Employee or Self-employed?

Transcript

NARRATOR: Hello and welcome to the Canada Revenue Agency webinar titled Employee or Self Employed?

Thank you for joining us.  My name is Kristin Renaud and I am your presenter today.

The purpose of today’s webinar is to provide you with information about how to determine if a person is an employee or self-employed.

Have you opened or are thinking of opening a new business where you will need to hire workers?  Do you already have someone working for you and are not sure of his or her employment status.  If so, you may be wondering if an employer-employee relationship exists or will exist between you and those workers.

If the worker is an employee, the payer is considered an employer.  Employers are responsible for deducting Canada Pension Plan contributions and Employment Insurance premiums, from remuneration or other amounts they pay to their employees.  They have to remit these deductions along with their share of CPP contributions and EI premiums, to the Canada Revenue Agency.

If the worker is a self-employed individual and has a business relationship with you, there are no withholding requirements as you are not considered an employer within that relationship.

The purpose of this session is to provide information on what the CRA examines when determining whether a person is an employee or is self-employed.

Before we cover the elements considered when determining whether a person is an employee or self-employed, I would like to give you an overview of the role of the CRA with respect to determining employment status.

The CRA has the responsibility under both the Canada Pension Plan and the Employment Insurance Act to issue legally binding rulings on whether or not employments are pensionable and insurable.

CPP/EI ruling officers are authorized to make rulings on questions that could have an impact on contributions made under the Canada Pension Plan or Employment Insurance Act. These questions include whether the employment is pensionable and insurable, and what is the amount of insurable or pensionable earnings.

 

An employer or a worker who would like to get an answer to these questions can request a ruling by sending a letter or a completed Form CPT1, Request for a Ruling as to the Status of a Worker under the Canada Pension Plan or Employment Insurance Act to their tax services office. A list of all the tax services offices can be found at the following link located on the CRA website:  www.cra.gc.ca/tso

A key part of the ruling process is the determination of the employment status.  In other words, is the worker an employee or a self-employed individual?

Why is it important to determine whether a worker is an employee or a self-employed individual?

Well, it is important because employment status directly affects a person's entitlement to employment insurance benefits under the Employment Insurance Act.  It can also have an impact on how a worker is treated under other legislation such as the Canada Pension Plan and the Income Tax Act.

To determine a worker’s employment status, the applicable legal principles must be applied.

Canada is a country in which there are two systems of law: the civil law in Quebec, and the common law in the other provinces.

Determining employment status is a concept of private law. When a federal law does not define a concept of private law, we must turn to the private law of the province to obtain it.

Because the CPP and the EIA do not define what a contract of employment is, the determination of the employment status is done differently depending in which province or territory the contract was formed.

If the contract is formed outside Québec, CRA officers will apply Common Law when determining if a worker is an employee or self-employed.

If the contract is formed in Québec, CRA officers will apply the Civil Code of Québec when determining if a worker is an employee or self-employed.

It is important to know where the contract was entered into and accepted.  For example, if an employer in Ottawa faxes a contract to a worker in Gatineau, Québec, who signs it and faxes it back to the employer in Ottawa, that contract is considered to be formed in Ontario.

First we will see how to apply the common law principles and then see how to apply the rules of the Civil Code of Québec.

When a contract is formed outside of Quebec, the CRA will determine whether or not the worker is an employee or self-employed by applying Common law principles.

Over time, the courts have established these principles on determining the employment status of a worker.  These principles were confirmed by the Supreme Court of Canada in the case 671122 Ontario Ltd. v. Sagaz Industries Canada Incorporated and reconfirmed by the Federal Court of Appeal case 1392644 Ontario Inc. operating as Connor Homes v. Canada.

To determine if a worker is an employee or a self-employed worker, the CRA examines the total relationship between the worker and the payer. This is known as the Total Relationship Approach or the TRA.

When we examine whether a person is an employee or a self-employed individual, the key question we ask is whether the person is engaged to perform services as a person in business on his or her own account, or as an employee. To do this, we apply the TRA which is a two-step approach.

The first step is to determine the intention of the parties involved and the second step is to evaluate the total relationship between the parties.

