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Sitting On The Fence: Independent Contractors V. 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 integral to the company. These could include payroll, IT and call centres. In fact, some industries such as construction, transportation and resource exploitation are almost synonymous with contracting services.

But what is it about contractors that are becoming so popular in today’s economy? 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. The company using contractors does not need to pay payroll tax on paying for their services. They would not need to pay worker’s compensation or benefit plans. There would be no reason to make payments for employment insurance and 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 expenses, such as restaurants or use of a personal vehicle, may be written off as a business expense. Also, depending on the circumstances, the individual may be entitled to a lower tax rate. Finally, working as a contractor should provide flexibility, allowing the individual to accept jobs and assignments when he wishes.

While 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 intensive purposes, the work performed was actually done by an employee.

At what point a contractor becomes an employee, or vice versa, 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 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 employee 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.

The 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 (especially if they are a salaried employee).

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.

Sometimes, however, the lines are not nearly as 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. It is therefore strongly encouraged that any business thinking of using contractors put in place a clearly defined and comprehensive contractor agreement.

 

This article is prepared for educational purposes only and is not legal advice.