Employee or Self-employed. What is the test?

Should employers be cautious?

In today’s constantly evolving work environment, being a self-employed contractor is becoming more the norm, rather than the exception.  An individual’s working status has become increasingly important with the trend towards outsourcing and short-term contracts.   Employers are seeking ways to reduce overhead and the costs associated with employee benefit programs.

As well, individuals are sometimes choosing to be self-employed rather than an employee.  Some of this is due to the need for some flexibility in working arrangements.  Some of it based on some notion that being self-employed has numerous tax benefits.  What comes into play from the tax department’s point of view is the effect on entitlements to Employment Insurance and Canada Pension Plan benefits.
In a recent Federal Court of Appeal decision (1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue), 2013 FCA 85), the Court ruled in favor of Canada Revenue Agency and reconciled the competing tests on the proper way to determine whether an individual is a contractor or truly an employee.

The Court of Appeal refined a number of lower court decisions into a two-part test.
The first step is determine if there a mutual understanding or common intention between the parties regarding their relationship?  This step generally will be determined by the written contractual arrangements and behavior of the parties.  For example, is there a written agreement, were invoices issued for services rendered, was the service provider registered for GST, were the income tax filings consistent with that of an independent contractor?

Employers should be cautioned that the existence of a mere contract is not enough to ensure that the worker is an independent contractor or that there is not an employer/employee relationship.
If there is a contract, then the second step is objective: do the facts support that the worker is providing services as a business on their own account?  There are a number of factors to consider:

  • The level of control exercised over the worker’s activities;
  • Does the worker provides his or her own equipment;
  • Do they have a say in hiring helpers and managers ;
  • Have they assumed any financial risk; and,
  • Do they have an opportunity of profit in the performance of their tasks?

The risk of an incorrect characterization of a worker as an independent contractor as opposed to being an employee can expose an employer to liability.  Canada Revenue Agency can assess the employer for failing to make and remit the appropriate tax deductions at source, failing to make contributions to a host of social programs and all related penalties and interest.  Employers should refer to the Canada Revenue Agency Guide RC4110 if they are unsure of the status of their workers.