Are you an ‘Employee’ or a ‘Contractor’?
Akiva Stern, BHRM, MIRHR
Akiva Stern is Sole Proprietor of HR AID. HR AID is an employment consulting company devoted to helping employees and small business owners easily access employment and labour information as well as helping to resolve their employment issues. Akiva is currently enrolled in the JD/MBA program at the University of Windsor.
Given the recent posting on the Report on Precarious Labour in Ontario, I thought it fitting to write my first blog contribution along the same vane. The fact is that precarious employment is important because of its ramifications for employers and employees alike. Let’s face it, classifications matter. Especially in law. Knowing the difference may mean saving money in the long run for employers, or getting employees what is rightly owed to them from the start. Being an Employee or an independent contractor can have direct consequences for how you are treated in relation to Taxes, Pension, and Employment Insurance, just to name a few. Here is a short break down of what you need to know…
The Cautionary Tale
James owned a bowling alley on Yonge Street. He needed to hire a manager but didn’t want to get stuck with all the employment costs as he was trying to save money. Instead of hiring a full time employee he decided to give Sarah a one-year contract as an independent contractor. He heard from his friend Justin at the ice cream shop that it was cheaper on their bottom line to hire contractors over employees. Over time Sarah did a great job and so James kept renewing her contract year after year. Finally, after 10 years James decided to let Sarah go and didn’t give her any pay or severance as an employee, claiming that she was just a contract worker. Sarah came back though with a lawyer and fought the case claiming that she was wrongfully dismissed. Sarah won the case and was considered a full time employee for 10 years. In the long run James got stuck with his own legal fees, and the money he owed Sarah, not to mention the damage to his reputation.
What is an Independent Contractor?
An Independent contractor is a self-employed worker engaged by a principle to perform specific work. Take for example someone who is hired to paint your house. This example is pretty straightforward. It gets more complicated when we have a temp agency with multiple people working for a company. The following break down shows the main factors that contribute to deciding whether someone is an employee or an independent contractor.
Step 1: What was the intent of the relationship
What did you contract for? Did both parties in the contract intend to create an employer-employee relationship, or did they intend to create a business relationship by contracting for a single service?
Step 2: Indicators of a working relationship
- Control – Who is in control of the work? How it is done and when? If you are in charge of your own work schedule and methods this will indicate a contracting relationship. If you are not, this will indicate an employee-employer relationship.
- Tools & Equipment – If you are bringing your own tools to the workplace then it indicates that you are more like a contractor than an employee. However, if your tools are being provided to you then this might indicate an employee-employer relationship.
- Subcontracting work or hiring assistants – Traditionally an employee has little power to hire on workers or assistants, whereas a contractor will have the power to hire as many workers as s/he likes without the consent of the person paying for the work.
- Financial Risk – Who bears the risk if the work does not get done? Generally contractors bear a lot more risk than employee’s when it comes to the bottom line. Most employees do not bear direct financial loss if something goes wrong.
- Opportunity for profit – Just like financial risk, the individual who not only stands to lose but stands to gain directly from the work will be more likely to be the controller of the work. Employee’s generally work on a salary and do not have their pay tied directly to the core profit of the business, whereas contractors will.
- Responsibility for investment and management – a significant investment from the worker will indicate a contracting position over and employee status. Do you own a stake in the business?
Questions you should ask yourself as a worker…
- Am I paid in regular wages or a lump sum?
- Am I in control of how the work is being done?
- Do I own my own tools or am I using someone else’s?
- Am I paying taxes on my own or having them deducted from my pay?
- Are there deductions on my pay? (This can include employment insurance or pension plan deductions)
- Can I hire workers or assistants?
- Who stands to lose/bears the risk if something goes wrong with the business?
- Am I an essential part of my boss’s core business? Could his business function without me?
- Do I have other clients/payees or just one?
Both parties should make it very clear that the relationship is one of a contractor and not employee-employer relationship. Here are some tips to help you keep the work in the ‘Independent Contractor’ Zone.
- Independent contractors will generally work for a specific/fixed period of time or towards a specific project.
- The payee should not take any deductions such as income tax, pensions, or employment insurance, nor give any benefits such as vacation or holiday pay.
- The contract should include a statement saying that you (the contractor) are responsible for all statutory requirements pertaining to the workplace.
- Contractors tend to have multiple clients and not just one payee.
- Set your own hours of work and purchase your own liability insurance.
Just because you signed a contract saying the worker is an independent contractor does not automatically mean s/he is. You must look at the criteria laid out above as well as the core or essence of the relationship. The more independent you are the more likely you are an independent contractor. Conversely, the more the business is dependent on the work you do, the higher chance there is of you being an employee.
For more information see the full form on the Canada Revenue Agency website.
*Not Applicable in Quebec.
**Special considerations may affect relationship status.
***The above is Information regarding Labour and Employment Issues and is not to be considered advice or instructions pertaining to individual or specific employment situations.