Independent Contractor or Employee?

Your business is growing. You need help. You don’t want all the responsibilities and costs of employees so you decide to hire people as independent contractors – asking them to bill you for their work.

Problem solved! Or is it?

This may only be the beginning of your problems. If you hire people as independent contractors but really they’re employees – you may be inviting unwanted attention from both levels of government.

• Federally - you won’t be remitting income tax, EI, or CPP as you should.

• Provincially – you probably won’t be meeting the terms of the Ontario Employment Standards Act, the Occupational Health and Safety Act, the Workplace Safety and Insurance Act and all the other provincial employment legislation.

If it turns out that the people you treated as independent contractors are really your employees, what happens?

The federal government may require that you pay both your and the employee’s EI and CPP contributions for the entire period of their employment. In some cases employers have been ordered to pay the employee’s income tax as well. At the provincial level, there are many more pieces of legislation that you may be found to have violated. Examples of orders against employers are payment of vacation, holiday and overtime pay; back payment of WSIB premiums; prosecutions under the Occupational Health and Safety Act. In all cases, the Ministry of Labour can levy significant fines.

What defines an employee versus an independent contractor?

Unfortunately there is no single, clear rule that applies. Different government departments use different tests to determine if the person working for you is an employee or not. Some of the tests that they apply are:

1. Who controls the assignment of work and how it’s done? Is the relationship a subordinate one? If you provide training or direction about how the work is to be done, that speaks to an employment relationship.

2. An independent contractor can choose to take work from you, or not; has control over their time; does their own scheduling of the workday, workweek, vacations, etc. Employees can’t do these things. The employer makes those decisions.

3. An independent contractor can hire others to do the work. Will you allow this person to send someone else in to do the work? Employees can’t send in a substitute.

4. An independent contractor assumes risk. If one of the people that you’re working with gets injured in the course of his/her work, do they carry some form of insurance for lost income?

5. Does the independent contractor have other clients? Where there’s only one client or source of income, it may be determined that this is an employment relationship.

6. Who provides the tools? If you do, that’s probably an employee.

7. Does the independent contractor have his/her own facilities where some or all of the work is performed?

8. Does the independent contractor have a Business number and remit GST?

9. An independent contractor is hired for a specific job rather than having an on-going work relationship.

10. A contractor is financially liable if he/she does not fulfill the terms of the contract. An employee can be fired but not sued.

11. An independent contractor seeks new clients.

This is not an exhaustive list. It’s not necessary that all of the above apply for a determination that an employment relationship exists.

How does an investigation of an employer get started?

A person may agree to bill you for their time, then when they finish working for you, decide that they want vacation pay. They file a complaint with the Employment Standards Branch and soon you find you’re being investigated.

Very commonly a person is injured, goes to the doctor, reports that they were injured “at work” and their doctor files a Form 8. Because you don’t regard the person as an employee, you don’t file a Form 7. Before you know what’s happened, you’re in discussions with WSIB.

Once one branch of the government is alerted to your situation, you’ll be on the radar screen for the others.

Hiring “independent contractors” may look cost-effective but if you’ve actually got employees, you may be ordered to pay far more than you would have had you treated them as employees in the first place.

Our question is, if it was that easy, why would anyone have employees?

At Access HR Solutions we have been surprised to find that some accountants are advising employers to hire people as “independent contractors”. When you need help to decide if you have an employee or not, call us. We’ll save you a lot of money and headaches in the long run!

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