine when and how the work is carried out,
- Choose how and when the worker is paid,
- Decide the jobs the worker will do, and
- Train the worker how to do the jobs.
Your worker is likely a contractor if they:
- Work independently,
- Do not have anyone overseeing their activities,
- Can work when they want and for other people,
- Can accept and refuse work, and
- Are not expected to continue the relationship (like an employee would be).
Tools and Equipment
The question to ask regarding tools and equipment is: Who owns or provides the tools and equipment necessary to do the job?
When it comes to tools and equipment, your worker is most likely an employee if you:
- Supply the tools and equipment and are responsible for their upkeep,
- Retain the right of use of the tools and equipment, and
- Reimburse the worker for the use of any of their own tools and equipment.
Your worker is most likely a contractor if they:
- Provide the tools and equipment needed to do the work and are responsible for their maintenance and upkeep,
- Have made a significant investment in the tools and equipment required for the job, and
- Supply their own workspace and pay to maintain it.
Because subcontracting work can affect profits, it’s also a factor to consider when thinking about the employee vs contractor situation. If a worker cannot hire an assistant and doesn’t have the ability to hire replacements, they’re an employee.
If the worker can hire help and doesn’t have to complete the services personally, they’re a contractor.
This next point refers to who is responsible for paying fixed costs. Fixed costs are expenses that need to be paid regardless if revenue is coming in. Rent is an example.
When looking at financial risk, your worker is an employee if they:
- Aren’t responsible for paying operating costs,
- Have a continuous relationship with you,
- Are not financially liable if the contract isn’t fulfilled, and
- Have no say over how much and when you pay them.
In regards to financial risk, your worker is a contractor if they:
- Can hire help,
- Perform the work substantially from their own workspace,
- Are hired for a specific job rather than continuously,
- Could be financially liable if the contract is not fulfilled,
- Don’t receive any protection or benefits from you, such as payroll benefits or workers’ compensation coverage, and
- Actively market their services.
In the CRA guidance, responsibility refers to both monetary responsibility, such as investing funds into a company, and the ability to have a say in how the work and workers are managed. If a worker has these types of responsibilities, they are self-employed.
Opportunity for Profit
As mentioned in the article discussing the risks of a Personal Services Business, the CRA is trying to understand who has the ability to earn a profit or incur a loss.
When looking at the opportunity for profit, your worker is an employee if they:
- Do not have the ability to realize a profit or loss,
- Are entitled to benefit plans generally only offered to employees such as group life insurance and extended health.
Your worker is a contractor if they:
- Hire someone to help them, and
- Are compensated by a flat fee and incur expenses in completing their work.
The CRA will examine all these factors on a case-by-case basis when trying to answer the employee vs contractor question. They try to get a well-rounded picture of the situation before determining employment status, and it’s important you consider all these factors as well.
When it comes to the Income Tax Act, there are always special considerations. If you feel your situation doesn’t fit neatly into the examples above, you can apply for a CRA ruling. For help with this, or to discuss this article further, contact us today.