Should Your New Hire be an Employee or a Subcontractor?

Congratulations! Your business is growing - new customers, new assignments - things are looking pretty good. But how are you going to get this all done? You wish there were more than 24 hours in a day but there aren’t. You know you need to bring someone on board to handle this extra work but should it be an employee or a subcontractor?

More and more businesses are hiring subcontractors instead of employees for several reasons:

• no CPP, EI or other benefits to be paid;
• there is no severance to be paid if the person is not suitable;
• less payroll administration is required;
• people want to be a subcontractor in order to claim additional expenses.

Revenue Canada though, has a keen interest in this issue as it affects the government’s cash flow in terms of taxes, CPP and EI collected. So, when does Revenue Canada consider a subcontractor an employee? It depends upon the facts. However, over time the following tests have been developed by the courts to settle this issue:

1. The Organization Test - is this person going to be part of the organization and act like an employee?
2. The Control Test - will you determine what, how and when this person will do the work?
3. The Specific Results Test - will the person be asked to provide a variety of services on an ongoing basis versus performing a specific task with a specific completion objective?
4. The Economic Results Test - will you provide the tools? Are you taking all of the financial risk and accepting liability for the work?

If you answered yes to any of the above questions, then the person you are looking to bring on board may be an employee and not a subcontractor. Not getting it right could have financial penalties for you as the employer. If there is any doubt, it is worth your time and money to consult with an accountant or lawyer.

Rychard Lardner
CHARTERED ACCOUNTANT
680 Bayview Drive, Unit 5, Barrie, ON L4N 9A6
Tel: 705-727-0763 • 888-714-4795 • Fax: 705-727-1184