The question of whether a worker is an employee or self-employed for federal income and employment tax purposes is a complex one. The facts of each working relationship must be analyzed independently to ensure proper classification. This is a critical determination as employees are entitled to many statutory benefits and protections that are not applicable for self-employed individuals. These obligations include the requirement to withhold federal income and payroll taxes, pay the employer’s share of CPP and EI premiums and pay other statutory amounts such as vacation pay, sick pay, public holiday pay and taxes or premiums in respect of health and safety protections.
Who is an “employee?” There is no uniform definition of the term. All province and territories, other than Quebec, rely on common-law rules to determine the worker’s status. Understanding the intent of both parties at the time of entering the contract is the first step of this process; did the parties intend to enter a contract of service (employer-employee relationship) or a contract for services (business relationship)? A well-structured contract is critical to make the intentions of the working arrangement clear. The second step of the process is to assess the facts of the working relationship to ensure they are aligned with intentions. There are a few key factors to consider when making this assessment: control, tools and equipment, subcontracting work or hiring assistants, financial risk, responsibility for investment and management, and opportunity for profit.
Quebec classifies workers based on their Civil Code. Generally, you are considered to be self-employed if you are free to choose the means of carrying out the contract and no relationship of subordination exists with your client. Conversely, you are considered to be an employee if you agree in a written or verbal contract to perform work for a limited time under the direction or control of an employer. While there are differences between the civil and common-law approaches, the factors discussed below largely apply to both.
Control is the ability, authority, or right of a payer to exercise control over a worker concerning the manner in which the work is done and what work will be done. The right to exercise control is the relevant factor, not whether this right is exercised. An employer-employee relationship is typically one of subordination; the payer directs how and when work will be performed, the methods to be used to complete the work, the method and amount of pay, what jobs the worker will do, has the final say on significant decisions and has priority on the worker’s time. A business relationship usually allows for more freedom and flexibility to the worker as they work independently and without oversight, are free to work for others at their own discretion and can choose which jobs to perform for the payer.
Employers generally provide the tools and equipment required to accomplish their work while self-employed individuals often provide their own. Tools can include computers, vehicles, appliances, instruments, specialized clothing, etc. A significant investment by the worker implies that they possess control over their use and therefore control over how the work is carried out. The worker is often responsible for repairs, replacements and insurance on the items in a business relationship while the payer may reimburse these costs in an employment relationship.
Self-employed individuals may have the right to subcontract the work to others or hire assistants at their discretion. Employees typically must perform the services personally.
Financial risk and responsibility for investment and management are intertwined. In an employment relationship, the payer is responsible for the operating costs of the business while the worker is paid an agreed upon amount and is reimbursed for any expenses incurred. The working relationship is a continuous one and the worker will not be financially liable for failure to fulfill obligations. The payer is also responsible for the capital upkeep of the business. A self-employed individual incurs expenses that expose them to potential losses, is hired for specific jobs, accepts financial liability, actively markets their services and has capital investment in their business.
Opportunity for profit must be assessed from the perspective of the worker. Can the worker realize a profit or incur a loss? A self-employed individual has both potential proceeds and expenses, and one can exceed the other. This is an important distinction as many employees can earn additional income by way of bonuses or commissions, but these amounts are not considered a profit as they are not the excess of proceeds over expenses.
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