As a growing business in Canada, it may seem like an easy answer – just hire everyone as an independent contractor. No payroll account with Canada Revenue Agency (CRA) to remit income taxes, no vacation entitlement, Employment Insurance (EI) premiums or Canada Pension Plan (CPP) contributions and even the Worker’s Compensation insurance burden goes to the contractor. The contractor invoices and the company simply pays during the next cheque run. When the company reorganizes or needs different skills, just not renew or immediately terminate the contract with the contractor. Easy, right? Wrong.
Even if both you and the worker agree to this type of arrangement, there are several bodies that can rule that the worker is actually an employee. These bodies include CRA, your provincial Employment Standards Branch (e.g. Manitoba, BC), your provincial Worker’s Compensation Bureau (e.g. Manitoba, BC), the applicable Human Rights Code (e.g. Manitoba, BC), provincial (e.g. Manitoba, BC) and federal Privacy legislation and the courts (in regards to contracts). Not only are back payments and potential fines due on vacation, EI, CPP and Worker’s Compensation insurance – if the worker didn’t submit their portion of tax, EI and CPP, it is owed by the offending employer. In Canada, as the worker typically has less power and could be unduly disadvantaged by this situation, the law leans towards it being an employee relationship rather than contractor relationship.
So when should you hire employees and when should you source contactors? A lot will depend on your workforce plan - what skills, experience and work do you need done - and is it better to buy, build or even borrow the talent?
On the compliance side, there are many considerations the various bodies will look at and also from different perspectives. CRA has several questions they consider when determining the worker’s employment status. Unsurprisingly, CRA's main focus is to ensure the correct tax is collected, while human rights tribunals and employment standards branches look to protect workers and have a higher bar to cross for them to be a true independent contractor. Determining criteria range from control over tools used, schedule followed and activities performed, to the ability for the worker to make a profit/loss and hire assistants. If there is any doubt, you can also ask CRA for an official ruling to determine if the relationship is employee or contractor. Or you can go the lower risk employee route with a well-written contract, clear policies and a modern payroll service.
As for what is best for your company's culture and context, contractors (under a contract for services - sometimes called consultants, personal service providers or independent contractors) provide flexibility for a growing company - bringing in specific skills for set project deliverables, often for short periods of time. They come with the tools and equipment needed to get the job done. This could be specialized software like a branding designer has or the volt meter an electrician uses. Contractors typically work for predetermined project deliverables whether that is predefined scope or a set budget and timeline. They work towards those deliverables rather than following a boss' schedule like 40 hours per week Monday-Friday. Related to the set deliverables, contractors may have their own employees and subcontractors they use to get the work done - both expanding the scope and increasing the speed of what can get done for you.
Some contractors offer a set price which may include bonuses and penalties tied to key performance indicators, while others work by the hour or day for you - this will be invoiced to you, with many contractors requiring a deposit and milestone payments along the way. Either option could work depending on your needs. In Canada, depending on your province, contractors will charge Goods and Services Tax (GST) or Harmonized Sales Tax (HST). And if providing goods as part of the project, there will be Provincial Sales Tax (PST) too. Within your organization, contractors may come under a different budget allocation than employees - an operating cost rather than a capital cost. By their nature, contractors are independent, likely have other clients besides you and their loyalty lies with their own company and reputation.
Employees (under a contract of services - sometimes called staff, workers or labour) will grow and adapt with your company. You develop, train and engage them - building them to be what you need - now and in the future. They will use the tools and equipment you provide such as phones and computers. You should still have set goals, performance expectations and known deliverables for your employees but these will be developed with them to align their interests with your needs. Minimum employment standards apply for hours of work and overtime pay plus how vacation and leaves are calculated and taken. Your employees may be managers and hire team members but this is on behalf of the company not to do their own work and at their own expense.
Employees will typically have a salary or hourly wage (commission and piece work are other options but minimum wages still apply). This is determined on: a) the value of the work they do and b) market conditions (see BrightGo's expertise share on What to Pay an Employee). With employees, there are still taxes to pay, but instead of GST you need to collect and remit provincial and federal income tax for the employee. As well, an insurance payment for EI and workers' compensation is necessary, and making CPP contributions. These employee costs are operating costs and reduce the amount of business taxes you need to pay. As an employer, you can change the conditions and type of work the employee has: just note that, depending on what the change is, you may be required to give a notice period or compensation for the changes. You may terminate an employee for "just cause" if they've done something that breaks the employment agreement like stealing or insubordination; though more likely will be "without cause" and given notice, pay in lieu of notice or a combination thereof. By their nature, employees are dependent, likely only have you as their employer and their loyalty lies with you and your company's products and vision.
Growing your team in Canada is an exciting time in your company. There are many ways to get more work done - and both employees and contractors could be a part of that plan. Just ensure you get it right for your company's needs and stay on the right side of the law. A well thought out workforce plan is a key tool to finding the right mix and one of your best tools for increasing clarity and reducing liability is an enforceable and well written (employee or contractor) agreement.
Have more questions? Need help with your workforce plan, contracts, setting up a Canadian payroll system or creating a goal-aligned performance program for your team? Contact BrightGo Solutions today to tap into our expertise.