In the changing world of work, more and more companies are using a contingent workforce to get work done. As an independent contractor, you’ve likely selected this type of work arrangement because you like the freedom and flexibility its offers. BOWEN wants to help you manage your compliance and mitigate your risk of reclassification.
What is the difference between an employee and an independent contractor, and why does it matter?
In employment law, the determination of employee or contractor status determines which laws protect and govern the worker in question. Therefore, this determination of status is crucial.
If a person is an employee:
- Receive employment protection under both the common law and employment legislation, this covers minimum wage, holidays, overtime, termination and notice.
- Protected by workers’ compensation legislation without having to pay premiums (if eligible).
- Income Tax, Canada Pension Plan, and Employment Insurance payments are deducted from pay cheque and remitted on employee behalf. May have employer-paid benefits such as health care, sick leave, holiday pay, pension plan, professional development and paid parking.
- Cannot claim tax benefits or deduct work-related expenses.
If a person is a contractor:
- Considered self-employed and therefore not covered by most employment protection under both the common law and employment legislation.
- Arrange and pay for your work-related accident compensation.
- Allowed to provide services to other organizations.
- Don’t have statutory deductions applied to payment and must provide tax, Canada Pension Plan and Employment Insurance payments to the government.
- Allowed to claim most reasonable business expenses as deductions on yearly income tax returns.
What is the definition of an independent contractor, a sole proprietor or a contract employee?
Independent Contractor: If you have established an incorporated business of which you are an employee and seek the advantage of a third-party administrator to manage your contract with the companies you work with, then you are considered an Independent Contractor.
Contract Employee: If you are an employee of a third-party agency on an assignment with a company, then you are considered a contract employee. The third-party agency, such as BOWEN, will ensure that your tax deductions, CPP and EI are remitted to Revenue Canada and your T4 slips will be issued.
Sole Proprietor: A sole proprietor is a one-person business that has not registered with a state as a business entity, such as a corporation, partnership, or LLC. If you start a business, count business expenses and income separately from personal expenses and income, and you do nothing to register your business with your state, you’re a sole proprietor.
How do I know if I am an employee or an independent contractor? What are the common law tests?
Common law tests have been developed by the courts and various panels to determine who is an employee and who is an independent contractor.
In general, the tests look at these five factors:
- Ownership of tools
- Chance of profit/risk of loss
None of these factors alone will determine in you are an employees or an independent contractor, you need to look at the whole picture.
Who conducts common law tests, and when?
The common law tests may be needed at various stages of the employment or business relationship. For example, the following programs or agencies may consider worker/payer relationships:
- A government program or agency such as the Canada Pension Plan, Employment Insurance or the Canada Revenue Agency, especially if there is a dispute between the parties, or the program or agency suspects that the essence of the relationship is not as previously asserted (even if both parties agree).
- A tribunal or court, if a dispute arises between the parties (e.g., a Workers’ Compensation Board issue).
- A court, if there is a third party negligence claim.
What are the risks of using the wrong label?
If a payer treats a worker as an independent contractor and some legal forum determines otherwise, the financial liability could be enormous:
- The payer will be forced to remit to the government all the deductions it should have made from the employee’s pay (e.g., Employment Insurance, Canada Pension Plan, income tax), plus any interest and penalties that apply.
- If a payer incorrectly describes many employees as contractors and the workers successfully complain to the Employment Standards Tribunal, the payer will owe these workers additional payments for items such as overtime, vacations and plus any penalties imposed.
If a worker believes they are a contractor and finds out later that they were an employee, the worker may have to resubmit applicable income tax returns and may owe monies, including penalties. For example, the worker may have deducted numerous expenses that an employee is not permitted to deduct.
Note: An agreement that labels a worker as either an employee or an independent contractor is not binding on the government or any other legal forum. The tests discussed earlier provide some guidance but these issues are often not clear-cut.
Will I be subject to any penalties if I get this wrong?
Yes. If the payer is audited and the Canada Revenue Agency rules that “contract workers” are actually employees, the payer will be responsible for, at minimum:
- Canada Pension Plan and Employment Insurance employer and employee contributions for the current year and the previous year.
- 10% penalty on the total assessment.
- Interest of approximately prime +1% from the date each of the contributions were due.
- The employee will be responsible for, at minimum, personal back taxes, if unpaid.
What are my options to continue my contract if I am found not compliant as an independent contractor?
- Secure other clients
- Three-month break in contract
- Convert to a Sole Proprietor until compliant
- Terminate contract
Where can I find information on:
If a contractor or employer is not sure of the worker’s employment status, either party can request a free ruling from the CRA to have the status determined. To find out how to do so, contact your CFIB Business Counsellor toll-free at 1 888 234 2232 or firstname.lastname@example.org for assistance. Remember, this is a free service for all CFIB members.