The Eagle Blog

Independent Contractors and Co-employment

One of the risks that we work hard to mitigate in the IT Staffing world is the risk of an independent contractor being deemed to be an employee (also known as co-employment). It is not even that simple, because if an independent contractor is deemed to be supplying their services as a “contract of service” rather than a “contract for service” then the consequences can be equally disastrous for all concerned.

So … what are those consequences?

1. The independent contractor could be disallowed all of their “expenses” related to running a business. This would likely be retroactive for some period of time (2 or 3 years?) and would amount to a serious financial hit.
2. The client and/or agency would likely incur penalties for not deducting standard deductions at source in addition to having to pay outstanding amounts going back some years.

What is the likelihood of this happening?

It is a rare occurrence, but it does happen. I know of several large companies that have been deemed to be “offside” in their transactions with independent contractors. Their approach is always to quietly pay what is needed and then implement stringent rules around the use of contractors in their organization.

We have been audited several times and always passed, but the issue almost always stems from an “independent contractor” doing something to indicate that they don’t really understand the difference between being independent and being an employee. For example: they try to claim Employment Insurance; they try to claim severance; or they claim workers compensation etc.

Canada Revenue Agency has a very active group of auditors who focus on this area of independent workers. Typically the IT contractor is well informed and is “onside” with the rules, but CRA does see this as an area of potential abuse and a source of potential tax revenues. If a highly skilled IT worker is paying income tax in the 40% to 50% bracket and some who looks just like them is paying at a corporate rate then CRA will be interested!

What Can Contractors Do to Mitigate those Risks?

In short … differentiate yourself from the employees in as many ways as possible! Some thoughts …

Do not show up at 8:30 and leave at 5pm every day, if that is how the employees act. Be there a little earlier, leave a little later and do not charge for every minute!
Do not accept training for free, along with the other employees. Pay something to differentiate yourself (its tax deductible).
Do not attend employee social events … unless you pay your own way.
Do not bring your personal problems to management at the client site.
Ensure that your contract does not exercise too much “control” … it should not indicate hours of work etc. as a company you are expected to deliver a service, not a set number of work hours.
Use your own tools as much as possible … use your own computer at home for all of the financials around your business, for time sheets and invoices etc. For business planning, for research associated with your job and anything else possible.
Arrange your payment schedule to be as “business like” as possible … monthly invoices are a good idea.
Look for ways to bring additional value, over and above the role you fill. Share knowledge, bring advice, be a “go to person” that is a positive influence.
Avoid office politics at all costs … be the independent business person.

I’m sure there are lots of other suggestions, but this is a real issue and over time it is very easy to fall into a “routine” and that may prove very costly if a contractor is deemed to be an employee!


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10 thoughts on “Independent Contractors and Co-employment

  1. I am a manager in the public service here in Ottawa. We routinely hire contractors because (1) they bring skills we don’t have; and (2) we can fire them if we need to.
    In my department, we like to keep good consultants: We treat them like employees and invite them to staff meetings so that they feel part of the team. It is obviously working, because some of our consultants have been with us for more than ten years through the same agency.

    Surely the agency would not leave a contractor in the same position for so long if there was any risk of his being deemed an employee?

  2. I am a manager in the public service here in Ottawa. We routinely hire contractors because (1) they bring skills we don’t have; and (2) we can fire them if we need to.
    In my department, we like to keep good consultants: We treat them like employees and invite them to staff meetings so that they feel part of the team. It is obviously working, because some of our consultants have been with us for more than ten years through the same agency.

    Surely the agency would not leave a contractor in the same position for so long if there was any risk of his being deemed an employee?

  3. Good advice Kevin! Here are a couple of other suggestions:

    *Tell* your client when you won’t be in the office. Do not *ask* for permission to take ‘time off’. (But don’t go overboard…do take the client’s needs into consideration.)

    Always negotiate with your agent over your rate and his margin. Do not just meekly accept what is offered, as an employee does.

  4. Good advice Kevin! Here are a couple of other suggestions:

    *Tell* your client when you won’t be in the office. Do not *ask* for permission to take ‘time off’. (But don’t go overboard…do take the client’s needs into consideration.)

    Always negotiate with your agent over your rate and his margin. Do not just meekly accept what is offered, as an employee does.

  5. There are many reasons to hire contractors and they can certainly gice organizations a great deal of flexibility.

    As an agency we LOVE long term contracts, and we know of no “written down rules” that identify an allowable contract term. However, we also recognise that the risk goes up the longer the contract goes. As I said there are no hard and fast rules … but if you have “contractors” that have been there for 10 years I think you should be very careful to differentiate between them and your staff. The last thing you want them to do is to feel like employees.

    Pretend you are new and don’t know anyone in the group. Could you easily tell the employees from the contractors? What would an auditor think? Contractors pay a lot less income tax than employees, which is what attracts CRA.

    There needs to be very discernible differences or you are running a risk.

    I would ask your agency what they are doing to protect you from a co-employment situation.

  6. There are many reasons to hire contractors and they can certainly gice organizations a great deal of flexibility.

    As an agency we LOVE long term contracts, and we know of no “written down rules” that identify an allowable contract term. However, we also recognise that the risk goes up the longer the contract goes. As I said there are no hard and fast rules … but if you have “contractors” that have been there for 10 years I think you should be very careful to differentiate between them and your staff. The last thing you want them to do is to feel like employees.

    Pretend you are new and don’t know anyone in the group. Could you easily tell the employees from the contractors? What would an auditor think? Contractors pay a lot less income tax than employees, which is what attracts CRA.

    There needs to be very discernible differences or you are running a risk.

    I would ask your agency what they are doing to protect you from a co-employment situation.

  7. Kevin, does the risk lie with the agency or the client?

    I am not a lawyer, but I would guess that the greater risk lies in the contractor/agency relationship, because the agency pays the contractor. On the other hand, the client has more to say about the contractor’s working conditions.

  8. Kevin, does the risk lie with the agency or the client?

    I am not a lawyer, but I would guess that the greater risk lies in the contractor/agency relationship, because the agency pays the contractor. On the other hand, the client has more to say about the contractor’s working conditions.

  9. Excellent point and certainly one of our “reasons for being” is to protect our clients. The client has no direct contractual relationship with the contractor, only with the agency. However it is possible for CRA to “look through” contract it deems are not reasonable.

    So … point taken, the agency is, and should be, at more risk than the end client. Assuming the agency has put all reasonable protection in place and has a good understanding of this “stuff” the risk to the client is very small.

    The real point of the blog was to identify some of those risks so that clients, contractors and agencies can think about risk and consequences. If all reasonable steps have been taken then this shouldn’t be a big problem.

  10. Excellent point and certainly one of our “reasons for being” is to protect our clients. The client has no direct contractual relationship with the contractor, only with the agency. However it is possible for CRA to “look through” contract it deems are not reasonable.

    So … point taken, the agency is, and should be, at more risk than the end client. Assuming the agency has put all reasonable protection in place and has a good understanding of this “stuff” the risk to the client is very small.

    The real point of the blog was to identify some of those risks so that clients, contractors and agencies can think about risk and consequences. If all reasonable steps have been taken then this shouldn’t be a big problem.

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