Employee v Independent Contractor
One common issue facing businesses of all sizes is how they should organize their human resources – should they be employees or independent contractors. From a tax perspective, businesses prefer independent contractors over employees as they are not required to withhold income tax or pay the employer’s portion of Canada Pension Plan and Employment Insurance, provincial payroll taxes, or Worker’s compensation premiums. However, the determination of whether an individual is considered an employee or an independent contractor is fact-based.
The leading case on this issue is 671122 Ontario Ltd. v. Sagaz Industries. In the case, the Supreme Court of Canada summarized a non-exhaustive list of factors used in the determination:
1. The level of control exercised by the “employer” over the individual. A high level of control generally indicates an employer-employee relationship.
2. Whether the worker provide their own tools. If they do, this may indicate an independent contractor relationship.
3. Whether the worker hires their own staff. If they do, this may indicate an independent contractor relationship.
4. The worker’s degree of responsibility for investment and management. A low degree of responsibility generally indicates an employee-employer relationship.
5. Whether the worker has an opportunity for profit/loss. If they do, this may indicate an independent contractor relationship.
One thing to notice is that the existence of an independent contractor agreement is not determinative. Instead, the actual facts of the relationship and the interaction between the “employer” and the individual determine the classification of the relationship. Therefore, businesses that are looking to have independent contractors instead of employees need to make sure that the relationship actually resembles an independent contractor relationship.
Originally posted on www.piccololaw.ca, used with permission.
TaxChambers LLP is collaborating with Andersen Global® in Canada.