Are you an employee or an independent contractor? Is your work arrangement an employee-employer relationship or a contractor-principal relationship?
In Alberta, the Employment Standards Code governs employment classification. The law treats employee and independent contractor employment statuses differently, yet it can be tricky to clearly determine which one applies to you. It’s important to figure this out at the beginning of your work contract.
Why Does Your Employment Classification Matter?
Employment misclassification is a common problem. In many cases, it’s simply an issue of not knowing or understanding the criteria for determining your employment classification. Other times, people intentionally choose the wrong classification to avoid costs and responsibilities.
Whatever the reason for misclassification, the consequences can be costly and far-reaching.
Your employment classification matters because it determines who is responsible for paying certain taxes (and how much is to be paid).
Employee vs Independent Contractor Checklist
To determine whether you’re an employee or an independent contractor, the law focuses on 5 key criteria:
- Who has control in the working relationship?
- Who has the greater potential for profit in the working relationship?
- Who carries the risk of loss in the working relationship?
- How integral to the business is the work?
- Who supplies and maintains the tools required for the work?
The details of employee and independent contractor classification are explained along with a comprehensive checklist in the RC4110 Employee or Self-Employed publication by CRA. Our Employee vs Independent Contractor Checklist below is a good overview and can help you classify your employment status appropriately.
If the following accurately describes your working relationship, you are most likely an employee:
- Your employer determines the where, when, and how of your work.
- You do not have the freedom to hire someone to help you perform your work.
- You are not free to work for other employers.
- You are not at risk of financial loss by performing the work of your job.
- The work you do is essential to the business. (For example, if you clean the office after hours, your job is not essential to the business. However, if you’re a salesperson or work directly with the products or services sold by the business, your job is essential to the business.)
- You have worked exclusively for the same business for a long period of time.
- The tools required to perform your work are provided and maintained by your employer.
In an employee-employer relationship, the employer is responsible for providing statutory benefits (like vacation pay, stat holiday pay, overtime pay, and leaves of absence). They are also obligated to provide reasonable notice of termination or pay in lieu, and are required to remit appropriate income taxes and CPP and EI premiums.
An Exception: Casual Work
Casual work is an exception to the usual employee-employer relationship. If you work on a casual basis – infrequently without a set schedule or time requirement and the work is not integral to the business – you are still considered an employee but you’re not pensionable for CPP nor insurable for EI.
Advantages & Disadvantages of Employees
Some of the advantages of being an employee include:
- Protections against unlawful termination
- Benefits such as vacation pay, health benefits like medical/dental/vision care, disability insurance, pension plans, and worker’s compensation coverage
- Your employer pays 50% of your CPP
- You qualify for EI
- You are eligible for the Canada employment amount tax credit
The downside of being an employee is that you have less freedom and control over your work and schedule. Also, very few of your expenses are tax-deductible and you are required to pay for EI.
Independent Contractor-Principal Relationship
If the following accurately describes your working relationship, you are most likely an independent contractor:
- You determine your work schedule and what work you perform.
- You have the freedom to hire others.
- You are free to work for other clients and have done so regularly and recently.
- You are at risk of financial loss if your client fails to pay.
- The work you perform is not integral to the business that hired you.
- You own and maintain the tools required to do your job.
As an independent contractor, the only pay or notice you’re entitled to are what is determined by the terms of your contract. You are responsible for paying all income tax and CPP.
An Exception: Dependent Contractor
Even as a contractor, you may be entitled to receive reasonable notice of termination if you’ve worked exclusively (or almost exclusively) for a single organization for a long period of time. This classification is called “dependent contractor”.
Advantages & Disadvantages of Independent Contractors
Some of the advantages of being an independent contractor include:
- You’re not required to pay for EI (unless you want to)
- More freedom and control over your work and schedule
- Potential for increased profits
- More tax-deductible expenses
That freedom, control, and potential for profit comes at a cost. Some of the challenges for independent contractors include:
- You don’t get employee benefits or termination protection (except what may be included in the terms of your contract)
- You’re required to pay the full CPP amount
- You don’t get overtime pay even if you work more hours than expected to get the job done
- You have the costs and responsibility of buying and maintaining the tools needed for your work
- You risk financial loss because of the operating costs of your business
- You’re not eligible for the Canada employment amount tax credit
What Determines Your Employment Status?
You can request a ruling from the CRA to determine your employment status. The status indicated on your employment contract is of least importance in determining whether you’re an employee or an independent contractor. What matters most is the substance or characteristics of your working relationship.
The law determines the true character of your working relationship based on the criteria outlined above. If what actually happens in your working relationship meets the criteria to classify you as an employee, you will not be classified as an independent contractor even if that’s your (or your employer’s) intention or desire. If you meet the criteria for an independent contractor-principal relationship, you will be classified as such even if you want to be an employee.
Even if your employer had you sign an employment contract stating that you’re an independent contractor, the characteristics of your working relationship will overrule that contract.
If you need help determining your employment status, or if you’ve been terminated by your employer and were considered an independent contractor, talk to one of the employment lawyers at Osuji & Smith today.