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Choosing between hiring an employee and an independent contractor for your business is an important decision. In Canada, this choice is influenced by both business needs and a complex legal landscape, including employment standards legislation, common law legal tests and tax rules. This article aims to provide a balanced view, incorporating both business and legal considerations.
Business Reasons: Contractor vs Employee
Hiring an Employee
Pros:
- Stability and Commitment: Employees tend to be more committed to the company, offering a stable workforce.
- Skill Development: Employees can be trained to fit the company's specific needs over time.
- Team Cohesion: Employees are generally better integrated into the company culture, which can improve teamwork and productivity.
Cons:
- Higher Costs: Employers are responsible for employment standards like overtime pay, vacation pay, and other employee-related costs like notice of termination and severance, plus WSIB (where applicable) fees and payroll taxes.
- Administrative Burden: Managing payroll, benefits, and compliance with employment and tax laws requires additional resources.
Hiring an Independent Contractor
Pros:
- Cost-Effectiveness: Contractors handle their own taxes, reducing your financial burden. In addition, contractors are not owed any minimum employment standards (like vacation pay, overtimes pay, etc.) nor any notice of termination/severance, generally. Furthermore, you can hire a contractor to complete just one job (or for just one time period), limiting your long-term expenses.
- Flexibility: Contractors can work set periods on specific projects, offering more flexibility in workforce management.
- Specialized Skills: Contractors often bring specialized skills that are crucial for specific projects but might not be needed long-term across your company.
Cons:
- Less Control: You have limited control over contractors, who may be working for multiple clients and who cannot be delegated to like employees.
- Availability: Contractors may not always be available when you need them, unlike an employee who generally works exclusively for you for set times (i.e. Monday to Friday, 9-5).
Legal Reasons: Contractor vs Employee
Hiring an Employee
Cons:
- Termination Rules: Firing an employee will cost severance.
- Compliance: Employers must adhere to various laws concerning employment standards and tax rules.
Hiring an Independent Contractor
Pros:
- Lower Legal Risk: Employment standards and taxation payroll deductions do not apply to contractor relationships, reducing the costs.
Cons:
- Misclassification Risks: Incorrectly classifying an employee as a contractor can result in significant legal penalties, including back payments for employment standards monies owed and even class actions.
Misclassification: A Growing Concern
Misclassifying employees as independent contractors is a significant issue, particularly in Ontario. Various legal tests have been developed to determine the true nature of the employment relationship, considering factors like control over work, exclusivity, ownership of tools and the ability to profit or risk loss. Whether or not you have a contract that says an individual is a "contractor" is largely irrelevant.
Use our calculator to see if a worker is an employee or an independent contractor here.
Conclusion
The decision to hire an employee or an independent contractor is nuanced. Business needs and legal considerations influence such a decision. Understanding the implications of both employment standards legislation and common law rules, along with awareness of CRA help, can help you make an informed decision that benefits your company in the long run and reduces risk.
If you're looking for employment contract templates or planning to draft independent contractor agreements, our HR tech software can help streamline the process.
Feel free to contact us for more information on how we can assist you in making this crucial business decision.
