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Most businesses and business owners require workers to perform various roles and different services either on a short term or long-term basis.
The type of work classification established between a payer (one who pays for the service) and a worker (one who offers services for payment either as a worker or independent contractor) substantially impacts both parties in various ways.
Tax obligations, the worker’s eligibility for employment insurance, other legislative protections, and the payer’s liability for the employees conduct just to mention a few!
Background
In this blog post, we will be examining the key differentiating aspects that separate the two worker classifications. You might be surprised to find out how an innocent seeming distinction can turn into a major problem, so we’ll go into the details to make sure you’re making the right decisions!
In most provinces there is an employment standard code to govern employment relationships and in Alberta, the Employment Standards Code controls such classifications. Employees and Independent Contractors are treated differently under the law, and may have different obligations under said law.
How to Determine the Status
An employee’s status is largely dependent on the facts and the totality of the relationship. A misclassification, however, can have dire consequences for both the business owner and the worker. The relevant factors to be considered may also depend on the province or territory where the contract was formed. In a province or territory other than Quebec, the following two-step approach may be used to determine a worker’s status.
First, we determine what the intent of the worker and payer was at the time the working arrangement was made. Specifically, we must ask if the parties intended a contract of services (employer-employee relationship) or a contract for services (business relationship).
To determine intent, we may look to the contract itself, the parties’ actions, and the totality of the circumstances.
Second, we look to the nature of the working relationship in order to verify whether the intent of the parties is reflected in the facts. Here we look to certain elements including the level of control the payer has over the worker’s relationship:
- Who’s providing the tools and equipment?
- Is the worker allowed to subcontract the work or hire assistants?
- What’s the degree of financial risk the worker takes?
- What about the degree of responsibility for investments and management the worker holds?
- The worker’s opportunity for profit?
The following factors are non-exhaustive but are otherwise key to a proper evaluation of the relationship created. A closer look at the factors are examined below.
Who Is Exercising Control?
Control refers to the ability and authority to determine the work to be done and the manner in which it is done. What matters is the degree of control over the work and the worker, not the control over the end result (i.e., the product or service). Relevant factors to determine the degree of control include:
- Who controls how, when, and the methods the work is carried out,
- How much time the worker is required to dedicate,
- How much the payer oversees the workers activities,
Generally, if a payer requires control over the time, type and methods of work, restricts the worker’s ability to freely work for other payers, and directly scrutinizes the workers duties, then the payer should hire the worker as an employee. Conversely, where a worker usually works independently, is able to contract for multiple payers freely, is able to refuse work from the payer and has little or no supervision over the activities done, then that relationship is indicative of an independent contractor relationship.
2. Tools and Equipment
Another factor to evaluate when determining the nature of a relationship between a payer and a worker is the ownership or control of tools and equipment used to accomplish the work. In an employer-employee relationship, the employer will typically supply, maintain and insure most of the tools used for work. In a payer-contractor relationship, the independent contractor will usually provide, maintain and insure their own tools for the completion of the work.
The lines may be grey in this area as some skilled traders supply their own tools even as full-time employees.
As these factors are not exhaustive, the mere fact that a worker is required to provide tools does not itself mean that the worker is a self-employed individual.
3. Subcontractors and Assistants
The ability to hire assistants or subcontractors at-will is another indicator of the type of relationship that exists between a payer and a worker.
In a typical employer-employee relationship, the employee is not at liberty to hire external help, or sub-contract the work assigned out. Conversely, in a payer-contractor relationship, the independent contractor may hire subcontractors/assistants at-will and may assign the work to someone else.
4. Financial Risk and Opportunity for Profit
The degree of financial risk and profitability on the part of either party is a key indicative factor of the type of contractual relationship entered into. In an employer-employee relationship, the employee will not bear any financial risk, operating expenses, or entitlement to profits made. Although employees may realize a profit in the form of a bonus, shares or other profit-sharing mechanisms if stipulated in a work contract.
By contrast, an independent contractor will be liable for operating expenses, payment of subcontractors, and may realize a profit from the employment relationship since they are able to negotiate the price, source material, and minimize expenses as they please. Independent contractors are also considered to be in business for themselves and are free to make business decisions that increase their profits.
5. What About Work Benefits?
The presence or absence of work benefits may indicate the type of contractual relationship entered into. Typically, employees are entitled to benefits including pension plans, group, accident, health and dental insurance plans, life insurance, etc. These benefits and employee protections are set out in the employment standards codes based on the province or territory. Independent contractors are not entitled to any benefits from the payer.
6. Deductions and Benefits
In an employer-employee relationship, the employer makes mandatory and optional deductions including federal and provincial tax, employment insurance premiums, Canadian pension plan premiums and may match an RRSP on behalf of the employee.
Furthermore, the employee is also entitled to statutory benefits like group accidental, health and dental insurance plans, life insurance, pension plans, vacation, overtime, statutory holiday and leaves of absence pay, etc. In a payer-contractor relationship, the independent contractor is responsible for making all mandatory deductions and fulfilling tax obligations directly. Independent contractors are typically not given any additional benefits after payment.
Unsure About Your Status?
An employee who is not sure of his/her employment status can request a CPP/EI Ruling from the CRA. Such a ruling will determine whether the worker is an employee or self-employed, and whether the employment is pensionable and insurable.
To ask for a CPP/EI ruling, you can:
Log into My Business Account if you are a payer and select “Request a CPP/EI Ruling”
Log in to My Account if you are a payer or a worker and select “Request a CPP/EI Ruling”
Ask your authorized representative to request a ruling for you. They can log in to Represent a Client and select “Request a CPP/EI Ruling.”
Write a letter or print and complete Form CPT1,Request for a CPP/EI Rulings – Employee or Self Employed?, and mail it to your designated tax services office listed on page 14.
A worker or a payer can request a ruling by June 29 of the year following the year to which the question relates. For example, if the employment took place in 2023, the ruling request has to be made no later than June 29, 2024. A final ruling may also be appealed.
For more information, please see the RC4110 Employee of Self-employed publication by CRA.
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