Employee vs Contractor - 7 Factors to consider

Employee vs Contractor: How to tell the difference

As your business begins to grow there becomes an inevitable need for workers beyond just yourself. Because of this growth, a large decision that will need to be made is whether to fill in the gaps by hiring an employee or hiring a contractor so that you can outsource the work.  

This decision is crucial because it will have a large effect on how your business runs and can cause a costly problem with the tax authorities.

In order to make the correct decision you want to consider your business model, the goals of your business and what CRA has to say about it. This guide will walk you through both the technical reasoning from CRA and some qualitative factors to consider.

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Canada Revenue Agency Factors

When it comes to determining whether a worker is a contractor or an employee CRA has a list of seven factors they will go through.

Step 1

Before going through these seven factors, CRA’s first step is going to be to determine the intent of the relationship so it is integral that the business owner and the contractor are in agreement as to the nature of the service. However, just because you decide and are in agreement doesn’t necessarily mean that CRA is in agreement.

Step 2

Next CRA will look at 7 factors to determine the working relationship. Each factor includes a non-exhaustive list of questions CRA would go through.

1. Control
   - Do you set the work schedule or does the worker?
   - Do you scrutinize the work of the worker?
   - Who decides the work that happens
   - Does the worker receive significant training

2. Tools and equipment
   - Who owns the tools?
   - What is the value of the tools?

3. Subcontracting work or hiring an assistant
   - Is the worker allowed to contract out the work or do they have to do it personally?
   - Can the worker hire an assistant?

4. Financial risk
   - Are there ongoing operating costs the worker has to pay for?
   - Who is liable if the job goes wrong?

5. Responsibility for investment and management
   - Does the worker have to put up their own money for the project?
   - Does the worker have staff?
   - Does the worker have a physical location, website, logo, business cards?

6. Opportunity for profit
   - Can the worker realize a profit?
   - Is the payment hourly or fixed?

7. Any other relevant factors, such as written contracts

There are specific sectors where CRA has made blanket rulings such as hairdressers, barbers, taxi drivers, caregiver, baby sitter etc.

If you have gone through all of these and you are unsure of whether a worker classifies as an employee or a contractor you can request a ruling from CRA.  

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What happens if you classify your workers as contractors and CRA later rules they are employees?

Well, first off you have the right to appeal the decision. If you choose to appeal the decision, go through court and CRA wins you will be required to pay all the taxes you would have had to pay if the workers were originally classified as employees.  

Note: If you are a contractor and you are incorporated and only work for one company, you may be a personal services business which excludes you from many of the benefits of incorporation.

What are the differences when paying each?

When you hire a contractor, the transaction is relatively simple. The contractor will send you a bill (make sure you get the bill so you can claim it as a deduction to lower your tax bill!). Next you pay the amount on the bill and the transaction is done.  

Note: Certain industries may need to make certain filings at the end of the year (for example construction companies who need to file T5018’s), and you should make sure the contractor is covered by WCB.  

However, when it comes to an employee on payroll you now have to among other things:

1. Remit taxes on behalf of the employee,

2. Pay taxes such as CPP, EI, EHT, WCB etc

3. Pay vacation pay, stat pay, sick pay, overtime pay

4. Pay health benefits such as health and retirement

5. And more

As you can see the picture quickly becomes much more complicated with an employee than with a contractor.

Which one is better, an employee or a contractor?

The answer to this question will depend on your goals. Here are a couple benefits when hiring a contractor vs and employee

Pros of hiring a contractor

1. Access to Expertise - without hiring the cost of hiring a full-time employee
2. Less admin work - There is significantly less administrative work
3. Flexibility - hours and payment options

Pros of hiring an employee

1. Quality of work – You are able to supervise and train to ensure the quality of your company is high.
2. Build brand expertise – A subcontractor will leave once the job is done taking their skills with them.
3. Loyalty to the company – A loyal, hard-working employee will ensure your customers are treated right, train new employees and remove the workload from you.

Often, we have found the answer boils down to if you are looking for specific expertise for a role that would not be full-time then a contractor is likely the way to go.  If you are looking to fill a role that will be full-time and is for the specific service or product your business provides, an employee is likely the way to go.

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