This presentation will:
- Discuss the legal and related financial implications
- Summarize some potential liabilities
- Discuss the legal test for distinguishing contractors from employees
- Dispel some common myths
- Conclude with steps to minimize the risk
2. 2
Introduction
This presentation will:
1. Discuss the legal and related financial implications
2. Summarize some potential liabilities
3. Discuss the legal test for distinguishing contractors
from employees
4. Dispel some common myths
5. Conclude with steps to minimize the risk
3. Employees Compared to Independent Contractors
Income Tax, Employment Insurance, CPP and WCB
3
Employee Independent Contractor
Employer must withhold
employee EI and CPP
contributions
No withholding of any taxes or
EI/CPP contributions
Employer must pay Employer
contributions to EI and CPP
Employer pays GST/HST
Employer must pay WCB levy No liability for WCB premiums
Employee has very few
Contractor can deduct any
deductions
expense reasonably related
4. Employees Compared to Independent Contractors
Employment Standards
•Employees enjoy all the rights under the ESA;
independent contractors have no protection
4
Employee Independent Contractor
Statutory holiday pay
(depending on provincial rules)
and vacation pay
Employer only pays for work
actually done
Overtime n/a
Maternity, parental and other ESA
n/a
leaves
Statutory notice of termination n/a
5. Employees Compared to Independent Contractors
Common Law
5
Employee Independent Contractor
Employer must provide more
onerous “reasonable”
notice/severance
General Rule: little or no notice of
termination required – although
law is evolving for
long-term contractors dependent
on one client
Other
Employee Independent Contractor
Greater administration
payroll time and cost
Less administrative time and cost
Employer liable for all
negligence of the employee
Client of contractor generally not
liable for negligence of contractor
6. Understanding the Legal Test
6
• Understanding the legal test is critical because:
A. Government agencies (CRA, Workers Compensation,
Employment Standards) can challenge how parties
have characterized a relationship
B. Generally biased in favour of employment relationship
C. Audits are triggered when former contractors claim
EI benefits, ESA entitlements or make WCB claims
D. Deemed employers can be held retroactively liable for
years of unremitted EI/CPP contributions, WCB levies,
overtime, etc.
7. Understanding the Legal Test
7
1. CRA Audit
• 4 years of both employer and employee EI and
CPP premiums plus interest and penalties
• CRA can also claim income tax
2. ESA Claim
• Amounts assessed vary between provinces and individual
circumstances
• Vacation pay at 4-6% over past 2-3 years
• In some cases, statutory holiday pay
• Termination pay
8. The Test for Contractor Status
8
• The courts and tribunals consider a variety of
criteria, no one of which is determinative
A. The traditional “four factors” were:
1. How much control over how the work is done?
2. Who owns the “tools” of production?
3. Is there a chance of profit or risk of loss in the
compensation arrangements?
4. How integral is the work to the employer’s business?
9. The Test for Contractor Status
9
B. Other relevant factors include:
1. The parties’ agreement and practices/perceptions
2. Whether the “contractor” is really “carrying on
business”
3. Whether the contractor can delegate the work
4. The degree of financial investment or responsibility
assumed by the contractor
5. How economically dependent the worker is on the
employer
B. WCB decisions emphasize who is able to control
workplace safety
10. Common Myths
10
Common myths include:
A. A written agreement cannot be challenged
B. If the contractor invoices, contractor cannot be an
employee
C. If the contractor is incorporated, no employment
relationship can be found
11. The Reality
11
It is impossible to eliminate the risk, but here are
some practical tips to minimize that risk:
A. Ensure your contractors understand the benefits of
contracting, including:
• greater flexibility;
• no requirement to pay employee EI premiums and
no tax automatically deducted;
• the right to deduct all reasonable business
expenses;
• Explain that fees would have to be significantly
lower if contractor was an employee due to his/her
payroll overhead
12. The Reality
12
B. Minimize supervision and direction of instruction
C. Be very clear and consistent in all dealings
D. Encourage contractors to provide “tools”,
e.g. .
13. Ensure Contractors “carry on business”
E. Encourage/require contractors to act like they are
carrying on business by:
• Invoicing regularly
• Charging and remitting taxes (GST/HST)
• Marketing themselves and developing work with others
• Providing additional “inputs”
14. Contract Content
F. Have all contractors sign agreement
• Define obligations;
• Define any quality standards or qualifications needed;
• Confirm contractor status and freedom to pursue other
work;
• Permit you to terminate/alter terms of engagement on
appropriate notice;
• Include an indemnity in the event of any claim relating
to employee status
15. The Reality
15
G. Consider requiring proof annually that contractor:
• Has paid CPP premiums and filed tax return as a
contractor
• Has paid own WCB premium
• Maintains any professional liability insurance
G. Encourage contractors to incorporate or sub-contract
H. Require contractors to arrange for qualified substitutes
and have the contractor pay the substitute
16. The Reality
16
J. Do not let contractors take on other general duties
K. Consider setting “value” or risk-based fees
L. Avoid “Red Flags”
• Representing/treating the contractor as an
employee
• Having the contractor working exclusively for your
studio for an extended period
17. Thank You
J. Geoffrey Howard
Tel: 604-891-2279
Email: geoffrey.howard@gowlings.com
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