Employee or contractor? That is the question. One of our clients recently went through a BC Employment Standards Branch mediation to determine if a worker was an employee or contractor. The result of the mediation was that the worker was probably an employee (mediation doesn’t give a ruling on this). The relationship had been terminated and therefore vacation pay, and severance pay was probably owing. If this case had not settled in mediation and had gone to a full hearing, thousands of dollars in fines may have been imposed as well.
Many small business owners think they can save money by engaging contractors rather than hiring employees. The perceived savings come from not paying Workers’ Compensation premiums and the employer share of CPP and EI, along with the time it takes to process payroll and submit payroll taxes. Well, let me tell you it is not that simple. Get advice from a Human Resource professional to determine if you have an employment or contractor opportunity for someone before you enter the relationship.
In Canada, there are three different agencies that will have a say in interpreting whether your relationship is one of employer/employee or contractor/sub-contractor. It is possible that these three agencies could rule differently if ever a particular situation was raised with them for a decision. Let’s take a look at all three.
Provincial Employment Standards Branch
Employment standards are legislated at the provincial level and so differ slightly from province to province. The Acts are there to set a minimum standard for employers to follow when dealing with their employees. Regardless of the relationship you think you have, generally speaking, people cannot give up their rights under the law. So, call it what you will, if certain conditions are met, the person you think is a contractor may well be deemed to be an employee. Let’s take a closer look using British Columbia’s Employment Standards Act.
Employment Standards – Employee or Contractor Considerations
According to the “Employee or Independent Contractor Fact Sheet” published by the BC Employment Standards Branch “The following factors are not, on their own, enough to show that a worker is an independent contractor. There may be an employment relationship, even if the worker does some of the following:
- agrees to be an independent contractor;
- charges GST;
- works at more than one job;
- submits invoices instead of time cards,
- doesn’t have statutory deductions taken from earnings;
- works independently without much direct supervision;
- drives their own car;
- provides their own tools; or
- is paid by piece rate or commission.”
The Act is intended to protect as many workers as possible. When deciding if a worker is an employee or contractor, one of the main questions to ask is “Whose business is it?”
The courts have developed some common law tests that may be useful, but they must be considered in a manner consistent with the definitions and purposes of the Act. Some of these tests include how much direction and control the worker is subject to, whether the worker operates their own business and has their own clients, whether the worker has a chance of profit or a risk of loss, whether the work they are doing is integral to the business and whether there is an ongoing relationship.
Canada Revenue Agency
The CRA is concerned about the relationship of employee or contractor as it impacts how someone is treated with respect to Employment Insurance, Canada Pension Plan and Personal Income Tax withholding.
Employers must open a Payroll Tax Account with CRA and are responsible for withholding from an employee’s pay, and remitting to CRA on their behalf, the employee’s share of EI and CPP as well as the appropriate income tax amount. In 2019 the employee rate for EI is $1.62 per $100 of insurable earnings (wages) to a maximum of $860.22 for the year. The rate for employee contributions to CPP is 5.10% of earnings to a maximum of $2,748.90. Income tax deductions are based on each employee’s individual circumstances as set out in their TD1.
In addition, employers are charged with employer contributions to EI and CPP. The rates for 2019 are 2.268% for EI to a maximum of $1,204.31 and 5.10% for CPP to a maximum of $2,748.90.
CRA – Employee or Contractor Considerations
This is the primary area where small business owners think they can save money by declaring someone a contractor rather than an employer. Tread carefully here as a misstep can be very costly. The questions CRA asks in determining the employment status of an individual include information related to the following elements:
- the level of control the payer (employer) has over the worker’s activities
- whether the worker or payer provides the tools and equipment
- whether the worker can subcontract the work or hire assistants
- how much financial risk the worker takes
- the degree of responsibility for investment and management the worker holds
- the worker’s opportunity for profit
- any other relevant factors, such as written contracts
This bulletin from CRA will help you determine whether you have an employee or a contractor. We recommend you obtain advice from a qualified Human Resource professional or lawyer to make the most informed decisions.
Workers’ Compensation is legislated provincially. In British Columbia the governing body is WorkSafeBC. If your business hires workers (full-time, part-time, casual, or contract), you need to register so workers are covered in the event of a workplace accident or illness. Premiums vary based on the industry you are in, typically lower for industries in which there are fewer accidents.
Employers’ responsibilities to WorkSafeBC include registering for coverage, paying premiums, reporting payroll, contacting them regarding changes to your business, providing a safe workplace, reporting injuries and disease, and investigating accidents.
WCB – Employee or Contractor Considerations
The question of employee or contractor becomes important as some contractors may be considered workers. This is particularly important in the construction industry. Contractors would be your workers if they do not operate as an independent business and are either not eligible for WorkSafeBC coverage or decline to purchase WorkSafeBC’s optional coverage. The WorkSafeBC website provides the following examples of where a contractor would likely be your worker:
- The contractor supplies only labour
- The contractor supplies labour and minor materials such as nails, drywall tape, or putty
- The contractor supplies labour and a piece of major equipment but is not registered with WorkSafeBC
This is another area where small business owners think they can save money. If you’re not covered and a worker (including a shareholder) is injured or contracts an occupational disease, you could be responsible for both the worker’s claim costs and your unpaid premiums. For more information check out the WorkSafeBC website or the appropriate website for your province.
My clients hear me say frequently “Save smart, spend smart”. By this I mean, don’t think you are saving money by not being diligent in following the laws of Canada and your province, by not seeking legal or other professional advice, by not purchasing liability insurance. These are just a few examples of areas that can come back and bite you in a big way so investing in them is spending smart.