In Step 1 we ask the worker and the payer questions to help determine the facts about their working relationship, and how they define it.  In other words what is the intent of the relationship?  Did the two parties involved intend to have an employer-employee relationship? Did the two parties involved intend to enter into a business relationship?

The parties’ intent can be found in a written agreement or sometimes the agreement is verbal.  Sometimes the intention is clear, and both parties are in agreement and therefore a common intent exists. There may also be situations where the two parties have a different understanding as to the status of their working relationship, in which case there is no common intent.

What is important to remember is that workers and payers can set up their affairs however they see fit; however, they have to ensure that the status they have chosen is reflected in the actual terms and conditions of the working relationship.

In Step 2 we address the central question: “Is the person performing services as a person in business on his or her own account, or as an employee?”

We ask the parties questions that will help us understand the working relationship and allow us to verify whether the intent of the parties is reflected in the facts.  We examine the relationship to determine if the actual working conditions are more consistent with an employer-employee relationship or a business relationship. 

So the first step is to establish the intent of the parties and the second is to see if the actual relationship is consistent with the intent.

We will now take a look at the questions asked of the worker and the payer to determine the total relationship and to see how they relate to the various factors. 

The factors the CRA considers are the level of control the payer has over the worker’s activities, whether or not the worker provides the tools and equipment, whether the worker can subcontract the work or hire assistants, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker and the worker’s opportunity for profit in the performance of his or her tasks.

Now let us examine each factor separately.

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.

It is the right of the payer to exercise control that is relevant, not whether the payer actually exercises this right.

Also, it is the control of a payer over a worker that is relevant, and not the control of a payer over the end result of a product or service purchased.

When we consider control, we look at the degree of control held by the payer or, alternatively, the degree of autonomy held by the worker.

The actual degree of control will vary with the type of work and the skills of the worker.

When examining the factor of control, it is necessary to focus on the payer's control over the worker's daily activities, the payer's influence over the worker and the payer's right to exercise control.

Some indicators that the worker is an employee are:

That the relationship is one of subordination. It is often the payer who directs, and controls many elements of how the work is performed.

The payer controls the worker with respect to both the results of the work and the method used to do the work.

The worker requires permission to work for other payers while working for this payer.

The payer determines what jobs the worker will do.

The worker receives training or direction from the payer on how to do the work.

Some indicators that the worker is a self-employed individual are:

The worker usually works independently within a defined framework.

The worker does not have anyone overseeing him.

The worker is usually free to work when and for whom he or she chooses and may provide his or her services to different payers at the same time.

The worker has the ability to accept or refuse work from the payer.

Self-employed individuals often supply the tools and equipment required for a contract. As a result, the ownership of tools and equipment by a worker is more commonly associated with a business relationship.

However, employees sometimes also have to provide their own tools. Because a worker is required to provide tools of the trade, this does not in itself mean that the worker is a self-employed individual. For example, many skilled tradespeople such as auto mechanics have to supply their own tools, even if they are full-time employees.

When reviewing the element of Tools and Equipment we consider the significance of the investment in the tools and equipment along with the cost of replacement, repair, and insurance.

Some indicators that the worker is an employee are:

That the payer supplies most of the tools and equipment required by the worker. In addition, the payer is responsible for repair, maintenance, and insurance costs.

The worker supplies the tools and equipment and the payer reimburses the worker for their use.

The payer retains the right of use over the tools and equipment provided to the worker.

Some indicators that the worker is a self-employed individual are:

That the worker provides the tools and equipment required for the work. In addition, the worker is responsible for the costs of repairs, insurance, and maintenance to the tools and equipment.

The worker has significant investment in the tools and equipment and the worker retains the right over the use of these assets.

If a worker can subcontract work or hire assistants there may be a business presence because subcontracting work or hiring assistants can affect their chance of profit and risk of loss.

Some indicators that the worker is an employee are:

That the worker cannot hire helpers or assistants.

The worker does not have the ability to hire and send replacements. The worker has to perform the services personally.

