Written on behalf of Peter McSherry
It is the facts and circumstances of a working relationship, and not the label, that determines whether an individual is an “employee” or an “independent contractor” (i.e., a self-employed person). A worker’s classification has implications for both the worker and the payer.
If the relationship between the worker and the payer is that of an employer/employee, the employer is responsible to deduct Canada Pension Plan contributions, Employment Insurance premiums, and income tax from what they pay to their employee, and remit those amounts to the Canada Revenue Agency. If the employer is not making these required deductions and remitting them, that employer will be required to pay both the employer and the employee’s share of the contributions and premiums, including interest and potential penalties.
In this blog, we review several important questions to help determine whether a worker is an employee or an independent contractor for income tax purposes.
What was the parties’ intention when they entered into the working arrangement?
This question examines whether the parties intended to enter into a contract of service or a contract for services. The contract or written agreement between the parties will assist by providing context for the working relationship.
However, in a case where there is a clear contract for services with a common intent from both parties that the worker is providing services as an independent contractor, the inquiry must go further as the working arrangement must reflect that of an independent contractor.
What level of control does the payer have over the worker’s activities?
Control, in this context, refers to the ability of a payer to exercise control over the worker in terms of how the worker performs the work and what work is completed. This question also requires a review of how independent the worker is. This assessment will vary in each industry as some tasks or jobs require more supervision and direction than others.
In an employment relationship, some or all of the following may be present:
- The payer decides what tasks the worker does,
- The payer has the final say,
- The payer sets the schedule for the worker, or
- The payer trains the worker in how to perform the work.
In an independent contractor relationship, some or all of the following may be present:
- The worker works independently most or all of the time,
- The worker has no direct supervisor, or
- The worker can set their own schedule and may work for other payers simultaneously.
Who provides the tools and equipment needed to perform the job?
Tools and equipment refer to the technology, equipment, and physical tools a worker requires to perform their job duties. These items could include tools like hammers or saws, special clothing or gear, musical instruments, or vehicles like vans or trucks.
It is typically more common for an independent contractor to provide and utilize their own tools and equipment. In contrast, employers often provide employees with the appropriate work-related tools and equipment. However, this is not a hard and fast rule. For instance, a tradesperson might use their own tools even in an employee-employer relationship. A critical aspect of this analysis is to consider the degree of investment in the tools or equipment and also, who would retain these assets after the work or job is over?
Does the worker have the ability to subcontract the work or hire assistants?
In an employment relationship, the employee will likely not be permitted to hire an assistant or helper, nor would they be allowed to subcontract their own job to others. Generally, in an employee-employer relationship, the worker is expected to perform the tasks themselves.
In an independent contractor relationship, the worker may hire others to help carry out the services contracted for without the permission or authorization of the payer.
What is the degree of financial risk assumed by the worker?
In most employment relationships, an employee does not bear any financial risk. This means that they do not incur any operating expenses for the business (unless these are reimbursed) and they do not have any financial liability for the business.
On the other hand, independent contractors usually incur costs to fulfill their work obligations. This may include the maintenance of their workspace, financial liability for not fulfilling a contract with a payer, advertising or marketing expenses, or paying others to assist them in fulfilling their contracts.
What degree of responsibility for investment and management does the worker have?
Employees generally do not make capital investments into the payer’s business.
An independent contractor, however, will make capital investments into their business and may also manage staff, hire and pay others to assist, and have a business presence.
What is the worker’s opportunity to profit from the arrangement?
In an employment relationship, an employee does not usually have the opportunity to earn profit from the business or assume the risk of incurring a loss. This does not preclude contractual arrangements that provide for commission or bonuses from being considered as part of an employer-employee relationship as these incentives are not “profit”. An employee will typically have access to benefits plans such as registered pension plans, and accident, health, and dental plans.
Independent contractors face a risk that their expenses will exceed their profits, meaning that they have both the chance for a profit, and the chance for a loss. An independent contractor can take actions to try and increase business or proceeds, and decrease expenses, to try to increase their profit or reduce their loss.
Is there any other relevant information to consider?
This question allows for the consideration of any information or documents which may not have fallen under a previous category. Relevant information can include an additional contract between the parties or other information which may be pertinent to the worker’s classification.
Special Rules Apply to Certain Employees
Employers of certain employees must follow specific rules regarding Canada Pension Plan credits, Employment Insurance, and income tax. These occupations can include but are not limited to, taxi drivers, emergency services volunteers, seasonal workers, agency workers, and fishers.
Contact Peter A. McSherry Employer Lawyer for Advice on Employee Classification
The experienced employment law team at Peter A. McSherry in Guelph helps clients manage various employment law matters, including employee classification and wrongful dismissal. We represent clients throughout an employment dispute’s negotiation and settlement process, including litigation if necessary. To learn more about the importance of employee classification and how we can assist you, reach out to us online or call us at 519-821-5465.