HIRING CONTRACT WORKERS? BE SURE TO MAKE IT CLEAR
As a new year dawns, maintaining profitability is likely to be at the top of the priority list of many business owners. With economic pressures expected to continue into 2009, many will also be trying to trim costs. Generally, the first area of an enterprise that goes under the microscope is the most expensive cost centre—the work force.
Some SME owners may choose to make their work force more flexible by utilizing part-time, seasonal, or temporary contract workers. Whether a company hires an employee or a contract worker, however, has significant implications for government obligations and remittances. The business relationship therefore needs to be clearly defined. For instance, if a company hires a worker as a contractor, it is not required to deduct Canada Pension Plan contributions, Employment Insurance premiums, or income tax from that employee’s pay. As well, the company does not have to remit the employer’s share of an employee’s CPP contributions and EI premiums.
But—and here’s the important part—if the Canada Revenue Agency (CRA) later determines that the contract worker is actually an employee, the company could be held liable. It may have to pay not only its share of contributions and premiums owing, but also the employee’s share, along with penalties and interest. This could prove to be a very expensive mistake.The CRA is increasingly evaluating and challenging these business relationships, so for a company that hires contract workers, it’s important to take the right steps to clarify that it is entering into a “contract for services” (business relationship) rather than a “contract of service” (employer-employee relationship). To evaluate the relationship, the CRA may ask the hirer and the worker questions related to the following “tests”:
- The degree of control the worker has regarding what work will be done and the manner in which it will be performed;
- Whether the worker supplies equipment or tools required to perform and/or covers insurance, repairs, and maintenance for this equipment;
- Whether the worker has the right to subcontract work or hire assistants;
- The financial risk (e.g. liable if work expectations are not fulfilled) assumed by the worker and whether the individual incurs any fixed ongoing costs or expenses that are not reimbursed;
- The degree of responsibility for investment and management held by the worker; for example, if the individual has invested capital to create a business or pays others to help perform the work;
- Whether the worker has the opportunity for profit and the risk of loss; for example if the individual has the right to negotiate the price of services and the right to offer those services to more than one organization.
If your company hires contract workers, there are a number of steps you can take to ensure the CRA interprets your business relationship as “a contract for services” with a self-employed individual rather than “a contract of service” with an employee. For information about how to determine and document a worker’s employment status, consult with a tax professional or refer to the Canada Revenue Agency guide Employee or Self-Employed? (RC4110(E)), which is available online.
When it comes to hiring contract workers, don’t risk expensive government penalties—be sure to clarify their relationship with your enterprise.
George Vandebeek, MBA, CA, is a partner of BDO Dunwoody LLP (www.bdo.ca), one of Canada’s leading accounting and advisory firms. George, who works in the Markham, Ontario office, assists entrepreneurs, business leaders, and professionals with assurance, accounting, and tax support. You can reach George at gvandebeek@bdo.ca or (905) 946-2519.
