Freelance work has been taking Canada by storm over the past 10 years as over 2.18 million Canadians are now taking part in temporary work in addition to or rather than part-time or full-time work. These changes are creating some exciting business opportunities for companies as hiring independent contractors for the short term allows a company to fit their short-term needs without having to worry about potential long-term impacts caused by the hire. Tax savings opportunities are also created by hiring short-term workers because money can be saved on things like benefits and pensions. With an independent contractor, the employer also does not have to withhold income taxes, opening up more cash flow opportunities.
While all these benefits of hiring independent workers can help a business, there can be potentially be costly consequences if it is deemed by the CRA that the alleged independent contractor is actually an employee of the company they are working for. These penalties include the income taxes, CCP and EI premiums, as well as penalties and interest on those balances.
When determining whether a worker is an independent contractor or an employee, a 4-step process is the determinant. The first of these determinants is “control”. This takes into account who is running the operation. Good indicators of which side is running the operation include who makes hiring decisions, who sets the hours of work and who directs what work is done and when. The worker being in charge of the majority of these indicators points towards an independent contractor.
The second determinant is “ownership of tools”. This indicator is very self-explanatory and whichever side owns the tools is very likely to be in control of the operation. The worker themselves providing their own tools points towards them being an independent contractor more than, if they are using company tools.
The third, and potentially most important indicator, is the chance of profit or loss. A worker is almost always going to be deemed an independent contractor if they takes on the risk of profit and loss. This includes things like covering for bad debts, covering the damage to property and covering the expenses associated with the project. They are also however, in line to receive the benefits of success.
The final, and certainly most complex, determinant of whether a worker is an independent contractor or an employee is whether the worker has integrated the payer’s activities into their own. Essentially what this means is that if the worker has added the payer’s activity alongside other commercial activities and are not dependent on the payee for their commercial activities they are an independent contractor and not an employee. If the reverse is occurring and the worker relies almost exclusively on the payer’s commercial activities, it is very likely that they will be deemed an employee.
If you have any questions relating to the classification of a worker in a business context, please do not hesitate to contact us S+C Partners LLP.