Is your Contractor Really an Employee?
The so-called “gig economy” has been in the news a lot. The rise of short-term contracts (freelancers, consultants, contractors) in the work landscape has been facilitated by technological advances and freelancer websites proliferating on the internet. The software company Intuit believes that as much as 45% of Canadians will be self-employed by 2020 and has released a new app for them.
Employers are taking advantage of this trend as a cost-savings strategy, and it can be a good one, especially in industries where business volumes fluctuate. It allows organizations to be nimble by bringing in specialized skillsets for particular one-off projects. Compared to payroll employees, freelance contracts offer greater flexibility when terminating regardless of reason. HR professionals should ensure that they have access to a pool of independent contractors they can draw on at the appropriate time. However, there are risks that can arise with the retention of freelancers that we’d like to bring to your attention.
Let’s consider a situation where you retain an independent contractor for a project. Your agreement may be titled “Independent Contractor Agreement.” Both you and the worker intend the relationship to be that of an independent contractor. The intent of both parties is only part of the equation, however; whether a worker is, in fact, a contractor is determined by assessing an overarching set of factors. This determination typically happens when someone complains to the employment standards branch, Revenue Canada, or files a lawsuit.
The courts and Revenue Canada have developed a series of criteria; in essence, they focus on the organization’s degree of control over the actions of the worker. This includes whether it manages the how, where and when the work is done, as well as the ability of the worker to hire others to complete the work. Other relevant questions include how integrated the worker is in the organization – for example, whether they work from home – and who owns the tools used to execute the work.
If we think of employment and independent contracting as being on two ends of a spectrum, then the more risk of financial loss or an opportunity for profit that there is for the worker, the closer it is to the independent contractor end of the spectrum. A significant investment by the worker also leans in this direction. If payment is by the hour, day or week instead of a fixed amount, then the worker is closer to the employee end of the spectrum, because there is no risk.
An organization may face significant liability and penalties if they misclassify a worker and engage them as a contractor when they are really an employee. Risks include payment of:
- Vacation pay
- Workers Compensation contributions, penalties and any costs connected to an injury
- Penalties for not complying with employment standards legislation
- Past contributions for CPP and employment insurance, plus interest
- Income Tax remittances plus interest and penalties of up to 20%
The growth of the freelance economy is one factor putting pressure on the tax base; this issue may give rise to increasing vigilance by Revenue Canada.
How To Protect Yourself
As an employer, the first thing to do is to inventory your current workforce to determine who you are treating as an independent contractor, then analyze their status to determine how they should really be classified. Next, make sure that your contracts are reviewed and standardized to focus on the outcome of the contract and not the way it’s performed; this may involve giving more control to the contractor over where and how the work is done. Canadian law changes often, make sure you retain an employment lawyer to review your contracts. Finally, consider using a contingent management solutions provider to manage freelance contracts; using a middleman may reduce risks and save you time and money.