When it comes to saving money by hiring outside help, many small businesses turn to independent contractors. By bringing on in new talent on a limited basis for specific jobs, businesses not only help clients but also avoid the headaches associated with hiring new employees.
But this often leaves employers with the problem of how to determine who should be treated as an employee and who is an independent contractor. By mischaracterizing someone as an independent contractor, small businesses can open themselves up to all kinds of penalties from the government. The Canada Revenue Agency uses a "four-point test" in order to determine who is, or is not, a contractor.
The first point is the issue of control. According to the agency, if a company controls when and where a person works, and tells them how to complete a task, then it is an employer-employee relationship.
"If the employer does not directly control the worker's activities, but has the right to do so, the notion of control still exists," the agency writes.
However, if the person doing the work is deciding how and when to perform a task, and how many hours they are going to work, then it means they can be considered a contractor.
The second thing to consider is the equipment being used to perform a task. If a worker rents equipment or purchases their own materials, it is usually a sign that they are an independent contractor. This is based on the fact they will be replacing the equipment themselves should any damage take place. According to the CRA, "When workers purchase or rent equipment or large tools that require a major investment and costly maintenance, it ... indicates that they are self-employed individuals."
The third part of the CRA's test is to determine who is a private contractor is the issue of risk. Under the law, it is understood that unlike employees, contractors not only have the ability to make a profit when running their business, but also take on the risk as well. Those risks include losing money because of bad debt or damaging equipment. More often than not, if an employee damages a piece of equipment while working as an employee, the company will pay to replace it.
The final point to consider is the interests of the worker. Is the private contractor only working for one client? How close a relationship is there when it comes to "commercial activities"?
According to the CRA, "Where the worker integrates the payer's activities to his own commercial activities, a business relationship probably exists... Where the worker integrates his activities to the commercial activities of the payer, an employer-employee relationship probably exists."
Once the relationship is no longer in dispute, and a small business has found an independent contractor, entrepreneurs are often confused when it comes time to fill out the paperwork. Luckily, thanks to companies like NEBS, small business owners can have one central place to fill out all of the relevant forms. At the NEBS' PAYweb.ca. businesses can access all sorts of useful information.
According to the Payweb.ca website, "When you choose NEBS PAYweb.ca, you are trusting your Canadian small business payroll to a team of experts. Simply access our online payroll management solution from any internet connection and input your payroll information. It's that easy!"
No matter how a business handles its payroll it is extremely important to understand the differences between hiring an employee and an independent contractor. While the definitions are often murky and confusing to small business owners by following the four-point plan, entrepreneurs should be on safe ground.
