Small business owners –
Are you confident you are classifying employees correctly?
Do you know the difference between an employee and an independent contractor? Whether you are an entrepreneur who has recently incorporated and are starting your own small business or you are a the small business owner responsible for hiring workers, it’s important to be compliant with HR law.
DID YOU KNOW: 2.7 million Canadians were self-employed in 2013
There are many advantages of bringing on someone who is self-employed but did you know you are assuming some risk by entering into this relationship? Although a independent contractual relationship is considered mutually beneficial, it is important business owners appreciate they are assuming a material risk in entering into this relationship.
Legislation and Employer Obligation
Risk arises when the relationship is improperly classified as an independent contractual relationship when it actually mirrors that of an employee. Where the business fails to properly treat the relationship as an employment relationship, the business may be subject to penalties, including fines and potentially even jail time, under various statutes. The chart below highlights specific legislation and employer obligations.
Legislation and Employer Obligations
· Income Tax Legislation: Deduct and remit income tax
· Employment Insurance Act/Canada Pension Plan: Deduct and remit EI and CPP/QPP premiums for employees
· Employment Standards Legislation: Ensure employees are provided with minimum terms and conditions of employment respecting hours of work, overtime, minimum wage, public holidays, leaves of absence, etc.
· Workers’ Compensation: Premium contributions per employee
So, how do you determine whether a relationship is an independent contractual relationship or an employment relationship? There are four recognized tests which courts, tribunals and government agencies generally apply in determining the relationship:
1. The Control Test
· The degree of control and independence the individual has in the workplace over such matters as the following:
o Performance of the services
o Negotiation of compensation
o Defining the scope of work
o Supervision, and evaluation of services
o Determining the time, place, and manner in which the service is to be performed
In other words, does the Organization exert the type of control over the individual providing the service that it appears to look more like an employment relationship?
1. The Integration or Organization Test
· If the services performed by an individual form an essential part of the Organization’s day-to-day business, the individual is more likely to be considered an employee
1. The Economic Reality or Entrepreneur Test
· Factors that are relevant to determining whether the individual is actually an independent business person include:
o Does the individual own his/her own tools?
o Does the individual assume a risk of profit/loss?
o Has the individual made an investment in the business?
1. The Specific Result Test
· Unlike employees, independent contractors typically are engaged to complete a specific project. Relevant considerations under this test include:
o Whether the contract is for a finite term or a specific result
If a worker is a true “independent contractor” the following will be true:
· Organization makes no statutory deductions and provides no health and welfare benefits
· Hours of work are not monitored and there is little direct supervision
· Finite term contract with specific tasks/projects listed
· No reimbursement by the Organization for expenses
· Payments are made by way of invoice based on fees charged by the independent contractor
· The independent contractor is incorporated and the Organization contracts with that incorporated business
· HST/GST/provincial sales tax is charged to the Organization
At the end of the day, it should pass a simple test: Is the individual actually operating an independent business?