When you start a business, an operational necessity is your staff who can be made up of Employees and Contractors. We’ll be going through the differences in this article. This is not legal advice, but an experienced lawyer in this space helped provide the information here.
Tests to determine if someone is an employee or a contractor
The CRA (Canada Revenue Agency) uses three tests to determine if your team member is an employee or a contractor:
- Control: How much control do you exercise over the member? Can you control their actions? How and where they do their work? And can you control how much they can delegate their work to others? If you exercise significant control over the team member, they’re an employee. If not, they’re a contractor.
- Economic Reality: Who bears responsibility for the profit / loss of the team member regarding the contract? If the team member is responsible for their own profits / losses and all the expenses necessary to pursue profit, they’re a contractor. If you’re responsible, then they’re an employee.
- Fourfold: The last test looks at four factors.
- Who has control? This is the same as above. If you do, they’re an employee; if not, they’re a contractor.
- Who provides the tools and equipment to complete their work? If you do, they’re an employee; if not, they’re a contractor
- Who has a chance to profit under the contract? If you do, they’re an employee. If they do, they’re a contractor.
- Finally, does the worker have a risk of loss under the contract? If not, they’re an employee. If so, they’re a contractor.
To learn more about this distinction, you can read this excellent article by Human Interest.
Rights for an employee vs a contractor
Why are such considerations important? Employees have rights that contractors do not. Employees are entitled to:
- A minimum wage
- Vacation entitlement
- Maternity / Paternity leave entitlements
- Notice of termination
- EI (Employment Insurance)
- CPP (Canada Pension Plan)
- Limits on the hours they must work
- Overtime compensation
- Lunch breaks
- WSIB (Workplace Safety & Insurance Board) insurance coverage
Contractors are not entitled to any of this because they are an independent business.
Risks of mis-characterizing the relationship
The CRA is obligated to collect dues on behalf of the Canadian population. If you classify someone as a contractor when they are really an employee, you are obligated to pay for all outstanding payroll deducations and WSIB premiums owed to the CRA since the start of the employment contract. This can include penalties, interests and fines. You could also be sued for infractions against their rights. For example, if you fired them inappropriately or did not pay them for overtime or maternity / paternity leave, you will have to pay for all outstanding dues to the employee, plus damages and legal fees.
Why are these relationships mis-characterized?
Often times, when businesses need manpower, but are short on cash flow, they start to depend on contractors to help. Why? Because they don’t have to worry about all the rights listed above and they save on the upfront cost of paying a regular salary even if business is slow. However, the after effects of making this kind of mistake can be more expensive than the money saved.
The importance of worker rights
I didn’t realize this before, but in the past, many employees were severely abused by their employers. Having to work in terrible conditions for long hours with little pay and no job security, it made many people suffer. These rights were put in place to protect people from such abuses. That’s why I understand the importance of employee rights. And that’s why it’s important to get the distinction right.