Some indicators that the worker is a self-employed individual are:

That the worker does not have to perform the services personally. He or she can hire another party to either complete the work or help complete the work, and pays the costs for doing so.

The payer has no say in whom the worker hires.

As indicated on the slide, the level of financial risk assumed by a worker is considered by evaluating all recurring fixed costs and unreimbursed expenses that are incurred by that worker.

The lower the financial risk is to the worker, the greater likelihood the worker is an employee.

Fixed monthly costs being paid regardless of whether or not the worker actually works could result in the worker suffering a loss.

Self-employed individuals can have financial risk and incur losses because they usually pay fixed monthly costs (for example - office space, equipment lease, etc.) even if work is not currently being performed.  Employees on the other hand will not have any financial risk as their expenses will be reimbursed, and no fixed ongoing costs. 

Some indicators that the worker is an employee are:

That the worker is not usually responsible for any operating expenses.

The worker is not financially liable if he or she does not fulfil the obligations of the contract.

The payer determines and controls the method and amount of pay.

Some indicators that the worker is a self-employed individual are:

That the worker hires helpers to assist in the work and the worker pays the hired helpers.

The worker performs a substantial amount of work from their own workspace and incurs expenses relating to the operation of that workspace.

The worker is financially liable if he or she does not fulfill the obligations of the contract.

The worker advertises his or her services and actively markets themselves.

The degree of responsibility of investment and management placed upon the worker is considered as well. It is necessary to check whether the employee must make an investment to provide the services.

When looking at Investment and Management, we consider whether the worker is free to make business decisions that affect his or her profit or loss. If the worker is making decisions that affect the bottom line, the worker likely has the ability to realize a profit or a loss.

We ask the question “Is the worker required to make any investment in order to provide the services?”  A significant investment is evidence that a business relationship may exist. Some indicators that the worker is an employee are:

That the worker has no capital investment in the business.

The worker does not have a business presence. (i.e. a Business Number, advertising, business bank account, etc.).

Some indicators that the worker is a self-employed individual are:

That the worker has capital investment.

The worker manages his or her staff.

The worker hires and pays individuals to help perform the work.

The worker has established a business presence. (For example a Business Number, advertising, business bank account, etc.).

The question of whether the worker can realize a profit or loss is also considered.

Opportunity for profit must be considered from the worker’s perspective, not the payer's. It is primarily an assessment of the level at which a worker can control his or her income and expenses.

Employees, contrary to self-employed individuals, do not share in the profits realized in a successful business, nor do they suffer the losses incurred in an unsuccessful one.

If the worker is not normally in a position to realize a business profit or a loss that would indicate the worker is an employee.

If the worker is compensated by a flat fee and incurs expenses in performing the services that would indicate the worker is self-employed.

After analysing the facts of the working relationship, the facts must be weighed collectively in the context of the relationship as a whole.

Here, what is important to understand is to not fall into the trap of making an analysis too "mathematical".

The relative weight of each of the elements will depend on the particular facts and circumstances of each situation. No one factor in itself will determine the employment relationship - we examine each factor as a component of the overall situation to determine the nature of the total relationship between the worker and the payer.

For example, in one situation, the control element could have an enormous weight in the outcome of a decision; however, in another situation the control element could have less weight.

During the weighing of each factor, we always take into account the nature of the job and the particular circumstances of the industry.

The last step in the TRA is to compare our findings with the parties' intent that was initially established in the first step.

If common intent exists and our findings of the central question confirm that intent, then the nature of the employment status will reflect the intention of the parties.

Where common intent is contrary to the result of the analysis outlined, it is our findings based on the facts obtained that will determine the employment status.

It is important to understand that the intention of the parties is not an element that in any way replaces the requirement of addressing the factual analysis of a working relationship.

The manner in which parties choose to describe their relationship is not usually the determining factor when the analysis of the relevant elements points in a direction contrary to how they labelled their relationship.

Therefore, simply because a payer wishes a worker to be self-employed and the worker may agree to this arrangement does not automatically make the relationship one of self- employment. The factual analysis must actually confirm the preferred intent.

We have now completed our review of how a worker’s employment status is determined under Common Law for provinces and territories other than Quebec. 

