Article Archives
Article Archives >> Employer and Employee IssuesEmployee or Sub-Contractor
(Monday, December 21, 2009)Summary
With the high cost of employee benefits, complicated payroll rules, and changes to the Employment Standards Act, many businesses are encouraging their employees to become “independent contractors” or hiring sub-contractors instead of employees, however, when engaging independent contractors, it is important to ensure that the status is not that of an employee to avoid the serious penalties of not withholding and remitting payroll source deductions. There are several items to consider in making the decision to hire employees or sub-contractors.
Article
One of the most frequently asked questions I get from small business operators is “Should I hire this person as an employee or an independent contractor?” Certainly, with the high cost of employee benefits, complicated payroll rules and changes to the Employment Standards Act many businesses are encouraging their hired labour to become independent contractors.
Certainly, one can see the benefit of hiring contractors just by looking at the numbers. The cost of hiring an employee can often exceed 20% of the employee’s gross wage when taking into account the employees portion of EI and CPP, workers compensation, holiday and stat pay, not to mention the numerous other benefits that may be in place with your company. Assuming the gross pay to be the same under either relationship, then the only additional cost of hiring an independent contractor may be the GST he or she may have to levy on their services, which may be recovered if you are a GST registrant.
If you wish to hire someone on a contract basis, it is important to ensure that your relationship with them is not one of an employer/employee in order to avoid the serious penalties of not withholding and remitting payroll source deductions. Canada Customs and Revenue Agency has been known to go back as much as three years and assess a company the employees and employers portions of unremitted CPP and EI deductions.
In recent court cases, employment relationships were found to be based on the following criteria:
· The degree of control the employer has over the day to day functions of the worker.
· The degree to which the worker is required to supply their own tools and equipment on a regular basis.
· The degree to which the worker is required to bear risk associated with their income and personal assets.
In light of these criteria, it is important to have a bona fide independent contractor agreement prepared with all the supporting facts. For example, you will want to clarify which party is responsible for WCB coverage. As well, you may want to have the contractor commit to paying any EI and/or CPP premiums should Canada Customs and Revenue Agency reassess them as an employee.
It is equally important to ensure that the contractor takes the necessary steps to ensure that he or she is “independent” in all respects. Many of these steps involve structuring their activities in a business-like manner, such as:
1. Establish a bonafide office for the business and, register the business with the applicable provincial body.
2. Advertise the services being provided in local newspapers, yellow pages, flyers and trade magazines.
3. Have appropriate letterhead and business cards printed.
4. Establish a separate business telephone number and listing.
5. Not receiving any employment related benefits from the contracting out company.
6. Earn revenues from other sources.
7. Use their own equipment and supplies, and provide their own space and secretarial staff, or at least pay rent or fees to others to provide space and secretarial staff.
8. Submit invoices for work done.
9. Obtain GST number
10. Pay WCB
