HUNTSVILLE - One of the most common grey areas encountered in business today is the issue of whether someone qualifies as a self-employed individual or an employee.
Very often an employer will prefer to hire someone as a self-employed contractor, particularly if the work is short-term. Sometimes the worker prefers to be treated as a contractor to take advantage of some of the tax deductions available to self-employed individuals. There are some important considerations, however, when determining whether or not a person can be hired as a self-employed individual, or should in fact be put on the payroll.
Revenue Canada is one government agency that has defined some of these considerations. They mainly deal with the relationship between the employer and the worker.
An employee is generally in a subordinate position to the employer, whereas in the case of a self-employed individual, it is more of a business-to-business relationship.
For example, if the employer set the hours of work, lays out exactly what is to be done, how it should be done, and supervises the work as it progresses, then the worker is probably an employee, and Revenue Canada would expect the employer to deduct income tax, CPP and EI premiums from the worker’s pay.
If, on the other hand, the worker sets his own hours and works independently, and is free to go to another job on any given day if he sees fit, he would probably qualify as a self-employed contractor. In this case, the worker is responsible for his or her own income tax and CPP contributions, and is not eligible for employment insurance if out of work.
Another factor used in determining the status of a worker is ownership of the tools and equipment used to do the work. Sometimes employees can be required to supply their own tools for a job.
However, if the worker has a substantial investment in tools and equipment, retains all rights over the tools, and is responsible for their repair and maintenance, it is likely that the worker would qualify as self-employed.
If in addition the worker supplies the workspace (a workshop or office for example) this supports the business-to-business relationship and would indicate self-employment.
The other government agency in Ontario that takes an interest in whether a person is self-employed or employed is the Workplace Safety and Insurance Board.
Their main concern is that workers are covered while on the job, and that the appropriate party is paying the premiums. They will issue a clearance certificate for individuals who meet a set of criteria, which will allow them to work as independent operators. These criteria are based on the same types of considerations that Revenue Canada uses. If on the other hand, they determine that an individual is an employee and not self-employed, then the employer would be responsible to pay the WSIB premiums for that individual.
Basically, they expect an independent operator or self-employed individual to be operating as a business, with all the risks responsibilities and benefits that a business normally has when they enter into a contract with a client.
These are just some of the factors taken into consideration when determining whether a person is an employee or a self-employed contractor. Revenue Canada and the Workplace Safety and Insurance Board are the decision makers regarding a person’s status and should be consulted if a ruling is needed.
More information on this topic is also available by calling the Muskoka Small Business Centre at 705-646-9021 or by email at firstname.lastname@example.org.