I’ve talked about volunteers, interns & other free help before. So today, let’s talk about another one of the most common ‘shortcuts’ businesses take in terms of cost and hiring is to hire an individual on as an ‘independent contractor’.
The Business Case
Hiring an independent contractor to do work for you has some advantages for a business, at least at first glance:
- Less bureaucracy - You get an invoice, you pay it. You don’t need a Canada Revenue Agency Payroll account, you don’t have to withhold funds for EI or CPP or deal with the paperwork involved
- Lower cost – you don’t have to pay EI or CPP or WorksafeBC. Often, you can ‘bargain’ lower salaries / rates overall because the contractor sees more of their actual pay.
- Quick termination – if they are contractors, there’s a lot fewer requirements if you are looking to terminate the contract
- HST / GST savings - as an ‘expense’, you get to clawback some of your HST / GST revenue if the contractor charges HST
The Contractors Case
So why do these contractors agree to this? Well, here’s a few reasons why:
- Lack of power – sometimes, the job is offered only on these terms.
- Expenses – whether it’s HST / GST that they charge and thus can use for other input tax credits or general expenses (e.g. telephone, rent, internet, etc.); there’s definitely financial benefit here
- Multiple sources of income – as a theoretical contractor, you could potentially have more than one source of income as a contractor.
It sounds like a win-win situation for everybody doesn’t it? Except…
The problem is, there’s a definite liability if your ‘independent contractor’ is found to be an employee. You are liable for:
- unpaid taxes, penalties, interest, CPP and EI premiums
- injuries on the job since the contractor wasn’t covered by WCB
- the onus is on the business, not the contractor to prove a contractor relationship if any complaints go to HRDC or the like
- obviously, the contractor is also liable for unpaid taxes, penalties, interest, CPP and EI premiums
- in addition, you aren’t automatically covered by HRDC and other employee laws. You can always complain, but it becomes a longer process to get restitution
What CRA looks for:
- Control – how much control does the employer have in this relationship? Does he dictate when, where and how you work? A great example is our bookkeeper. She does all our work remotely, I just send her the files. The only real control I have is when I expect the work to be completed.
- Ownership of tools – whose tools are being used? how significant are those tools? Rob who shoots all our videos brings and uses all his own equipment
- Chance of profit / loss - who runs the biggest risk here of profit or loss? Is the contractor taking on any potential risk? Kaja for example isn’t a contractor since she’s guaranteed her pay and she hasn’t taken on any operating expenses for the business or herself
- Integration – This is a kind of a weird one and discusses who is absorbing who into their business practices. It’s often an indicator of how much work is being done by the contractor for the employer / number of clients the contractor has.
Now, I’m obviously not a lawyer so this isn’t legal advice. However, from all that I know of, the risk of not ‘hiring’ an employee properly is often quite high. Sometimes, the line can be quite grey. Other times, the hassle might seem too much – example, hiring a really short-term worker (a few days). In both cases, as a business owner and as a potential independent contractor; it’s worth knowing your rights and liabilities.