Do you know the differences between hiring employees and contractors in your Canadian business?
Feb 04, 2022
What are the legal differences between hiring an employee versus hiring an independent contractor?
Are you planning to hire people to help you grow your business? Congratulations! This is an important step for every business. It is important to understand the legal implications.
- Employees - The business becomes “vicariously liable” for all of the actions of an employee. The business owns the employee mistakes.
- Contractors - The Contractor remains liable for their own actions, including potential mistakes. They should get their own licenses and insurance to cover these.
Making Remittances to Canada Revenue Agency (CRA)
- Employees - The business is responsible legally to make tax and other remittances on behalf of the Employee - Income Tax, EI, CPP. These amounts become liabilities of the business and can become a liability of the owner.
- Contractors - The Contractor is responsible legally to make their OWN tax and other remittances on behalf of the employee - Income Tax, EI, CPP.
Employment Laws and Minimum Standards
- Employees - The employer business must follow employment standards set in legislation. Except for limited industries, these are provincial laws. They set minimum standards for such things as pay rates, vacation, termination notice, overtime.
- Contractors - The Contractor is not covered by employment standards. The terms of the contract will govern how the Contractor gets paid and other terms and conditions.
How to Determine Whether You are Hiring an Employee or Contractor
So now that you know some of the different legal implications, how can you make sure that you hire someone in the proper category?
Businesses may be tempted to hire contractors so that they have fewer upfront costs (see remittances above) and also so that they do not have to make a more permanent commitment to one person and skill set. This is all good, you just have to exercise some caution.
The Legal Test
If you are not careful, Canada Revenue Agency could decide that your new hire is an employee rather than a self-employed contractor. This is a situation that you REALLY want to avoid as it could result in owing back remittances.
Thanks to a case involving the dancers from the Royal Winnipeg Ballet, we now have a clear legal test to help with this.
First step - determine the subjective intent of each party to the relationship. This can be determined either by the written contractual relationship the parties have entered into or by the actual behaviour of each party, such as invoices for services rendered, registration for GST purposes and income tax filings. It is clearest if you have a written contract.
Second step - determine whether an objective reality matches the intent of the parties in step 1. The facts need to match your intent when you balance the facts in the four categories below.
In this step, we need to apply our own facts against a four-part legal test:
So you want to hire an independent contractor (self-employed) person and NOT have them considered an Employee?
Here are some of my best tips for hiring an independent contractor:
- Document your intentions in writing via a signed contract. This will make the intent clear for part 1 of the test above.
- Get the Contractor to invoice your business for services provided. Do not pay them as if they are on your payroll.
- Make sure the Contractor is set up as a business and has a CRA Business Number.
- The Contractor should be responsible for their own expenses including cost of inputs and insurance. They can be reimbursed for certain job-specific costs like travel.
- Give a Contractor the ability to decide HOW to do the work including allowing them to subcontract.
Getting It in Writing
So you have gotten this far and are thinking - ok so now where do I find the appropriate legal contract templates? Don't worry, I've got you.
The Legal Hiring Template Package in my online store has all of the templates and video lessons that you need to implement this newfound knowledge. And it will give you peace of mind as you hire new people that you are covering all the bases and make the expectations clear upfront.
Have questions or comments? Reach out to me at [email protected].