Hiring contractors instead of employees gives you flexibility

The trend of people working remotely from home is expected to continue, even after the pandemic eases. For businesses in the Greater Toronto Area, this presents an opportunity to save money by hiring some workers as contractors – rather than employees.

However, the Canada Revenue Agency has strict definitions about self-employed contractors and employees. Be sure to follow these carefully in order to avoid big penalties. 

How you save money by hiring contractors

When you have employees, you are required to pay the employer share of premiums for Employment Insurance and the Canada Pension Plan. You must provide vacation pay. Your company may offer employees benefits, which is another expense for you.

In addition, employees have rights to be given notice if you decide to terminate them. Should you decide not to provide notice, you are required to pay severance. On the other hand, you can easily reduce the hours of contractors or stop using them completely if you need to cut costs.

The business relationship with a contractor is much simpler. They send you an invoice and add HST. You don’t have to provide benefits or remit to the government your share of payroll taxes.

The differences between employees and contractors

So, can you simply hire contractors rather than employees? Well, no. You must first determine how an individual’s job position should be categorized. The CRA lays out several criteria explaining the difference between employees and independent contractors. Here’s what being self-employed looks like:

·        Amount of control: The individual must be responsible for his or her own scheduling and work activities. If they prefer to work from midnight to 6 am, that’s their choice as long as they complete their project and are available to answer your questions.

·        Tools and equipment: The contractor should be responsible for providing their own tools. If you are an electrical contractor, your independent electricians must bring their own equipment.

·        Financial risk: Contractors take a chance that they can make a profit or loss. For example, if you hire an independent salesperson, they may earn big revenues – or nothing if they are not able to convince prospects that your product is wonderful.

It’s not enough to have a legal agreement with an independent contractor stating that they are not an employee. There have been cases in which a contractor has been terminated and has sued for wrongful dismissal, claiming to be an employee. The courts have ruled on the side of the individual – and against the company – because the firm did not follow the CRA’s rules.

For more information about the regulations on hiring independent contractors, visit the CRA website. Employee or Self-employed? - Canada.ca

If you need advice about the differences between contractors and employees, please get in touch with Scalability at support@scalability.ca.