Contractor or full-time staffer — weigh benefits, drawbacks

“For businesses, the decision to go with an independent contractor or a full-time employee arises all the time,” says MacLeod, principal of MacLeod Law Firm.

From an employer’s perspective, retaining a contractor may result in lower costs because contractors are not generally eligible for vacation pay, statutory holiday pay or overtime pay, which employees are typically entitled to receive under the Employment Standards Act.

“As an independent contractor you only get paid when you work,” MacLeod tells AdvocateDaily.com. “You receive an agreed-upon amount without perks like benefits, training allowances or participation in a pension.”

In case of accidents, full-time workers are covered by the Workers’ Compensation Act, he says, and if they are let go from the firm, they can receive employment insurance (EI) benefits.

“If you are an independent contractor, you are not generally entitled to these benefits unless you have registered and made the payroll deductions,” MacLeod says.

“The key advantage of being an independent contractor is that you will pay less in taxes, and you can write off expenses that employees cannot.”

Many employers initially fill vacancies with contractors so they can evaluate the individual before making an employment offer, he says.

“Often both parties are very happy with that arrangement, as the contractor generally gets a higher rate of pay, and the employer avoids things such as payroll taxes and contributing to workers compensation,” MacLeod says. “It’s a win-win situation, except for the government, which loses out on taxes.”

He cautions that legal problems often arise in this arrangement, citing three examples.

The first occurs when a pregnant contractor applies for EI benefits, requiring her to provide a record of employment, MacLeod says. When told by the employer it cannot provide one since she was not a full-time employee, the contractor could challenge that in court, arguing that she was, in essence, doing the same job as a full-time employee.

The second example involves a contractor who has worked for a company for a decade or more, and then is told their services are no longer needed, he says.

“The contractor may then ask for termination pay, stating they should be considered a full-time employee since they have worked exclusively for the firm for a number of years,” MacLeod says.

The final scenario is that of a contractor injured at work and then seeks workers compensation benefits, he says.

“The employer will say that he is not eligible, but that can also be challenged in court,” MacLeod says. “Variations of these three examples come up all the time.”

In these cases, he says the court applies a four-part test to determine if a contractor should be considered a full-time employee.

Control

“The court looks at how much influence the organization exerts over contractors, such as telling them how to do their job, what hours they have to work, conducting performance reviews, and administering discipline if needed,” MacLeod says.

Tools and equipment

“What tools or hardware do contractors need to do their work, such as cellphones or computers, and were these things provided by the company?” he asks.

Chance of profit/risk of loss

MacLeod says self-employed persons usually have some degree of financial risk and more opportunity for profit than employees.

Integration

“Is the function a contractor provides integral to the business?” MacLeod asks. “If the firm makes widgets, and contractors are widget makers, there is probably a good chance they are going to be found to be employees.”

The courts will also consider if the parties entered into an agreement which states whether they intended to create a contractor relationship.

“That last factor is considered, but it’s not determinative,” he says.

MacLeod offers these tips for employers about to hire someone on contract.

“First, get legal advice on the risk that the person will be found to be an employee down the road should the relationship be challenged,” he says.

If the independent contractor route is deemed to be best, MacLeod says firms should have the person sign an independent contractor agreement.

For employees, he says the main legal risk they face by challenging their status as a contractor is a reassessment of the taxes by the Canadian Revenue Agency (CRA) if they are deemed to have been a full-time employee in previous years.

“As a contractor, your effective tax rate is quite a bit lower than if you’re an employee, so the CRA could theoretically order you to pay additional taxes,” MacLeod says.