Defending Contractor Status

J. Geoffrey Howard

November 2011

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Introduction

This presentation will:

1. Discuss the legal and related financial implications

2. Summarize some potential liabilities

3. Discuss the legal test for distinguishing contractors from employees

4. Dispel some common myths

5. Conclude with steps to minimize the risk

Employees Compared to Independent Contractors

Income Tax, Employment Insurance, CPP and WCB

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Employee Independent Contractor

Employer must withhold employee EI and CPP contributions

No withholding of any taxes or EI/CPP contributions

Employer must pay Employer contributions to EI and CPP

Employer pays GST/HST

Employer must pay WCB levy No liability for WCB premiums

Employee has very few deductions

Contractor can deduct any expense reasonably related

Employees Compared to Independent Contractors

Employment Standards

•Employees enjoy all the rights under the ESA; independent contractors have no protection

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Employee Independent Contractor

Statutory holiday pay(depending on provincial rules) and vacation pay

Employer only pays for work actually done

Overtime n/a

Maternity, parental and other ESA leaves

n/a

Statutory notice of termination n/a

Employees Compared to Independent Contractors

Common Law

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Employee Independent Contractor

Employer must provide more onerous “reasonable” notice/severance

General Rule: little or no notice of termination required – although law is evolving forlong-term contractors dependent on one client

Other

Employee Independent Contractor

Greater administrationpayroll time and cost

Less administrative time and cost

Employer liable for allnegligence of the employee

Client of contractor generally not liable for negligence of contractor

Understanding the Legal Test

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• Understanding the legal test is critical because:

A. Government agencies (CRA, Workers Compensation, Employment Standards) can challenge how parties have characterized a relationship

B. Generally biased in favour of employment relationship

C. Audits are triggered when former contractors claimEI benefits, ESA entitlements or make WCB claims

D. Deemed employers can be held retroactively liable for years of unremitted EI/CPP contributions, WCB levies, overtime, etc.

Understanding the Legal Test

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1. CRA Audit

• 4 years of both employer and employee EI andCPP premiums plus interest and penalties

• CRA can also claim income tax

2. ESA Claim

• Amounts assessed vary between provinces and individual circumstances

• Vacation pay at 4-6% over past 2-3 years

• In some cases, statutory holiday pay

• Termination pay

The Test for Contractor Status

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• The courts and tribunals consider a variety of criteria, no one of which is determinative

A. The traditional “four factors” were:

1. How much control over how the work is done?

2. Who owns the “tools” of production?

3. Is there a chance of profit or risk of loss in the compensation arrangements?

4. How integral is the work to the employer’s business?

The Test for Contractor Status

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B. Other relevant factors include:

1. The parties’ agreement and practices/perceptions

2. Whether the “contractor” is really “carrying on business”

3. Whether the contractor can delegate the work

4. The degree of financial investment or responsibility assumed by the contractor

5. How economically dependent the worker is on the employer

C. WCB decisions emphasize who is able to control workplace safety

Common Myths

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Common myths include:

A. A written agreement cannot be challenged

B. If the contractor invoices, contractor cannot be an employee

C. If the contractor is incorporated, no employment relationship can be found

The Reality

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It is impossible to eliminate the risk, but here are some practical tips to minimize that risk:

A. Ensure your contractors understand the benefits of contracting, including:• greater flexibility;• no requirement to pay employee EI premiums and no

tax automatically deducted;• the right to deduct all reasonable business expenses;• Explain that fees would have to be significantly lower

if contractor was an employee due to his/her payroll overhead

The Reality

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B. Minimize supervision and direction of instruction

C. Be very clear and consistent in all dealings

D. Encourage contractors to provide “tools”,e.g. .

Ensure Contractors “carry on business”

E. Encourage/require contractors to act like they are carrying on business by:

• Invoicing regularly

• Charging and remitting taxes (GST/HST)

• Marketing themselves and developing work with others

• Providing additional “inputs”

Contract Content

F. Have all contractors sign agreement• Define obligations;

• Define any quality standards or qualifications needed;

• Confirm contractor status and freedom to pursue other work;

• Permit you to terminate/alter terms of engagement on appropriate notice;

• Include an indemnity in the event of any claim relating to employee status

The Reality

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G. Consider requiring proof annually that contractor:

• Has paid CPP premiums and filed tax return as a contractor

• Has paid own WCB premium

• Maintains any professional liability insurance

H. Encourage contractors to incorporate or sub-contract

I. Require contractors to arrange for qualified substitutes and have the contractor pay the substitute

The Reality

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J. Do not let contractors take on other general duties

K. Consider setting “value” or risk-based fees

L. Avoid “Red Flags”

• Representing/treating the contractor as an employee

• Having the contractor working exclusively for your studio for an extended period

Thank You

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J. Geoffrey HowardTel: 604-891-2279Email: geoffrey.howard@gowlings.com