Employee or Contractor – How to Tell the Difference

Did you hire an employee or a freelancer?

Are the people who work with you employees or contractors? It’s critical to know the answer because getting it wrong can be costly and result in issues with the Canada Revenue Agency.

Factors to Consider When Determining If a Worker is an Employee or a Contractor

There is rarely a black-and-white answer when assessing whether you are dealing with an employee or a contractor.

The most important issue to answer is whether the worker is performing services as a sole proprietor (contractor) or as an employee. We’ll use the term contractor to refer to a self-employed person in this article.

A variety of characteristics are assessed, and then the total working relationship as a whole point to either an employee or a contractor. What are the most important of these? That’s what we are going to take a closer look at here.

INTENTION

The first thing to consider is what the intention was when the working partnership was formed.

Was it supposed to be an employer-employee connection or a commercial partnership between the two parties? This is referred to as a service contract (employer-employee) or a contract for services (business relationship).

Both parties’ intentions are a good beginning point, yet intent and reality are frequently at odds. Both parties may have meant to perform services as contractors, but the circumstances end up indicating an employer-employee relationship, from a legal point of view anyway.

The remaining aspects will either confirm the original intent or expose the true nature of the working connection (as determined by CRA’s standards).

CONTROL

Who decides when and how work is completed? This is an important consideration while establishing a working partnership.

It indicates an employer-employee relationship if the payer has more influence over how and when the task is completed.

Here are some frequently encountered instances of control elements that reflect employee and contractor status.

Employee Control Indicators

• The payer will frequently direct how and when the work is executed, as well as evaluate the finished work.
  The payer determines how the work is conducted as well as the end product.
  The manner and amount of payment are under the control of the payer. Salary talks can still take place, but in an employer-employee relationship, the payer ultimately has the final say.
  It indicates an employer-employer relationship if the worker needs permission to work for other companies.
  The payer or other workers provide training or direction on how to complete the task.
  In the general workplace, the worker is subordinate (lower in status) to the payer.

Contractor Control Indicators

• Contractors are frequently independent of the payer.
  There is no one monitoring the worker’s actions or prescribing how and when they are accomplished.
  The employee is free to work for other clients and can deliver services to many clients at once.
  As in a subordinate relationship, the worker has the option of accepting or declining labor from the payer.
  There is no continuity or loyalty in the working relationship as there is with an employer. The contractor has complete control over whether or not she works for the payer.

EQUIPMENT AND TOOLS

The next consideration is who will offer the essential tools and equipment to perform the tasks.

In general, an employer will give tools and equipment to her staff, whereas contractors will bring their own and use them to perform the job.

True, employees must sometimes furnish their own tools in order to complete some of their tasks, but this is just one of many considerations to keep in mind.

Employee Indicators for Tools and Equipment

• The majority of the tools and equipment required to accomplish the work are provided by the payer.
  The payer is responsible for the tools and equipment’s upkeep and repair.
  The payer owns the tools and equipment and retains the right to use them.
  Any equipment purchased by the employee is reimbursed. By the way, the term equipment refers to things like software too, which some business owners often overlook as a factor when determining the real working relationship they have with their workers.

Contractor Tools and Equipment Indicators

• The worker is in charge of repairs and maintenance as well as providing the tools.
  The worker has invested their own money in the equipment and retains ownership and use rights.
  The employee provides her own workspace and works from there extensively.

SUBCONTRACTING CONSIDERATIONS

Is it possible for the worker to hire an assistant or subcontract the work? This is an important consideration that will influence the character of the working relationship.

Employees can’t usually hire an assistant or outsource their work, but contractors can.

Employee Subcontracting Work Indicators

• The employee is not permitted to employ an assistant or subcontract the work.
  The employee is unable to delegate the work to someone else.

Contractor Work Indicators for Subcontracting

• The worker is not required to perform the work themselves. They can either hire someone to assist them or finish the task alone.
  The payer has no say in who the worker hires to help them.

RISK AND REWARD IN BUSINESS

The nature of the working relationship can also be determined by whether the worker faces any financial risk or has a profit opportunity.

If the worker faces financial risk or has the potential to profit, he or she is a contractor, not an employee.

Employees are rarely at risk of losing money as a result of their labour. They also normally have a defined amount of compensation for finishing a job, so there is no room for profit.

Employee Financial Risk and Reward Indicators

• The worker is usually not accountable for any of the operating costs associated with the job.
  If the employee fails to meet her commitments, she is not financially accountable.
  The worker is rarely in a position to realize a profit or loss in the workplace. They get paid the agreed-upon amount.
  Benefit schemes that are generally only available to employees are available to the worker.

Contractor Financial Risk and Reward Indicators

• The worker is allowed to employ and pay workers out of her own pocket to assist her with the work.
  The employee does a lot of her work from her own office, which comes with its own set of expenses.
  Rather than being hired on a permanent basis, the person is hired for a specific job.
  If the worker fails to meet the contract’s responsibilities, she may be held financially accountable.
  Unlike an employee, the worker does not receive benefits from the payer.
  Outside of the current working arrangement, the employee continues to advertise her skills in order to work with others.
  The worker is paid a set rate and is reimbursed for expenditures incurred while performing the services. If expenses exceed expectations, this results in a variable amount of profit or even a loss.

INVESTMENT

Is there any investment required of the worker in order to supply the services?

A substantial investment demonstrates that the connection is between a payer and a contractor, rather than between an employer and an employee.

Employee Investment Indicators

• The worker has no financial stake in the payer’s company.
  To do the job, the worker does not need to furnish any important tools or equipment.

Contractor Investment Indicators

• The worker has put money into finishing the job. This could be in the form of monetary compensation or the provision of equipment.
  The worker employs and compensates others to assist with the job.

Employee or Contractor: Putting It All Together

In order to determine the nature of the working connection, you must analyze all of the variables listed above and reach a conclusion. The conclusion is based on the entire working relationship and is open to professional interpretation.

If all of the factors point to one form of working relationship, then you can move forward.

Unfortunately, even when looking at the entire picture, it is not always evident. A worker may choose his own timetable and use his own tools, but he or she has no control over how the work is accomplished and is unable to recruit an assistant. That’s two indicators in each direction… what now?

Fortunately, there is expert help available. For example, an accountant can assist you in making this very important determination. Your accountant can use their professional judgment to counsel you once they’ve analyzed all of the factors we have mentioned, and then help you structure things so that everyone is happy, including the CRA!