Employees vs Independent Contractors
When a person is hired to do a job, they can be hired as either an employee or an independent contractor. The difference is an important one for both the person hiring (the “Hiror”) and the person being hired (the “Hiree”).
The consequences of this difference, generally speaking, are as follows:
- Income Tax – If the Hiree is an employee, the employer must deduct from their wages and remit income tax to the Canada Customs and Revenue Agency (Revenue Canada). Failure to collect and remit, even if the employer honestly believed the employee was an independent contractor, can result in a penalty of 10% of taxes not deducted which can be increased in certain circumstances. Additionally, directors of an employer that is a corporation can be held to be personally responsible.
- Employment Insurance – The same rules apply as for income tax deductions. A Hiree who is an independent contractor may receive amounts that would otherwise be deducted and remitted if they were an employee. There is, of course, a consequence in not receiving benefits if an independent contractor is unemployed.
- Canada Pension Plan – The Plan imposes the same responsibilities by the Hiror as Employment Insurance, although the penalties for failure to comply differ.
- Workers’ Safety Insurance Act (Workers’ Compensation) – Amounts payable for Workers’ Compensation only have to be paid in the case of an employee. Failure by an employer to pay can result in the employer having to pay an additional amount in the situation of an injured worker.
- Employment Standards Act – If a Hiree is an independent contractor, the relationship is governed by the agreement between the parties and the Hiree is not protected by the provisions of this Act. The Hiree may, however, receive more than they would have received under the Employment Standards Act if the Hiror terminates them without legal cause in the middle of a contract for a fixed term.
So, why would a person want to give up the protection of these laws and enter into an independent contract? For the Hiror it’s much less work complying with different government departments and their rules. Furthermore, the Hiror will know their exact rights and obligations, including the cost of ending the relationship. For the Hiree, the answer is money. They get to take more home, deduct more costs for income tax purposes and often work for more than one Hiror at the same time.
Often it is difficult to tell whether someone is an independent contractor or an employee. The Hiror does not want to make a mistake and not make remittances if they are required as the consequences can be expensive. Just calling an Hiree an independent contractor is not enough. The Hiror must look at the amount of control they have over the Hiree, who owns the Hiree’s tools of the trade and whether the Hiree has a stake in the profits or losses of the Hiror. In making this determination, the parties should also look at whether or not the Hiree is an “integral part” of the Hiror’s business, the Hiree’s ability to work for others, whether the Hiree pays their own expenses and a number of other factors. A carefully worded written agreement can save a lot of problems down the road and should be reviewed by your professional advisors.