Contractor vs Employee? Making the Right Decision for Your Business

If you're a business owner, you will likely have to consider the contractor vs employee relationship at some point. It can be tricky to determine the correct classification, but it's important to get it right. In this blog post, we'll discuss the key differences between employees and contractors, as well as how to treat them correctly.

Determining whether a worker is a contractor vs employee is treated differently in Quebec compared to the rest of Canada. This article discusses the process for identifying the employment status of a worker outside of Quebec.

Contractor vs Employee: Determining the proper status

The contractor vs employee status of a worker is determined using a 2-step process.

First, the intent of the relationship when it began needs to be understood. Was the relationship between the payer and worker intended to be a contract of services (employee-employer relationship) or a contract for services (business relationship)? Sometimes this is clearly detailed in a written agreement and sometimes the payer and worker can have different ideas of what their relationship was meant to be. This forms the basis of analysis on which the employment status is determined.

Second, the payer and worker are asked about the facts of their relationship to get a complete understanding of the of their working relationship.

The following areas are further investigated reach a conclusion:

• How much control does the payer have over the worker?
• Does the payer provide tools and equipment to the worker to complete their work?
• Is the worker allowed to hire assistants or subcontractors to complete their work?
• Does the worker take on any financial risk in order to complete their work?
• Is the worker required to make a capital investment in order to complete their work?
• Can the worker earn a profit from the work they are doing for the payer?

We'll take a more detailed look at each of these questions below.

Control

Here, we want to look at how much control the payer has over the worker in dictating how and when the work gets done.

The degree of control that the payer has over the worker will help to determine whether there is a contractor vs employee relationship.

The following are some indicators to determine the relationship between the payer and the worker.

Signs of an employee-employer relationship

• The payer assigns work to the worker.
• The payer chooses how to pay the worker and how much to pay them.
• The worker needs permission from the payer to go work for other payers.
• The payer is superior to the worker and the worker receives directions from the payer on how the work is to be performed.
• The payer listens to input from the worker but ultimately the final decision is made by the payer.
• The results of the work and how it is performed are dictated by the payer.
• The payer dictates when the work is performed by the worker.

Signs of a contractor relationship

• The worker works independently, and the payer does not supervise their work.
• The worker can hire assistants and subcontractors to help with the work.
• The worker is free to work for other payers.
• The worker can accept or decline additional work from the payer.
• The worker can set their own schedule and is not bound to a schedule administered by the payer.

Tools And Equipment

If a worker is required to provide their own tools and equipment required to complete the work they are doing, it could indicate a contractor relationship.

A contractor typically provides their own tools and also incur expenses to repair, replace, and acquire new tools needed for the work they do. However, this indicator does not always mean that that the worker is a contractor. Tradespeople such as mechanics are often required to pay for their own tools but are involved in an employee/employer relationship.

Signs of an employee-employer relationship

• The payer pays for the tools and equipment and is responsible for repairs and maintenance costs.
• The payer has the right to use the tools that the worker uses.
• The payer reimburses the worker for any tools and equipment paid for by the worker.

Signs of a contractor relationship

• The worker pays for their own tools and is responsible for the repairs and maintenance of them.
• There is a significant financial investment in the tools and equipment by the worker and they have the right to use those tools.
• The worker has their own workspace that the worker pays for and is where they do most of their work.

Subcontractors And Assistants

The ability to hire subcontractors or assistants can impact the financial risk and opportunity to profit by the worker and can affect the determination of whether the worker is a contractor vs employee.

Signs of an employee-employer relationship

• The worker is not allowed to hire anyone to help with the work they are doing.
• The worker is not allowed to send someone in their place to do the work.

Signs of a contractor relationship

• The worker can to hire who they want to carry out the work.
• The worker can send someone else to do their work; they don't have to carry out the work themselves.

Financial Risk

Typically, an employee would not incur financial risks as any expenses paid by them would be reimbursed by the payer. They would also not have ongoing costs that would be incurred even if no work was being done.

On the other hand, a contractor can have financial risk as they have ongoing costs that still need to be paid even when they are not working for the payer.

The focus needs to be on expenses that are not reimbursed, as both employees and contractors can have expenses that do get reimbursed by the payer.

Signs of an employee-employer relationship

• The worker is not at financial risk if the contract is not satisfactorily completed.
• The payer selects when and how much the worker is paid.
• The worker is not responsible for paying for operating costs.

Signs of a contractor relationship

• The worker incurs financial risk if the contract is not completed satisfactorily.
• The worker advertises their services to other payers.
• The worker hires assistants or subcontractors to help complete the work.
• The worker performs a significant amount of work from their own workspace that they pay for.
• There is no ongoing relationship between the worker and the payer. The worker is hired to perform work on a specific project.

Investment And Management

Is the worker required to make an investment in order to provide services? Can the worker make decisions that will affect the profitability of the job to them? Do they hire workers and give them directions on what jobs to complete and when to complete them?

These are all questions that can identify whether the worker is a contractor vs employee.

