Businesses may occasionally opt for hiring an independent contractor rather than an employee to provide a certain set of services. This can be beneficial for a business as it eliminates certain obligations that would be incurred upon hiring an employee, such as remitting taxes on wages and providing employee benefits. Problems tend to arise, however, when the line between an independent contractor and an employee isn’t clear. This brief blog post will look at the criteria the Canada Revenue Agency (CRA) uses to differentiate between an independent contractor and an employee. This criteria should be referred to when determining the nature of an employment relationship in order to establish intention as clearly as possible and leave little room for interpretation.
The CRA considers the following factors when differentiating between independent contractor arrangements and employer-employee relationships:
1. Control
The CRA defines control as the individual engaging the independent contractor ( referred to as the payer) having the ability to dictate the way in which a service is provided by the independent contractor (referred to as the worker). For example, if a payer is heavily directing and controlling how and when a certain service is carried out, it is likely to be interpreted as an employer- employee relationship. On the other hand, when a worker has minimal to no oversight over his or her work product, this would likely point to an independent contractor type of relationship. Another defining feature of an independent contractor is that they have freedom to
pick and choose work from a variety of employers with no expectation of continuity or loyalty.
2. Tools and Equipment
Independent contractors often invest in their own tools and equipment that are used to carry out their services. This is another factor pointing to the lack of control the payer has in this type of relationship. Since employees may also be required to invest in their own tools and equipment, it isn’t always clear what the nature of the employment relationship is. That said, independent contractors are more likely to be responsible for maintaining and investing in their own equipment, tools and workspace.
3. Subcontracting
Whether a worker has the ability to subcontract or hire workers to perform certain tasks can point to the degree of autonomy an individual has. Independent contractors retain the ability to hire assistants to work alongside them. When hiring an independent contractor to perform a service, the payer has no say in whether the worker can hire its own assistants or employees.
4. Financial Risk
Financial risk considers the degree of risk the worker takes. Employees do not usually take any risk in an employee-employer relationship since this is a continuous type of relationship and the employer determines the time and rate of pay. Independent contractors, on the other hand, do take on financial risk such as when they hire workers or have their own workspace.
5. Responsibility for Investment and Management
This factor considers the degree to which a worker may be required to make an investment in order to provide services. Employees will rarely be found to have made an investment in the provision of their services. Independent contractors, however, may find themselves managing and investing in hired workers.
6. Opportunity for Profit
Whether a worker can incur a loss or gain profit will be indicative of the degree to which the worker controls the business aspects of the services provided. Independent contractors have a chance of earning profits because they have the ability to pick and choose their contracts.
The factors that differentiate between an employee from an independent contractor are not always clear cut which is why it is important to be mindful of the criteria discussed above. Connect with us today if you have any questions or concerns about the information discussed in this post.