Key Differences Between The Classification Of Independent Contractors Vs Employees
Knowing for certain whether a worker is an independent contractor or an employee is relevant to both the worker and to the employer/person contracting the worker’s services (also known as the payer). Classifying a worker incorrectly carries risks for both parties.
Our Richmond Hill employment lawyers can help you minimize the risks by analyzing your situation and providing advice on the key differences between the classification of independent contractors vs employees.
Why is it important for a worker to know the difference?
The worker’s employment status affects:
- the worker’s right to collect employment insurance
- the worker’s ability to claim certain deductions or expenses under the Income Tax Act
- how the worker is treated under the Canada Pension Plan.
Why is it important for an employer to know the difference?
Independent contractors and employees are treated differently for tax purposes. Employers are required to withhold income tax, Canada Pension Plan contributions and Employment Insurance premiums from an employee’s paycheque and remit it to the Canada Revenue Agency (CRA). There is no such requirement for independent contractors.
An employer who fails to make the required deductions from an employee’s paycheque will be held responsible for the amounts it failed to deduct. Over time, this can add up to a significant amount of money, especially if more than one employee has been misidentified as an independent contractor.
How does the government determine a worker’s employment status?
In situations where either party is unsure about a worker’s employment status, they can request a ruling from the CRA. The CRA uses the following criteria to determine whether the worker is an employee or an independent contractor:
- the intent of each party when they entered into their working arrangement
- the level of control of the payer over the worker
- the ability of the worker to subcontract the work or hire and manage staff
- the degree of financial risk assumed by the worker or financial investment required by the worker
- the ability of the worker to profit from the working arrangement
- other factors, such as a written contract between the parties.
A worker might be an employee if:
- the payer dictates what the worker does on a daily basis
- the worker needs the payer’s permission in order to accept work from others
- tools and equipment are supplied by the payer
- the worker is paid a predetermined amount not tied to the profits and losses of the payer’s business and may be entitled to benefits such as a dental insurance or pension plan.
A worker might be an independent contractor if:
- the worker is free to work on their own schedule
- the worker can accept work from multiple different payers and can accept or refuse to take work from the payer
- the worker owns their own tools and equipment and supplies their own work space
- there is a risk of the worker losing their investment or a chance of the worker making a profit over and above the expenses they incurred to do the work
- the worker can hire staff to help them perform the work or can subcontract a replacement to do the work for them.
No single factor is determinative and the relevance of each factor varies depending on the nature of the work or industry in question. Our employment lawyers can help you understand the key differences between the classification of independent contractors and employees in your particular situation. Contact us to book your consultation today.