Contractor Or Employee? Guidelines for Alberta
Canadian Federation of Independent Business - CFIB
Among the many changes arising from a rapidly evolving economy is the expanded nature of services provided by independent contractors. Whether home based, or more traditional in structure, it is important to recognize that the business relationship between your company and the independent contractor is different in the eyes of various government agencies. Failure to understand these government rules regarding independent contractors can, in some instances, result in cost increases and penalties that may be greater than the cost of hiring the contract labour in the first place.
The following information, developed from Canada Revenue Agency and Alberta Workers' Compensation Board sources, is provided as a guide only. The regulations affecting independent contractors are constantly being re-written, and are affected by decisions arising out of the courts. The intent of this handout is to make members aware of the issues surrounding such contract business relationships. If there is any doubt as to what your obligations or responsibilities are, please contact the appropriate government office at the numbers given in this Information Bulletin.
Canada Revenue Agency
Basically, two types of employment contracts are considered:
1. Contract of service (insurable employment income - employer must deduct EI, CPP)
2. Contract for service (non-insurable contract work)
There is a four fold test that the Canada Revenue Agency uses to help determine whether or not someone is an independent contractor or an employee. By merely saying that one party is an independent contractor, or having a lawyer draft an agreement does not legally or conclusively ensure that the party is an independent contractor. The legislation is specific, but due to the many forms of contract work the rulings often fall into very grey areas.
None of the following factors on their own are conclusive, but all contribute to the decision on whether a worker is an employee or an independent contractor.
Note: Throughout this handout, the employer is commonly referred to as the payer.
FOUR FOLD TEST
The main difference between employees and contractors is the payer's authority to exercise control over not only what work will be done, but the manner in which it is done. Even if the control is never exercised, this factor is strong evidence that an employer / employee relationship exists. Similarly, with an independent contractor the employer is entitled to stipulate what is done or what result is achieved but not the manner in which it is completed.
Other control factors include:
Method of Pay. Payment for work by the hour, week, or month as opposed to a lump sum may be considered strong evidence of an employer / employee relationship.
Hours of Work. Specified hours of work is a strong indication that the worker is an employee, and freedom to choose his/her own time of work is an indication that the worker is a contractor.
Traveling Expenses. Payment by the payer of the workers' traveling expenses and other expenses incidental to the payer's business can indicate control over the worker.
Employee Benefit Plans. Does the payer contribute on behalf of the worker? Are the plans for the specific benefit of employees? If so, this tends to indicate an employee relationship.
Training. Training of a person by an experienced employee, by correspondence, by required attendance at meetings, or other methods is a factor of control because it indicates the payer wants work performed in a particular manner. An independent contractor generally uses his / her own methods and comes with their own expertise. Therefore, the independent contractor should receive no training from the payer.
Full-time Service to the Payer. If a worker must devote full time to the business of the payer, the payer then has control over the amount of time the worker spends working and therefore restricts him/her from other gainful work. If a person provides services or represents a number of firms at the same time, it can indicate an independent status.
Facilities Provided by the Payer. Providing the work space, equipment and the furnishings necessary to the work tends to indicate control on the part of the payer. On the other hand, if the worker has a substantial independent investment (i.e. lease / rent / own) in the facilities used in performing services this tends to show an independent status.
Payer's Premises. Work done on the payer's premises is not by itself an indication of control but it does imply that the payer has control especially when work can be done elsewhere. A person working in the payer's place of business is physically within the payer's direction and supervision. In addition, the use of desk space, telephones, etc., provided by the payer places the worker within the payer's direction unless the worker has the option to use other facilities.
Establishes Routines and Schedules. If a person must perform work in the order or sequence set out by the payer, it shows the worker is not free to follow his/her own pattern of work, but must follow the established routine or schedule of the employer.
Compliance with Instructions. A person required to comply with instructions about when, where, and how he/she is to work is ordinarily an employee.
Oral or Written Reports. If regular reports must be submitted to the payer, it indicates control in that the worker is compelled to account for his/her actions.
Right to Discharge. The right to discharge is an important factor for indicating control through the ever persistent threat of dismissal. An independent contractor normally cannot have his/her work terminated without liability, as long as he/she produces a result which measures up to the contract specifications.
Specific Result. Acknowledges that an independent contractor is usually hired to do a very specific job. Once completed the business relationship is over. On the other hand, employees are available to the company for a variety of tasks in a continuing relationship.
2. OWNERSHIP OF TOOLS & EQUIPMENT
Where the payer supplies tools, equipment, materials, etc., it is indicative of control over the worker. It also indicates a substantial investment in the business. This supports an employer/employee relationship. Alternatively, where the worker provides the tools, equipment, materials, etc., it indicates a lack of control by the payer. This also indicates (depending on the size of the investment) that the worker is in the business as a self-employed contractor with an investment into that business. However, this does not necessarily apply to occupations where it is customary for employees to use their own hand tools (i.e. mechanics).
3. RISK OF PROFIT/CHANCE OF LOSS
This indicates that a person is in the business to make money and is at risk of losing money as opposed to earning a fixed wage / salary or ongoing commission.
Integration has to be considered from the point of view of the worker, not the payer. Where the worker integrates the payer's activities to his own commercial activities, this demonstrates an independent status. The worker is acting on his own behalf, he is not dependent on the payer's business and he is in business for himself.
