HR Tips

Employee or Contractor—Which is Better?

As a business owner it can be difficult to decide whether to hire an employee or to bring on an independent contractor. What are the pros and cons of both? And what’s the difference anyway?

In essence, an employee is a worker who agrees to perform work for an employer in return for wages or salary, either full-time or part-time, and for a specific or indeterminate amount of time and is subordinate to the employer. An independent contractor operates their own business and contracts their services to others.

Employees

Pros:

• Committed to your organization– worker requires permission to work for other employers while working for you
• You, the employer, can schedule the number of hours the employee works
• You determine what jobs the worker will do
• You have the right to decide where, when and how the work is to be done
• You train the worker on how you want the work to be completed
• You determine and control the method and amount of pay; hourly rates tend to be less than contracting out

Cons:

• You have specific responsibilities under various Acts, such as: Employment Standards Act, Occupational Health & Safety Act, Human Rights, Employment Insurance Act, Income Tax Act, CPP, etc.
• You have to pay vacation pay and statutory holidays
• You supply the equipment and materials for the worker
• You typically pay for the work-related expenses of the worker
• You are liable if the worker does not fulfill the obligations of the work
• If you are not happy with the workers results, you need to terminate the working relationship, which can be difficult

Independent Contractor

Pros:

• You don’t have the specific responsibilities under various Acts, such as: Employment Standards Act, Occupational Health & Safety Act, Human Rights, Employment Insurance Act, Income Tax Act, CPP, etc.
• The contractor provides their own tools and materials
• The contractor covers their own expenses
• You only pay taxes on the services provided
• The contractor is financially liable if he or she does not fulfill the obligations of the contract
• You don’t have to pay vacation pay or statutory holidays
• You have more flexibility if you are not happy with the work completed—you don’t have to use that contractor again.

Cons:

• The contractor can provide services to others
• You don’t have control over the hours the contractor works
• The contractor can turn down the work you ask them to do
• The contractor is free to choose how they perform their work
• The contractor provides a service for a fee that they set and can negotiate, which is typically more than an employee’s hourly rate

Whichever you choose there are some important things to consider.

• You need to pay an employee including CPP and EI on a regular, longer-term basis, whether you are making money or not.
• You have to have the time and knowledge to handle the paperwork that comes with having employees.
• You have to be able to direct and train employees and provide feedback and effectively deal with performance issues.
• How certain are you that the person you are hiring has the skills and will do the work to your satisfaction.

It is important either way to have a contract that is signed by both you and the worker or independent contractor. The employment contract and the contract with an independent contractor must state the specifics of the relationship so that there is no confusion.

Many employers get into trouble when they think they have hired an independent contractor, but are actually in an employee/employer relationship. Independent contractors/self-employed individuals have been found to be employees under labour relations and employment standards legislation, as well as under the Income Tax Act, Employment Insurance Act, CPP, etc. This can be a very costly error if you are held liable for notice of termination, severance, income tax and other deductions.

The difference between an employee and independent contractor are based on a number of factors. Independent contractors bear the chance of profit or the risk of loss, that you have and maintain and arm’s length relationship and the independent contractor has control over their work. These are some of the determining factors that the courts rely on to determine the relationship, regardless of what you intended.

There are many resources available help you create the right contract for the right puCaerusose. The key is to put in the time and effort—remember this is the document that will dictate your relationship—but you have to follow it. Do your homework, make sure your employment contracts and independent contractor contracts are solid and clear. If you are unsure, ask for advice in the beginning before big mistakes happen. It will cost much less in the long run.

Caerus HR Consulting can work with you to ensure you make the best staffing decisions for your business. We’ll make sure you’ve thought through your staffing needs, and you have the right people in place to achieve your goals. As your business thrives, we’ll be there to ensure you are complying with any human resources laws and support your team as it grows.

Caerus HR Consulting provides HR consulting services to small and medium-sized businesses. For more information on creating an HR strategy through organizational culture and leadership, contact Ramona Packham, Owner & HR Business Partner, at 613-220-9005 or at Ramona@CaerusHR.com for more information. People Business for Business People.