When it’s time to grow your business, people are usually high on the list. The question is should you hire an employee or a self-employed contractor? Who you choose to join your team and how they are hired is more complicated than simply finding people with the right skills. Although both employees and contractors can yield a similar result when it comes to job performance; there are significant differences between the two when it comes to risk, compensation, ownership of job materials, and more. In this blog, we present key questions to ask yourself when considering these two hiring options that can differentiate the relationship and responsibilities of each party involved.
What is the hiring goal?
When two parties enter into an agreement, the intention of the hiring should be clearly outlined in the contract or agreement. A “contract for services” is awarded based on a Business-to-Business relationship whereas a “contract of service” would be considered an employer-employee relationship. Even when both parties mutually enter into a business relationship with the same goal, there are criteria to consider and question as they may influence how the Canada Revenue Agency (CRA) views the relationship.
Does the worker have independence?
Contractor As self-employed individuals, a contractor has control over how and when their work is completed and for who. They may choose to provide services to multiple payers at the same time and can move freely between businesses to accept or decline work. In this relationship, the contractor negotiates how, when, and how much they are paid. Employee The span of control in an employer-employee relationship is comparable to a superior and subordinate relationship. The employer directs, oversees and evaluates the work performed with most employees working for only one employer. Except for any variations in salary and hours negotiated in terms of employment, the employee is subject to the terms of payment as dictated by the employer.
Who supplies the tools or equipment?
Contractor It is common practice for a contractor to provide the equipment and tools required for them to fulfill their obligations to a payer. The contractor has invested in the materials needed to run their business and is responsible for all maintenance, replacement and insurance on them. Employee The ownership, maintenance, and replacement of tools and equipment required for an employee to perform their job fall under the employer’s responsibility. There are some exceptions where employees are required to provide tools or equipment but the majority of the investment is done by an employer.
Can the worker hire others?
Contractor A contractor can choose to subcontract a job and is not personally required to complete the work for a payer unless explicitly stated in a contract. A contractor can also freely choose to hire others as a subcontractor or employees without the influence of a payer. Employee An employee is unlikely to be able to hire another person to perform a job assigned to them unless explicitly agreed to in their employment contract.
Who Assumes the Risk?
Contractor When workers assume financial responsibility or risk for the job performed, they are more likely to be considered contractors. A self-employed contractor incurs expenses to operate their business including hiring others and is held accountable for any contractual obligations. This higher level of risk can also provide opportunities to realize larger profits. Employee An employer assumes the financial responsibility for an employee and therefore realizes a larger share of the rewards for taking on this risk. An employee may have remuneration based on performance, such as a commission or a profit-sharing plan but in general, their pay is tied to a salary or hourly wage with no personal risk of financial loss for job performance. If you’re unsure if an employee or a self-employed contractor relationship is currently in practice in your business, or if a change to manpower structure is on the horizon, reach out to your accountant for advice that’s specific to your circumstances. If you still have questions, give us a call here at McNabb Lucuk LLP in Grande Prairie and we’d be happy to walk you through the numbers.