As a business owner, you might prefer to hire independent contractors instead of employees so you can receive services as needed without having to provide your contractors with employment benefits. This manner of contracting for services can be beneficial, but if you do not have a proper agreement in place and if you do not maintain an obvious client-contractor relationship (as opposed to an employer-employee relationship), your contractors may be deemed to be your employees.
When circumstances lead a court or the Canada Revenue Agency to consider your contractors to be your employees, you become responsible for giving your contractors benefits under the Employment Standards Act, 2000 (ESA) (i.e. vacation, sick days, and severance pay), and for withholding and remitting income tax from your contractors’ pay.
To significantly reduce the risk of your contractors being viewed as your employees, your written agreement with each contractor should contain a number of key provisions, including but not limited to the following:
1. The term of the agreement should have a set beginning and end date or should end when the project for which the contractor was hired is complete. The longer your contractor works for you, including by repeatedly extending the term of the agreement or by having an open-ended term, the more likely he/she will be considered your employee;
2. Your contractor should have control over how and when he/she provides the services (i.e. methods, work hours, and location). The more control you have over how, when, and where your contractor works for you, the more likely your contractor will be viewed as your employee;
3. Your contractor should be required to provide and use his/her own tools and materials and should incur all expenses related to performing the services;
4. Your agreement should permit your contractor to work for other clients and companies while he/she is working for you. Allowing your contractor to work for others, even your competitors, during the term of your agreement will decrease the risk of your contractor being considered your employee;
5. Your contractor should be required to invoice you for his/her services periodically;
6. Your agreement should clearly state that your contractor will provide the services as your contractor, that he/she is not your employee and has no entitlements under the Employment Standards Act nor to any benefits from you; and
7. Your contractor should acknowledge that he/she is obligated to report all compensation received from you as income and agree to pay all self-employment and any other taxes on that income.
Keep in mind that your behaviour is equally as important as your agreement. If your agreement includes all of the key provisions but your behaviour suggests that your contractor is your employee, you will still be exposed to risk.
Before you hire a contractor, ask a qualified business lawyer to prepare or tweak your agreement and advise you on how to interact with your contractor.
