If you are an HR professional, why should you be interested in whether a role is to be filled with an employee or a contractor?
After all, dealing with this question is usually seen as a question for finance, (the actual determination of the person’s status is based on the CRA’s interpretation.)
However, if a senior executive came to you and said they were going to bring a number of retirees back as contractors, would you suggest that they get advice from the finance department? Or, since this decision will impact HR, would you be in a position to offer them input?
The HR professional needs to have enough of an understanding of how the status of employee or contractor is determined to be an active participant in the decision making to ensure that the HR implications are fully considered.
HR considerations should include:
the short term and the long term effects on the succession and human capital plans of the organizationthe potential effect on the current staff and retentionhow to document the role if the worker is to be an independent contractor so that future liability can be limitedwhat other relevant federal or provincial labour codes and other legislation would apply to the individual if a contractor is later deemed to be an employee
As a financial professional, I’m not an expert in the HR, but as an experienced manager I can appreciate how important they are.
Contractors used for a specific project usually leave at the end of the contract. Any organizational knowledge that they pick up is lost.
Conversely there is no employee picking up that same knowledge or skill by working on the project.
There could also be resentment among full time employees that contractors are brought in to work on interesting projects while they feel they are stuck in the routine daily functions.
The financial implications can be different in large enterprises than in smaller companies.
Large companies have the resources to research their situation and often, because of their procurement rules, use contractors who are employees of large specialist firms.
In this case, there’s no risk of them being reclassified as employees of the company. They’ll generally bring in contractors for specific, well defined projects. However, during the recession many companies downsized and had to bring back downsized employees as contractors.
In the current environment of a growing talent shortage as boomers retire, there will be situations where an organization will want to retain the skills of employees who are retiring as their special skill sets are hard to replace.
These retirees, if brought back as independent contractors, represent a financial vulnerability for the organization if they’re determined to be ‘employees’ since they are often doing the same job they did before they left the company.
Smaller enterprises often using contractors because they are cash strapped and want to avoid commitments to the fixed overheads that come with employees and are vulnerable both because often the contractors were not brought in for specific projects but rather are doing the jobs of full time employees and because the situation is often not well documented.
Let’s examine some of the financial implications:
The employment status of an individual as an independent contractor can have very real financial advantages for the company but it can have serious liability concerns too. If it is determined that someone you’ve classified as a contractor is an employee in the eyes of the CRA, then the company is liable for the unremitted company portion of EI and CPP contributions along with the employee portion not deducted, plus penalties and interest.
There could also be severe implications for that individual worker since their personal tax returns will be reassessed to disallow any business expenses that they have been deducting related to the contract resulting in them owing taxes, interest and penalties.
It is the relationship as a whole that will determine the employment status.
Unlike most other areas of business that are subject to government interpretation and oversight, there are no hard and fast rules in regulations or law to answer the question of whether an individual is an employee or an independent contractor.
There is no continuum of rules where you can determine where you fall, which means that decisions on the status get made on a case by case basis.
However, there are four tests that CRA applies, and while they are not hard rules, they are documented and published and therefore critical to determining the situation.
Of the four, the first three are the most critical:
Control (who has the right to control the worker’s activities including
remuneration, timing, and methods to be used)
Economic Reality (includes the ownership of tools and does the worker have
risk of profit or loss)
Specific Results (are the services applied to a specific objective or result)Integration (are the services part of the contractor’s business as separate
from the employer’s business)
HR also has a role in monitoring contractors over time.
In some situations workers are determined to be independent contractors initially but circumstances can change with renewals of the contract.
For example, if the contract is extended over several years and the contractor has no other clients and is not actively searching for other clients, their status may well have changed.
This is especially true if the renewals are for them to continue doing the same work/projects and it appears that it is becoming less of a project and more of a regular function and position.
This can give rise to what is essentially a separate type of employee called a deemed employee or dependent contractor. They are documented as an independent contractor but have enough of the characteristics of an employee to be treated as one for purposes of deducting and paying EI and CPP.
So, to answer the original question, it is essential that the HR professional be fully engaged in decisions on whether or not to use contractors from the start and play an active role in documenting the relationship on an ongoing basis.