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If it walks like a duck and quacks like a duck, it’s a duck.

At the Osgoode Employment Law Conference in December 2011, this is how lawyer Natalie MacDonald started her presentation on determining if a potential new hire is an employee or self-employed.

How do employers know the difference?

There are very good guidelines that help determine if an individual is an employee or self-employed. Sometimes companies pay employees on a short term contract without taking off any deductions. When  they ask a few questions, they find that the individual is really an employee and should have regular payroll deductions. Hopefully this type of situation is an oversight and not a standard process.  It puts the organization at risk for penalties and fines, but it costs the company so much more.

The Canadian Revenue Agency Guidelines  outline steps to determine if an individual is an employee or self-employed and a detailed account of the liability for not making deductions. Here is a quick check list to get you started:

Control – Does the boss direct the person and tell him/her what to do? If the person doesn’t have control over work hours, and work flow, he/she is likely an employee.

Tools and Equipment – Does the employer supply the person with a computer, and a phone at work to do his/her job? An employee is not responsible for bringing his/her own laptop to work.

Subcontracting and hiring assistants – Does the individual have the opportunity to hire or subcontract an assistant and pay them out of his/her own pocket? If not, the person is an employee.

Financial Risk – Does the individual have to pay for mistakes? If a mistake happens that has a negative financial impact, the self-employed contractor most likely will have to discount the project impacting his/her own bottomline, and an employee is not expected to reach into their pocket to pay for his/her mistake. 

Profit – Does the individual have the chance to profit?  An employee earns income and bonus as per the policies and parameters set by the company, but they don’t have potential for profit.

Responsibility for investment and management – Does the individual have a capital investment in the company and make management decisions freely? If not, he/she is an employee.

Some might weigh the chances that they won’t get caught. Some might argue that it’s easy to pay them as a self-employed professional.  But the risk is significant in more ways than one. Why? Because there is a risk to the organization of penalties, fines, and reimbursements as mentioned earlier. But there are other more intangible risks.

The deductions go to fund government programs that provide the Canadian identity of a more equal society. They help fund the Canadian Pension Fund and Employment Insurance when people need it most. What if every employer decided not to make deductions? Our way of living would be very different. And what is the risk of the most important intangible?

Actions speak louder than words. If it is okay for an employer to ignore the legislative criteria and requirements, is it okay for an employee to do the same with his employer?   I don’t think so.

So if it walks like a duck and quacks like a duck, it’s a duck! 

Best regards, Joanne Royce

Royce & Associates
A Human Resources and Training Solutions Company
Creating Happy, Healthy, and Productive Workplaces

Photo Credit: SXC, am y