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What is the difference between an employee and a contractor?
Editorial by Christian Saint Cyr
National Director / Canadian Job Development Network
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With the growth of the gig economy, workers are increasingly being asked whether they would consider working as an independent contractor. This is a natural response for many employers as they are looking to cut costs such as benefits, CPP contributions, Employment Insurance, workers’ compensation, insurance and all of the costs associated with complying with employment standards.
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There may be very good and legitimate reasons for asking someone to be an independent contractor, but often-times an employer is looking to limit their liability. When an employer hires someone, there may be a written contract, but there is also an implied contract that both parties, but mostly the employer agrees to legal and financial obligations.
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These obligations include deducting and paying source deductions (such as tax, E.I. and C.P.P.) to the Canada Revenue Agency, complying with overtime pay, providing minimum employment levels (such as a minimum shift of four hours), providing workers compensation protections, ensuring a safe workplace and the requirement to pay some sort of severance should employment end. Many of these protections are enforced by organizations such as the Canada Revenue Agency, the provincial employment standards branch, provincial workers’ compensation agencies and human rights councils.
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There are also legal protections that require the courts to determine and enforce issues such as severance. Rather than employment standards which enforce a minimum expectation (such as the payment of over-time), the courts utilize precedent to determine fair compensation such as adequate severance or the damage to a person’s employability. These payments, when successful, are typically far greater than the minimum’s enforced by government agencies.
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The employer will also have an implied responsibility to pay internally determined costs such as benefits, flex days, pension plans, investment contributions, professional development, parental leave, bonuses, etc. While the employer may choose a combination of these elements to build and maintain their workforce, they also may be negotiated with a group of employees as part of a collective agreement.
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There is a tremendous amount of liability or cost associated with hiring employees and by calling someone a contractor, many employers expect to release themselves from these liabilities.
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For instance, if I come into work and the employer sends me home, they may be responsible for paying a minimum four-hour shift, while as a contractor they would owe me nothing unless specifically stipulated in our contract.
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If I were injured on the job, not only would I have financial protection, in many cases my employer would have a duty to accommodate my return-to-work.
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This is not to say there aren’t good reasons for employers or organizations to contract-out services. Contracting out may result in having a team of people do the work rather than just one individual. It may also accommodate special technology or expertise that no single employee can provide. In many cases, an employer will hire a consultant because they simply can’t find anyone to take the job.
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For the contractor, there are also good reasons to agree to contract work. Contracting may pay far better, provide far greater flexibility and allow an individual to focus on just the work that needs to be done.
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Many times, people believe that if they have multiple organizations they contract to then they must be a contractor. This is not true unto itself. It is a factor, but you can still be a contractor and have only one client or be an employee and work for multiple employers.
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The Canada Revenue Agency (CRA) and the provincial employment standards organizations each have criteria to determine whether a person is an employee or a contractor.
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Just some of the factors examined by the CRA include:
- the level of control the payer has over the worker's activities
- whether the worker or payer provides the tools and equipment
- whether the worker can subcontract the work or hire assistants
- the degree of financial risk the worker takes
- the degree of responsibility for investment and management the worker holds
- the worker's opportunity for profit
- any other relevant factors, such as written contracts
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The CRA looks at the answers separately for each element and then together.
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If an employer is trying to avoid liability by hiring someone as a contractor, the contractor is also taking on a great deal more risk.
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Working as a contractor, an individual might want to think about the following questions:
- If I’m injured on the job, do I have my own workers’ compensation account?
- If my contract is terminated or there is no more work, do I have sufficient financial resources to cover my expenses?
- Can I afford to continue if my client doesn’t pay or takes too long to pay?
- How much is it going to cost to do the work I’m agreeing to?
- Will I be covering my own income taxes and C.P.P. contributions?
- Have I arranged for my own extended benefits?
- Do I have liability insurance?
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The costs and potential costs to a contractor are considerable and individuals should carefully consider this pathway. If I person is comfortable with the potential downside, they should agree to a payment that is considerably higher than what they would earn as an employee.
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As an employee, you may receive work inconsistently and this would significantly impact what you charge. For someone who is working every day, an agreed payment may be 50 per cent higher than their wage as an employee. If the contractor is working on major projects, but they are infrequent, the contract fee might be several times what they would earn as an employee.
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As a general rule, factoring in the lost benefits of being an employee and the potential costs, a contractor should charge at least double what they would earn as an employee. This could be a little lower if the work is very regular and there is high-trust with the client.
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Also, if an individual is going to act as a contractor, it’s helpful to have a ‘contract’ that stipulates exactly what is expected from each party, potentially penalties if the contract is not adhered to and a process to resolve any conflicts. I would highly recommend consulting a lawyer to assist with this process.
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The ongoing skills shortage and realities such as artificial intelligence and a more global economy is likely to continue to driver a greater move to self-employment. This is not a bad trend, but job seekers should be mindful of what they are committing to and their own personal suitability.
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We’ll be discussing the growth of self-employment in more detail at our #MotivatingMondays meeting of the Canadian Job Development Network, Monday March 11th at 8:30am Pacific; 9:30am Mountain; 10:30am Central; 11:30am Eastern; 12:30pm Atlantic and at 1pm in Newfoundland. Visit: www.MotivatingMondays.ca on Monday to join the session LIVE.
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