"Is my worker an employee or an independent contractor?" This is a common question that we often come across from our clients. While each has its own pros and cons, the classification is subjective and requires a great deal of judgement. Getting the correct classification is crucial to avoid fines and penalties while having access to many benefits.
We are often approached by businesses to consult and determine which type of relationship they have: an employee-employer or a worker-payer relationship. Many times, after careful analysis of the facts and circumstances, we have noticed that there is a misclassification of individuals in these areas or it wasn't as clear cut as originally thought. In some situations, the relationship is quite clear but for others they become quite blurry. In these situations, an in-depth analysis and review should be made to understand the facts and circumstances in order to properly categorize your workers.
An individual who is deemed to be an employee is subject to the following:
Limitations in terms of deductions available
The employer is required to withhold and remit payroll taxes on your behalf (subject to CPP and EI)
The employer is required to make CPP and EI contributions
Workplace Safety and Insurance Board (WSIB) remittances are required by the employer
An employee-employer relationship is governed under guidelines of the Employment Standards Act (ESA) which provides protection of severance, pension, injury and compensation rights
On the other hand, an individual who is deemed to be an independent contractor is subject to the following:
The contractor can deduct all reasonable business expenses related to generating income from the business (with certain exclusions)
More autonomy in how the work is completed and ability to share in the profit/loss of the job
Reduce payroll related expenses. The business is only required to match CPP contributions as a self-employed individual is typically EI exempt
Individuals are not governed by the ESA and as a result would not have the same access to job protection
Depending on the side you're on (employee or employer), it may be advantageous for you to be classified as an employee or independent contractor as it can help you save on payroll related costs or gain access to significant business expenses to reduce your taxable income.
Classification Guidance Tests:
Since the definition of an employee is not specifically defined in the Income Tax Act, there is a great deal of complexity in making this judgement. As a result, some guidance has been made available that can help make this determination using case law. Court rulings have provided some precedents which have been summarized into three tests.
Economic Reality Test
Specific Result Test
NOTE: Please note that there is no one specific test that can result in a clear-cut determination. All of the facts and circumstances in the situation must be assessed together.Ultimately, you want to determine what the true intent of the working relationship was between the two parties when they entered in the working arrangement.