Signs of an employee-employer relationship

• The worker doesn't have to make an investment into the payer's business.
• The worker doesn't advertise their services, such as maintaining a website or advertising to other payers.

Signs of a contractor relationship

• The worker does advertise their services to other payers.
• The worker hires their own staff and directs them on how to do jobs and when to do them.
• The worker makes an investment required to provide services.

Opportunity For Profit

The final question to consider when determining a contractor vs employee relationship is, can the worker make decisions that can affect the amount of profit or loss they realize for the job?

This indicator is looked at from the worker's point of view and if they are in control of dictating the proceeds for a job or incurring expenses.

Signs of an employee-employer relationship

• The worker receives an hourly wage or a salary and is paid on a regular basis.
• The worker receives benefits such as a pension plan and health and dental insurance plans.
• The worker isn't able to realize a profit or loss as they would receive employment income rather than receiving revenue and incurring expenses.

Signs of a contractor relationship

• The worker receives a flat fee for their services and incurs expenses in order to provide those services.
• The worker can hire someone to take their place in order to complete the job.

Regulatory Differences Between An Employee vs Contractor

The following table lists the regulatory differences between an employee and contractor. This is important when considering which option best suits your needs.

The Benefits Of Hiring An Employee

Hiring an employee over a contractor comes with several benefits, each suited to different business needs and objectives. Here are some of the key advantages:

• Long-term Commitment: Employees are typically more invested in the company's future and can offer long-term commitment, ensuring continuity and stability.
• Training and Development: While initial training might be required, employees can be molded according to the company's culture and needs. Over time, they can undergo further training and development, enhancing their skills to benefit the business.
• Company Culture: Employees often integrate more seamlessly into a company's culture and contribute positively to team dynamics, fostering a sense of community and shared purpose.
• Cost Predictability: With employees, businesses can better predict monthly costs, as they have fixed salaries and benefits. With contractors, costs can vary based on hours worked or project specifics.
• Control Over Work Processes: Employers have more control over employees in terms of directing their work, setting their hours, and determining their methods and processes.

The Benefits Of Hiring A Contractor

Hiring a contractor over an employee offers several advantages, depending on the specific needs and objectives of a business. Here are some of the main benefits:

• Flexibility: Contractors can be hired for specific projects or periods, allowing businesses to scale their workforce up or down based on demand without long-term commitments.
• Specialized Expertise: Contractors often possess specialized skills or expertise that might not be required on a permanent basis but are essential for specific projects.
• Quick Onboarding: Contractors, especially those with niche skills, can often hit the ground running, reducing the time and resources spent on training.
• Short-term Commitments: If a project doesn't require long-term attention or if the business is undergoing fluctuations, contractors offer a temporary solution without the need for vacation pay, overtime pay, or severance pay.
• Tax Implications: Businesses typically don't have to withhold or pay taxes on payments to contractors, simplifying the tax process. In addition, T4 slips and records of employment (ROE) don't need to be prepared and filed for contractors.

Requesting A Ruling From The CRA

If either the employer or employee is unsure of the correct contractor vs employee classification, they can ask CRA for a ruling. The ruling will determine whether the employment status is an employee or contractor as well as whether they are pensionable or insurable.

You can use the following methods to contact the CRA to request a ruling:

• You can log in to My Business Account and click on the "Request a CPP/EI Ruling" link to file your request.
• You can log in to My Account and click on the "Request a CPP/EI Ruling" link to file your request.
• If you have an authorized representative on your account such as an accountant, they can file a request for you.
• You can write a letter and complete the request form and mail them to your designated tax centre.

Once the CRA gives a ruling, it will apply to a specific period or periods of employment. If the terms of employment change after the ruling is given, another ruling can be requested.

The deadline for requesting a ruling is June 29 of the year following the year your request relates to. If you have a question relating to employment from 2022 then a request for a ruling must be submitted to the CRA by June 29, 2023.

Summary

When considering the contractor vs employee relationship, it's important to look at the intention of both parties when the working relationship began in addition to the facts of how their working relationship is actually being carried out.

Answer the questions as to whether the worker:

• Has control.
• Uses their own tools and equipment.
• Can hire subcontractors and assistants.
• Has financial risk.
• Makes an investment and can make business decisions.
• Has the opportunity to profit.

This should enable the parties to come to an understanding of whether they have an employee or contractor relationship.

However, if either the payer or worker is still unsure of what type of relationship they have, then they can either request a ruling by the CRA or have their accountant look at the situation to determine if they have a contractor vs employee relationship.

Visit our payroll services and plans pages to learn more about how we can assist you in reaching your goals. They provide an overview of our services, including information on the benefits and features of each. Feel free to contact us if you have any questions about our services.

Disclaimer

The author takes reasonable care to make sure the information on this blog is complete at the time it was posted. The information may not be comprehensive or current and is provided for general information purposes only.

This blog is not meant to be used as an alternative to professional advice. You should always consult with a professional to obtain advice on your specific situation.

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