Are You an Employee or a Contractor? Here is How to Tell the Difference.

by margento | September 16, 2020

Are you an employee or a contractor?  This is a question consistently asked from our clients and business owners.  The CRA has laid out specific criteria for you to know the difference.  However, interpreting their rules can be tricky and getting this wrong can be a costly mistake.

In this blog, here is what we will cover:

  • Criteria determined by CRA
  • Is it better for you to hire and employee vs. a contractor?
  • What is the difference from a tax perspective to the business owner and employee?

Criteria Determined By CRA

Unfortunately, when evaluating the criteria laid out by CRA there is no clear answer to whether you are an employee or contractor.  The answer is determined on a case-by-case basis using the criteria provided by CRA and precedent court cases.

The criteria determined by CRA include:

  • Control – over the work that needs to be done and how it is done.
  • Tools and equipment – who has ownership of the tools?
  • Subcontracting work or hiring assistants – Can the contractor subcontract their work to others?
  • Financial risk – Does the contractor make any personal investment to provide the service or do they risk losing money vs. earning a profit?
  • Intention – what does the actual contract between the parties say?

Control

Control is the ability for the worker to exercise their say in how the work is done and when it is done.  A certain level of independence exists where the worker can dictate the workflow. 

Below are some common examples from each perspective.

Control – Employee

  • The payer determines when the job must be completed.
  • The payer determines the hours during the day that the work must be done.
  • The worker is directed or trained by the payer on how to complete the job.

Control – Contractor

  • Contractors complete the work on their own time under their own direction.
  • The worker is free to take on other jobs from other clients.
  • The contractor can end the working relationship whenever they like or refuse work.

Tools and Equipment

Was there a significant investment in tools and equipment by the worker to complete the job?  Whether the worker owns their own tools or not is a supporting indicator on the contractor vs. employee relationship. 

Tools and equipment – Employee

  • The worker has no tools and is provided tools and equipment by the payer.
  • The payer is responsible for maintaining the tools.
  • The payer reimburses the worker for any tools purchased and has ownership of tools.

Tools and equipment – Contractor

  • The worker provides their own tools and equipment.
  • The worker is responsible for maintaining and servicing equipment.
  • The worker has invested in their own tools.

Subcontracting Work

Is the worker able to subcontract the job to other workers?  An employee does not have the right to subcontract the job where a contractor can. 

Subcontracting work indicators – Employee

  • The worker has no right to hire subcontractors.
  • The worker is unable to have someone else perform the job in their place.

Subcontracting work indicators – Contractor

  • The worker can hire others to assist on the job.
  • The payer has no say in who the worker decides to subcontract the work.

Financial Risk

It is important to determine the degree of risk that the worker assumes.  Consider any financial costs the worker incurs on the job, or risk of potentially running a loss from performing the job.

Financial risk – Employee

  • The worker is not responsible for operating costs.
  • The worker is not liable if the job is not completed according to the contract.
  • The relationship between the worker and payer is continuous.

Financial risk – Contractor

  • The worker is hired for specific jobs only.
  • The worker hires others to help on the job.
  • The worker advertises their services and open to engage with other clients.
  • The worker is liable if they do not meet the obligations of the contract.

Intention

One of the most important indicators and first question to ask yourself is “what is the intent of the relationship between payer and worker?” 

The intent is specifically laid out in the contract between payer and worker.  Intent is not the catch-all determining factor, but it is a great starting point.  The parties may have the intent for it to be a contractor relationship, but all factors above may point to an employee relationship.

Request a Ruling From CRA

If you review all the criteria and you are still uncertain as to whether you are an employee or a contractor, you can contact CRA and request a ruling on the matter.

This can be done through your CRA “My Business Account” or by mailing this CRA form to your tax center.

Alternatively, consult with your accountant!  Your CPA should have the expertise to analyze your unique tax situation and help you make the determination whether one is an employee or contractor. 

Employee vs. Contractor – Which is Better?

As a business owner you are wondering which is better for you?  Everyone has a different situation and below are key factors to consider.

Hiring a Contractor Benefits

  • Less administrative work – if you hire a contractor, you do not need to enroll in a CRA payroll account and remit monthly payroll tax deductions to CRA.  Payroll complicates things by making the employer responsible for Records of Employment and T4s at the end of each year.
  • Lower cost – if you pay a contractor, the payer does not need to match CPP and EI or worry about vacation pay.

Hiring an Employee Benefits

  • Retention and loyalty – when you hire an employee, you have someone who is now part of your team.  They are essential to grow your business and in many cases are the most valuable asset to a business.  Their knowledge is your knowledge, and if you find a quality employee and treat them well, the return on that investment is immeasurable.

At the end of the day, if you are looking for someone to help grow your business and lead your company to success.  Hiring a long-term employee is the correct choice.  If you are still growing and can’t quite commit to a full time employee, but you want to engage on new contracts/jobs, then hiring a contractor can fill in that gap until you are ready to hire someone long-term.

What Is the Difference from A Tax Perspective?

Listed below are a few key regulatory differences you should be aware of.

  • Payroll Remittances – Employers are required to withhold and remit payroll tax deductions to CRA.  If you hire a contractor, you are not obligated to do so.
  • Employment Insurance – Employers need to pay into EI for their employees.  This adds an additional cost to hiring an employee.
  • Canada Pension Plan – Employers need to pay into CPP for their employees.  This adds an additional cost to hiring an employee.
  • Vacation and Overtime Pay – There are statutory requirements for vacation and overtime pay based on hours worked by your employee. 
  • Workers Compensation – Employers will be required to remit WCB on wages paid to employees.
  • Severance Pay – There are statutory guidelines to follow when it comes to terminating an employee.

Overall, it is more expensive to hire an employee.  Although, if you find the right employee who is fit for the job, adding them to your team is an essential component to growing your business.  If you are looking for a long-term worker who has the required expertise to do the job and add value to your business, an employment-work relationship is best.  On the other hand, whether someone is an employee or contractor also comes down to facts determined on a case-by-case basis. 

Contact Argento CPA today if you need any assistance determining the difference between contractor vs. employee!

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