Where the worker integrates his activities to the commercial activities of the payer, an employer-employee relationship probably exists. The worker is acting on behalf of the employer, he is connected with the employer's business and is dependent on it.
Professionals (i.e.: Lawyers, Doctors, Accountants, Engineers, etc.)
The manner and degree to which a professional has become integrated into the payer's operation is a deciding factor. Following are some factors which can be used to establish integration:
- Is the professional restricted from hiring associate professionals or engaging substitutes if he/she is absent from work?
- Is the professional permitted to engage in private practice where his/her services can be offered to the public? If so, is there a provision that he/she may not assume outside duties to the detriment of his primary services to the payer?
- Does the professional have to follow a schedule of fixed hours of work which is to be followed without substantial deviation?
- Is the professional subject to the direction and control of the payer, or must he/she comply with the payer's general policies?
- Is the professional accorded the rights and privileges which the payer has created or established for employees (i.e. benefit plans, vacation pay, etc.)?
Answering yes to most or all of these questions gives Canada Revenue Agency a strong indication of employee status rather than independent contractor status. Other considerations are:
- How is the professional paid? (i.e. salary, commission, percentage, etc.)
- Does the professional lease / rent office space or are they provided the facilities by the payer?
- Hiring Others. Hiring one's own employees indicates that a person is an independent contractor, unless the supervising and payment of assistants is by the payer which shows control over all workers on the job.
- Status Under Other Legislation. The fact that a worker may be covered under a WCB Act does not necessarily establish that the worker is considered an employee for Canada Revenue Agency purposes.
Barbers, hairdressers, manicurists, and other people who provide services in a barbershop or hairdressing business, and drivers of taxi and other passenger carrying vehicles, are ALWAYS considered insurable for EI purposes even if they meet the criteria for self-employment. The owner, proprietor, or operator of the business is considered to be the employer and must pay employer/employee EI contributions for those workers. This obligation is stated in the EI Act and Regulations and has been challenged and defeated in Court on many occasions.
CPP and Income Tax
If this same individual does not meet the general criteria for employment under a contract of service, he/she is considered to be self-employed by Canada Revenue Agency for CPP and income tax purposes. In this situation, the employer is not required to deduct CPP or income tax from these workers, as he/she has responsibility for their own deductions.
Special status also applies to fishers, placement agency workers, employees of a temporary help service firm, power saw employees, and Status Indian employees. Contact the Canada Revenue Agency or consult Canada Revenue Agency's "Employers Guide to Payroll Deductions" for more details.
If your company is audited and Canada Revenue Agency rules that your "contract workers" are actually employees, each party will be responsible for a MINIMUM of:
1. CPP and EI employer and employee contributions for the current year and the previous year.
2. 10% penalty on the total assessment and interest of approximately prime +1% from the date each of the contributions were due.
1. Personal back-taxes, if unpaid.
You may not need to pay EI if your workers are related to the owners of the business even if they are employees. Contact Canada Revenue Agency before ceasing to deduct.
Still Not Sure? Need Further Advice?
If you have any questions as to the status of an independent contractor you can contact the following office for advice: Canada Revenue Agency Throughout Alberta, Telephone: 1-800-959-5525.
WORKERS' COMPENSATION BOARD - ALBERTA
If you are working as an independent contractor you can call the number listed below and apply for a WCB Account Number. If you are limited or incorporated you automatically qualify for a WCB account. If you are not eligible according to the Act you will fall under "employee" status and any employer you do work for will be responsible for your WCB premiums.
If you are in an industry where WCB coverage is compulsory, coverage for yourself as the Director / Owner is voluntary. Should you decide not to obtain coverage for yourself if you are injured at work you will not enjoy lawsuit protection under the Act or WCB benefits.
If you are an employer using independent contract work you must ask the contractor for his / her WCB Account Number and call the number listed below for a "CLEARANCE". This will tell you that the contractors’ account is in good standing with the WCB. Should your independent contractor not have a WCB Account or they are not Ltd. / Inc. you are responsible for their WCB premiums.
The Alberta Workers' Compensation Board has the authority under Section 11(2) of the WCB Act to do one of 2 things for all Alberta independent contractors:
- Deem the independent contractor an employer. (Therefore the independent contractor is responsible for obtaining a WCB account covering themselves (voluntary) and any of his / her employees under that account.)
- Deem the independent contractor an employee of the company he or she is working for. (Therefore the independent contractor is restricted from obtaining a WCB account but must have coverage for themselves and all employees.) In the event that you are audited by the WCB, and your independent contractor does not have a WCB account or you have not obtained a "clearance", you will be forced to pay the WCB premiums, back premiums, penalties and interest that apply during the course of the work.
WCB Alberta, Clearances and General Information
Calgary, Telephone............................(403) 517-6000
Edmonton, Telephone........................(780) 498-3999
Or call the RITE Line at 310-0000 and ask for the WCB in the city you require.
Clearances are available on the WCB website http://www.wcb.ab.ca (Employers / Online Services)
Canadian Federation of Independent Business (CFIB) Alberta
Calgary, Telephone............................... (403) 444-9290
Edmonton, Telephone........................... (780) 421-4253
Toll-free: ...................... ................….. 1-866-444-9290
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- Workers' Compensation Board (WCB) - Alberta
- Employee or Self-Employed?
Canadian Federation of Independent Business
Toll-free (information): 1-866-444-9290
Telephone: Telephone: 780-421-4253
Toll-free (information): 1-866-444-9290