I have found that the topic of Employee vs Contractor is a gray area for many entrepreneurs, yet it can be a very expensive error if an individual is not classified properly. There are several benefits to hiring a contractor including greater flexibility, reduced overall costs, and often a greater specialization that a contractor can bring to a project. That being said, an entrepreneur must take care to consider the relevant factors in determing whether to pay an individual as an employee or contractor. The purpose of this blog post is to provide an overview of the various factors which help to determine whether an individual is an employee or contractor.
The following factors indicate that an individual is more likely to be an employee:
1) Company selects the individual who will provide the services.
2) Individual is paid on a fixed hourly or monthly basis.
3) Company directs day-to-day work of individual.
4) Company controls the method and location of performing the work.
5) Individual has employees of the company assisting him or her.
6) Company's supervision disciplines or dismisses individuals.
7) Individual is covered by the employee group benefit plan.
8) Individual does not have own GST number.
9) Company provides necessary tools or equipment.
10) Company completes "Record of Employment" for Service Canada.
11) Company completes T4 Slips for individual each year.
12) Individual works full-time for company and does not work for anyone else.
13) There is an on-going relationship between the individual and the company with no definite end-date.
14) Individual is treated the same as all of the company's employees.
15) Individual is employed as part of the business and his or her work is an integral part of the business.
The following factors indicate that an individual is more likely to be a contractor:
1) Service is performed by an individual selected by the contractor.
2) Contractor receives lump sum payment for completed project or work upon submission of invoice.
3) Contractor has a chance of profit and a risk of financial loss.
4) Contractor agrees to produce a specified result, but has the freedom to decide the method to achieve the result.
5) The contractor hires any helpers directly.
6) There is no discipline by the company. Failure to produce necessary result is dealt according to the contract.
7) Contractor is not provided any employee benefits.
8) Contractor has own GST number, charges company for GST and remits to the CRA.
9) Contractor provides own tools and equipment.
10) No Record of Employment or T4's are prepared since not an employment relationship.
11) Contractor works for a number of different clients.
12) Relationship terminates upon completion of specified task.
13) There is a contract between the company and the contractor.
14) The contractor's workers are not treated like the company's employees.
15) Contractor's services are peripheral to company's operation and are not integrated into it.
As an individual can display factors as both an employee and contractor, it is important to consult with a professional accountant to analyze the factors in your specific case. By taking the time upfront to properly classify an individual, an entrepreneur can save themselves both money and headaches down the road. If you have any questions or comments on this blog post, I can be reached via email at email@example.com or via phone at (306) 713-2477.
Jordan N. Brown, CPA, CA
President, Lift Accounting
(Disclaimer: This blog post is for informational purposes only and is not, nor can it be interpreted or relied on as professional advice.)