As mentioned earlier, the Civil Code of Québec applies when the contract is formed in the Province of Québec. In such situations, we use what we call the Civil Code of Québec approach or the C.C.Q. approach to determine the employment status. We seek to establish whether there is a contract of employment or a contract of enterprise or for service, or if you prefer, if there is an employer-employee relationship or a business relationship whereby the individual is considered to be self-employed.

The C.C.Q. applies a three-step process in determining the employment status.

The first step is to determine the intention of the parties.  The second step is to prove the performance of the contract by reviewing the performance of work, the remuneration paid and any elements of subordination.  The final step is to compare our findings with the intention of the parties.

Let’s start with the first step which consists of determining the intention of the parties.

The intention of the parties must be determined at the start of the process. We need to know how the parties defined their working relationship and why they defined it as such.

However, like the TRA, regardless of the intent, it is the factual working terms and conditions that reflect the true working relationship between the parties. 

The next step is to prove the performance of the contract.

There are 3 key elements of a contract of employment: The performance of work, remuneration and a relationship of subordination.

The first two points, present in both the contract for employment and the contract of enterprise or for service, do not generally cause any problems, as they are material facts that are relatively easy to determine.

The presence of a relationship of subordination is the determining factor.

One of the key elements, whether for a contract of employment or a contract of enterprise or for services, is that the worker must perform work. It must be proven in some way that the work was performed.

To prove that work was performed we will ask questions such as:

Did the worker render services?

What position did the worker occupy?

Was the worker provided with a work description?

What were the worker’s duties?

Another key element is that remuneration must be paid or be due to the worker.

The concept of remuneration or salary is interpreted broadly to include various methods of remuneration, such as commissions, piecework, freelance work and fees.

To determine whether remuneration was paid or provided in return for the work we will ask questions such as:

Was remuneration paid or will any be paid to the worker and if none was paid, why wasn’t it?

Is there an agreement between the parties regarding remuneration?

How was the payment to the worker calculated?

How often were payments made and how were they made?

What was the amount paid?

Is there any proof of payment (such as payroll records or cancelled cheques)?

Was the worker paid during his or her annual vacation, or received overtime compensation?

Did the worker receive a bonus or other monetary advantage?

Did the worker receive any employment benefits from the payer (such as an insurance plan)?

The answers to these questions will allow us to conclude if there was remuneration payable or not.   

The main characteristic of a contract of employment is the worker’s relationship of subordination, both in the desired result and the means used. Without such a relationship, there can be no contract of employment. If there is no subordination, it is a contract of enterprise or for services.

In fact, the CPP / EI officer will investigate whether the work is performed under the supervision or control of the payer or if the payer has the right to supervise or control the worker.

The officer will consider whether the payer has given or had the power to give instructions to the worker. These instructions would determine the work to be done, how to do it, where the work must be done and when, and the timeframe within which it must be done.

It is important to keep in mind that the factors we discussed earlier to explain the TRA for contracts formed outside the Province of Québec are also useful to determine if there is a relationship of subordination.

For the third and final step, we must compare the results of the analysis to the intention of the parties.

When comparing the results of the analysis to the intention of the parties we must verify whether the contract was performed in accordance with the intention of the parties and performed in accordance with its terms.  

Even if the parties clearly showed their intention; that is not necessarily conclusive.

Again I will reiterate, as stated earlier, regardless of the intent, it is the factual working terms and conditions that reflect the true working relationship between the parties.

We have now completed our review of the C.C.Q. process.

In conclusion, depending on where the contract is formed, a different approach is used to determine a worker’s employment status – employee or self-employed.

All contracts formed in the province of Quebec use the C.C.Q and those formed in the rest of Canada use the TRA approach.

As each employment contract is different with a unique set of facts, as such we must analyze each contract on its own merits.

If there is ever a doubt about your employment status or that of an employee of yours please submit a CPT1, which can be found by visiting our website.

If you are looking for more information regarding employment relationships you can visit our website at www.cra-arc.gc.ca where you can find the following two publications:

RC4110 - “Employee or Self-employed?”, and

CPP/EI Explained articles.

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