Employee or Independent Contractor
Please find below guidelines used to determine whether an individual is an employee or an independent contractor. The following is compiled from an article by Robert Mot, CA, published in the Nov. 1990 edition of CMA Magazine, and an opinion letter of Feb. 19, 1986 provided by KMG Thorne Riddell, Chartered Accountants, for Camosun University.
The determination of whether an individual is an employee or independent contractor depends upon whether or not a "employer-employee" relationship exists between the payer and the payee. Normally an employee is subject to the direct supervision of their employer who controls the manner in which tasks are performed. An independent contractor works independently to achieve a specified result.
There are a number of considerations when evaluating whether an individual is an employee or an independent contractor for income tax purposes, and the courts over the years have developed key tests to assist in determining this. Four of the most significant tests are:
This test deals with the ability of the company or institution to control the actions of the individual. The distinction to be made is whether a contract between the individual and the University is a contract for service or a contract of service. Revenue Canada's IT 525 states that:
"A contract of service generally exists if the [University] has the right to control the amount, the nature, and the management of the work to be done and the manner of doing it. A contract for services exists when a person is engaged to achieve a defined objective and is given all the freedom required to attain the desired result."In addition to this is the ability, where possible, of the contractor to control the place of work and the ability to delegate items to others.
The University specifies the courses (and curriculum) to be taught, as well as the times and locations of these courses. In addition to this degree of control is the integration of the courses into the business of the University, and the requirement to co-ordinate all efforts toward the objective of education, according to the standards and policies established for the institution. These factors preclude entering an independent contractor relationship.
Economic reality test
This test deals with the economic practices of the individual. If the individual has ultimate responsibility for the profit or loss of the contract, then this test would indicate a self-employed situation. Where there is financial risk, opportunity to profit or possibility of loss and responsibility for costs, it is inferred that the taxpayer is an independent contractor. On the other hand, where these elements do not exist, there is an inference of employment. The extent to which the individual uses the property of the employer (i.e. classroom, learning resource materials, audio-visual equipment, tools, etc.) in the course of the contract is also considered.
- Specific results test
This test deals with the nature of the service provided. If an individual is contracted to achieve a certain objective or result, then the service provided would indicate that the individual is an independent contractor. If, however, the contract is for personal services with no specific objective, the contract would resemble one for employment. In other words, this test looks to whether the alleged employee is required to make their services available on an ongoing basis or whether services are made available to achieve a specified result.
This test deals with the individual's degree of involvement in the organization. This test presupposes that if the services provided by an individual are integral to the organization, then their involvement is one of employee. If the services can be viewed as part of a separate business of the individual who provides the services, the individual may then be viewed as an independent contractor. The courts have tended to downplay this test, however, on the basis that businesses can be mutually dependent on each other without a "master-servant" relationship.
No one factor determines whether an individual is an employee or an individual contractor. Revenue Canada and the courts look to the facts in each situation when assessing. The following "Test on Employment Status," taken from the NACUBO Business Officer, August 1992, may also assist with the determination of whether an individual is an employee or an independent contractor.
|follows instructions on how to work||works without detailed directions on procedure
|trained on how job should be done
||uses own experience, expertise to do job
|works within campus environment
||works alone - not part of campus "team effort"
|hired to work as an individual, based on skills, talent, and potential
||hired to provide service many times, regardless of who actually does work
|has indefinite employment status
||hired for a set time period only
|works under set hours
||sets own hours
|works for one employer at a time
||can work for several employers at a time
|works mainly on-site; employer-directed off-site
||can work either on-site or off-site, without employer direction
|works in employer-established order to allow for supervision
||works any way desired to provide required service or product
|reports on work efforts as part of supervision
||reports only as agreed upon
|compensated regularly, at specified time periods
||paid on per-job basis in a lump sum
|has work-related expenses paid by employer
||pays own expenses out of expected compensation
|has tools and supplies provided by employer
||provides own tools and supplies
|does not own or control work site
||may own or control work site
|generally does not work on profit / loss basis||generally works on profit / loss basis|
|gives employer exclusive effort||works for many contractors at once|
|cannot offer efforts to general public||markets services to anyone who wants them|
|can be fired at employer's discretion (subject to employment agreement)||can be fired only if work falls short of expectations|
|can end employment at any time||responsible for completing job as agreed upon|
Source: NACUBO Business Officer, August 1992
Still not sure about employee or self-employed status? Check out http://www.cra-arc.gc.ca/E/pub/tg/rc4110/rc4110-e.html for additional help.