Sitting on the Fence: Independent Contractors or Employees?

Businesses employing contractors to perform specific tasks within their operations is not new.  What is new though, is the increasingly large role that independent contractors are playing in a modern, service based economy.  These days, it is not uncommon for companies to employ contractors in a number of areas which would have previously been viewed as integral to the company, including payroll, IT and call centres.  In fact, some industries such as construction, transportation and resource exploitation have long been recognized as being heavy users of contracting services.

But what is it about contractors that are making them so popular in today’s economy?  For starters, contractors provide flexibility.  If a service is only required for a period of time, it may be more beneficial to hire a contractor, even at a premium rate, than to hire additional staff.  Also, relationships with contractors may start and end on short notice, something which would be difficult or impossible with permanent staff. There may also be a number of administrative and payroll advantages to using contractors.  A company using contractors does not pay payroll tax for their services, although there may be other taxes such as GST.   They would not need to pay worker’s compensation, benefit plans or employment insurance. Crucially, the company would not be required to provide their contractor with pay in lieu of notice at the end of the project.

For the individual as well there may be advantages to being an independent contractor.  For example, many costs of business may be written off, including some restaurant meals, cell phones or the use of a personal vehicle.  Depending on the circumstances, the individual may also be entitled to a lower tax rate.  Finally, working as a contractor should provide flexibility, allowing the individual to accept jobs and assignments when and where he wishes. 

1193011_64091126While this relationship may offer many benefits, it can be put into question if the relationship is not properly defined.  For instance, if the Canada Revenue Agency senses that the contractor is not truly “a contractor” but rather an employee in disguise, they may challenge the relationship and claim unpaid taxes.  Another example can be when the contractor is not actively working.  He or she may wish to claim employment insurance benefits (a benefit typically only offered to employees) or may wish to benefit from provisions under Employment Standards legislation.  The contractor may then argue that for all intents and purposes, the work performed was actually done by an employee.

So at what point does a contractor becomes an employee? The answer to this question is not always clear, particularly in cases where the contractor and the company have worked closely together over a number of years. Fortunately, the Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. has provided us with a test for assessing whether a contractor relationship actually exists:

The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account.  In making this determination, the level of control the employer has over the worker’s activities will always be a factor.  However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for an investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.

An employee will likely be expected to work regular office hours.  He or she will be assigned tasks by their supervisor, will sit at a desk and use equipment owned by the employer, will have co-workers also paid by the employer, and in many circumstances, will have limited financial risk – they will be paid for time spent working, and not based on the task assigned to them.

In contrast, the contractor would typically show up on a job and work the time required to satisfy the task at hand.  If additional help is required, they would bring their own workers.  They would work with their own tools, and would not expect to use the tools of the company.  Finally, the contractor’s fortunes will depend on the demand for their services.  There is, accordingly, increased financial risk than an employee would have.

Oftentimes the lines between an employee are not clearly drawn.  As such, determining whether an individual is a contractor or an employee will always depend on the facts.  One strong indicator that a person is in fact a contractor will be an independent contractor agreement. While an independent contractor agreement is not a fail-proof indicator of a contract worker, it will clearly demonstrate the intentions of the parties. It is therefore strongly encouraged that any business thinking of using contractors put in place clearly defined and comprehensive contractor agreements.

David M. Brown,
Doak Shirreff LLP
dbrown@doakshirreff.com
Advertisements

5 Comments

Filed under Employment Contract, Independent Contractor

5 responses to “Sitting on the Fence: Independent Contractors or Employees?

  1. Lona Manning

    Employment Insurance Canada does offer an EI option for self-employed persons, but best to read the fine print carefully before signing up to pay the premiums.

  2. Jane Hsu

    How Canada Revenue Agency can sense that the contractor is not truly “a contractor” but rather an employee in disguise? As far as I know, there’re cases exist, but the employees don’t fight for their rights because they are afraid that they might lose their jobs.

    • Thank you for your question Jane. There are many circumstances which may bring about further investigation by CRA. Sometimes, a worker or the employer ask for a review for clarity. Other times, the worker may apply for EI or other social security benefits which may prompt a closer look. There can also be an income tax audit which prompts the taxman to go in for further examination.

      CRA has published a free guide for workers and companies to help them make the distinction between employees/contractors. It’s available online at: http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-12e.pdf

  3. Pingback: Working with the “Dependent” Independent Contractor | The Barristers' Lounge

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s