Employers often prefer hiring independent contractors to in an effort to save payments made towards Canada Pension Plan (CPP) and Employment Insurance (EI). However, misclassification of an employee as an independent contractor can have disastrous consequences.
Merely asking an employee to execute an independent contractor agreement is not determinative of the relationship. The Canada Revenue Agency (CRA) and Employment Standard officials will look behind that veil of agreement and assess the real intention of the parties. There are several factors that determine whether an individual is an employee or an independent contractor. Below are a few important factors.
Employees are generally under the employer’s control. Employers determine the hours or work, vacation days, who performs what work, how much work does a person perform, how that works is performed etc. Independent contracts normally set their own timings and determine how they will perform their work.The degree of control is an important factor. However, each profession is different and lack of control is not always determinative of an independent contractor relationship.
- Ownership of Tools
Employees usually do not own the tools of a business like a computer, instruments, vehicles etc. Independent contractors normally bring their own tools to their client’s place. However, not all businesses require tools and some businesses may want to hire independent contractors to work on their computers or drive their business vehicles.
- Ability to subcontract work
This is an important distinguishing factor. Independent contractors usually have the ability to subcontract their work. They may send a replacement if they are personally unable to complete a project. Employees don’t have that right.
- Chance of profit, a risk of loss
Independent contractors usually have a chance to make a profit or run a risk of incurring a loss when working on a client’s project. For example, contractors pay their overhead costs and depending on the project, may make or lose money. Employees get reimbursed for any business expense and hence do not undergo any loss.
- Ownership of work
Contractors usually are responsible for the quality of their work. If the quality suffers, they risk not getting paid. This is usually not the case with employees. Employees may get disciplined by the employer for work-related issues but their pay does not entirely depend on the quality of the work.
- Ownership of contractor’s business
Contractors usually own their own business, whether it is as a sole proprietor or incorporated entity. They also issue invoices after the work is performed and they also charge service tax for their work. However, this by itself is not determinative of the independent contractor relationship. There are many factors that need to be looked into and ownership of contractor’s business is just one of those.
- Flexibility to work with other clients
Independent contractors can choose who they want as their client. They can have multiple clients at the same time. Employees work for only one employer at a time.
All the above factors are important but depending on the circumstances, some factors may be more important than others. It is also important to remember that if a certain work was being performed by an employee in the past and you decide to engage an independent contractor in that employee’s place, the CRA or Employment Standards officials may consider that contractor to be an employee. Additionally, an independent contractor that continues to perform work for an employee for an extended number of years may be considered to be an employee or a dependent contractor.
Risk of Misclassification
If you misclassify an employee as an independent contractor, you run the risk of paying penalties under ESA, any backdated payments to CRA for EI and CPP calculations, and termination entitlements of a worker under common law.
For more information on Employee or Independent contractor, read CRA’s guide: https://www.canada.ca/content/dam/cra-arc/formspubs/pub/rc4110/rc4110-17e.pdf
You may also want to read Ontario government’s article explaining the difference: https://www.ontario.ca/page/difference-between-employee-and-independent-contractor
To get a preliminary opinion on how to classify your employees, contact us.