Contractor vs Employee
We’d all like to minimize our payroll costs and one strategy is to hire contact employees. Hiring a subcontractor frees the business from paying the employer portion of CPP and EI requirements. Whether a worker is an employee or contractor is matter of evidence i.e. substance over form. Determining the status of contractor vs employee: there are several tests that must be examined prior to declaring the employee a contractor.
Control: Does the worker have control over the work they do? A contractor controls how they control their time and how they go about the work they perform.
Tools and Equipment: Does the worker provide their own tools and equipment? A contractor would have a significant personal investment in the tools they use, and would be take care of the repairs and maintenance of them. A hammer and tool belt are not significant tools if the job requires other materials such as trucks, trailers, compressor, ladders etc.
Integration: How heavily integrated is the worker in your business? If the majority of the work performed is for your company or they are performing a task that is essential to the running of your business, they may be classified as a contractor.
Opportunity for Profit: When considering contractor vs employee ask yourself this: can the worker make a profit or incur a loss due to their decisions? A contractor has control over their costs and what they charge for their services, and can make an active difference in their profits and losses.
It is important to ensure that you are classifying your workers correctly as there are heavy costs for non compliance. If the CRA performs an investigation and determines that your contractors are actually employees, your business will be responsible for payroll taxes for both employer and employee all the way back to the start of their employment. A sudden charge like this coupled with penalties and interest can put a heavy strain on your business.
We’ve seen several cases where the contractor reports his income as an employee to get employment insurance and then assists Service Canada in determining their employment status. It’s tough to fight CRA when the worker is working against you.
Please note: Having a worker as a subcontractor does not free the employer from WSIB responsibilities unless you see the contractor’s clearance certificate on a quarterly basis.
Regardless of the contractor vs employee dilemma above, business owners need to consider whether using contractors builds their business or is merely a short term fix. Contractors have little to no loyalty and take all of your culture with them when they leave.
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James Abbott, CPA and Associates