This question is most often asked of me by employers who hear from someone that they can avoid the costs and risks of being an employer if they convert their employees to “independent contractors”. This tactic is also used by some employees who do not want income tax, EI and CPP premiums deducted at source. This issue has caused a lot of problems for uninformed employers.
What is an independent contractor? The most useful answer is: someone who does work for you that is NOT an employee? So how can you tell if someone is an employee or independent contractor? There is no magic formula to determine the answer. The underlying theme is CONTROL. The tribunals and courts look at a number of factors, none of which is necessarily conclusive on its own, but each is an indicator of the presence or absence of an employment relationship. Ask yourself these questions:
Does the person have a desk and a phone? Does the person work set hours, or can they determine their own schedule? Who owns the tools? Do you pay wages, or does the person submit invoices? Do you specify WHO does the task, or do you only care that the job is done? (For example, your office cleaners are likely independent contractors: you don’t care who shows up to do the cleaning, as long as it is done right.) Does the person set the fee, or is it dictated by you? Is there a chance of profit (and corresponding risk of loss) for the person? Do you decide how the work is done, or can the person choose the method? Does the person work at your place of business or somewhere else?
When you ask yourself these questions, you should get a sense over who has control and whether the person is an employee. If you think it is unclear, be safe and assume the person is an employee, or change the work environment so that the answers to the questions make it clear that they are not employed. It is not worth being audited by Revenue Canada.
Now that we have outlined the difference between employees and independent contractors, we are in a better position to determine which is which. Let’s discuss why it matters.
There are a number of benefits to having independent contractors instead of employees. The most obvious is the lack of payroll taxes. That means no EI, CPP, EHT or WSIB premiums. The next advantage is that there is no termination pay, severance pay or severance packages that you have to pay out when you terminate the contract. (Of course, if you breach a term of the contract with the contractor, you might be sued.) There are no such things statutory holidays, overtime, vacation pay and all the administrative requirements of having employees.
There are disadvantages. The most obvious is what I referred to last month: lack of control. You do not have the level of control that you have with an employee. You cannot discipline or terminate the employees of a contractor. Instead of being the person that writes the pay cheque that pays the mortgage of your employee, you are just a client of a contractor who, if they don’t like you, will go and get another client. You can terminate an employee at any time (you may have to pay them some money). On the other hand, you may be locked in a contract with your contractor that you cannot get out of, even if you want to.
It is vitally important not to get it wrong and call true employees “contractors”. You are the employer: the onus is on you to figure out whether the person is properly an employee or a contractor. It does not matter if you have a written contract that say that the employee “is not an employee but an independent contractor”. The Court and tribunals will look at the facts of the relationship, not the words.
If you are audited, Revenue Canada and HRDC will require that you pay them BOTH the employer and employee premiums for CPP and EI that should have been withheld and remitted. You will not be allowed to get the employee’s portion back from the employee either. Never mind the inconvenience of being audited. If they find other things that they do not like, you can be sure that the audit will expand.
Finally, workers who you thought were contractors might be able to sue you for wrongful dismissal, even though you never thought they were employees.
The Bottom Line: If you aren’t sure, get advice. If you still aren’t sure, be safe and assume that you have an employee. The cost of being wrong is too much of a gamble.
At Mason Bennett Johncox we regularly help employers and employees throughout Durham Region navigate complex situations at all stages of the employment relationship. Contact us today.
