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Employee or Independent Contractor: What Works for You?
There is much discussion regarding the pros and cons of being an employee vs. an independent contractor for the individual, but what about from the business owner’s point of view? You know what work needs to be done for your business to be successful – but is it best to hire an employee to carry out the task or hire an independent contractor? There are benefits and drawbacks to both kinds of employment as well as confusion as to what the difference between the two forms of employment really are. As an employer, you need to understand your obligations in regards to taxation and employment standards as well.
What would CRA say?
For taxation purposes, the Canada Revenue Agency (CRA) has the final say in whether an individual working for you is an employee or an independent contractor. Regardless of what your contract with the individual states as your working relationship, CRA may deem a contractor an employee. Here are a few of the basic tests used by the Employment Standards Branch:
Control: The level of control an employer has over the worker’s activities will always be a factor. An employment relationship implies some supervision or control over the worker. The right to exercise control is significant, whether or not the control is actually exercised. Is the person under the direction and control of another regarding the time, place, and way in which the work is done? Is the person hired, given instruction, supervised, controlled, or subject to discipline? Did the person answer a help wanted ad, was told what to do, how to do it, and when to do it? Did the person have to do the work him or herself, or could that person give the work to another to do? Does the person perform work normally or previously performed by an employee? The greater degree of control that the individual is under, the greater the likelihood that they are an employee.
Ownership of Tools: Does the person use tools, space, supplies, and equipment owned by the company? If so, this would indicate an employment relationship.
Chance of Profit: Does the person have a chance of profit? If their income is always the difference between the cost of providing the service and the price charged for the service, the worker may not be an employee.
Risk of Loss: Is the person at risk of losing money if the cost of doing a job is more than the price charged for it? If not, this would indicate an employment relationship.
Basically, if it walks like a duck and talks like a duck, it’s a duck. In other words, even if you have entered into what you think is a contractor agreement with an individual, if that individual walks and talks like an employee, the CRA will deem them an employee.
What Works for You?
As a business owner, there are several benefits to hiring an independent contractor rather than an employee. Depending on the kind of work you need completed, here are a few benefits and drawbacks of an independent contractor to consider:
Benefits of Hiring an Independent Contractor
- You pay for the services they deliver, not for the time they spend working on it regardless of outcome.
- For project-based work, you can hire additional contractors for busy periods and avoid being overstaffed during slow times.
- You can hire a specialist for each task.
- A contract is easier to end than having to lay off or terminate an employee.
- Payment for services is via invoices rather than payroll. This eliminates need to track and submit payroll taxes, CPP, vacation, and sick time.
- Supervision is minimal and many HR functions are unnecessary, such as ensuring the worker has a career path, paying for education, and training.
- A contractor will demand higher pay to compensate for their higher degree of personal risk.
- They will have several projects/ employers at one time and will not be entirely focused on your company.
- If your business is specialized, you will need to invest time in training each contractor to your procedures and style.
- You might lose consistency because they are gone when the job is complete. You may be able to set up an ongoing maintenance/consulting contract for ongoing support; however, there is no guarantee that the same contractor will be available for future work.
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