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!