Employee vs Contractor: The CRA’s Definition

Employee vs Contractor: The CRA’s Definition

As a small business owner, you are responsible for making several important decisions every day. From day-to-day operations to adding team members, you must consider a variety of components when running a business. 

When it comes to your team members, it is critical to know the differences between an employee and a contractor. Many businesses would prefer to have a team of contractors, as it requires minimal paperwork and less payroll management. However, both pros and cons exist to having employees and contractors on your team. 

To better understand the difference between these two employment structures, we need to define the two. When it comes to defining employee vs contractor, the CRA, or Canada Revenue Agency, helps make an official determination.

Factors That Distinguish Employees from Contractors

The CRA lists various factors that officially differentiate employees and contractors in Canada. Consider the following when looking at hiring an employee vs a contractor.

1. The Working Relationship

Part of the employee vs contractor CRA definition is determining who controls the work. That is, the CRA looks at who controls how the job gets done and when. When navigating the distinctions between employees and contractors according to CRA definitions, it’s essential to understand the implications of contract conversion. Explore more about the process and considerations at contract conversion for comprehensive insights.

Employers often set their employees’ schedules, telling them when to show up and what tasks to accomplish. In some business structures, the employee sets their own schedule and continues the work according to their timeline. However, giving an employee the freedom to set their schedule does not necessarily give them control over the work process. 

However, contractors often have more control over how the work gets done. Contractors not only set their own schedule but will have their own set of objectives and standards for completing a job. 

When determining worker employment status, the CRA will look at whose right it is to control the work.

2. Who Owns the Equipment?

Another factor the CRA will look into is who owns the equipment in use. For example, independent contractors tend to have their own equipment that they use to complete a job. Employees, on the other hand, will use tools or equipment owned by their employer’s company. 

To summarize, if your workers use equipment that your business owns, they are most likely employees. Independent contractors will generally utilize their own tools.

3. Financial Profit and Risk

Generally, a contractor will have a greater financial risk than an employee. 

Employees have regular salaries or commissions to rely on for compensation. Contractors, on the other hand, will have a greater risk of profit or loss. 

For example, a contractor typically has control over how much they charge for services and the quality of the job they produce. How they manage their project, and the tools they use, could impact their profit margin, putting them at risk of a potential loss. In contrast, employees perform the work for an expected paycheck, resulting in minimal risk.

4. Organization Dependence

When differentiating employee vs contractor, the CRA will determine the financial dependency of the employed worker upon the organization. In general, employees will have a higher financial reliance on the company they work for than a contractor will. 

For example, a person who earns 90% of their total income from one company is most likely an employee. In contrast, contractors tend to work for multiple companies throughout the year and might earn only 20% of their income from one organization. 

Essentially, a worker who depends mainly on one company for income is most likely an employee. Independent contractors are more likely to have various sources of income aside from their earnings from your company.

5. The Intent of the Parties

The Canada Revenue Agency will often consider the intent of both parties in an employer or business relationship when determining whether a worker is an employee or contractor. Suppose your business hires someone with the intent to provide certain benefits such as sick days or health benefits. In that case, the CRA will likely consider the individual an employee of your company. 

If a worker signs on for a job intending to be an independent contractor, the CRA will consider their original intention when determining their employment status. Coming to a clear and defined agreement when hiring an individual is the best way to determine their working relationship with your business.

Employee vs Contractor: Benefits and What to Consider

Several benefits come with hiring an employee or contractor. However, you should also consider various factors.

Employee Advantages

As a business owner, hiring an employee generally means hiring someone to do the work as you see fit. As a result, your business has primary control over how and when the job gets done, which adds consistency and longer worker-employer relationships.

Things to Consider

Hiring an individual as an employee puts your business in charge of various employee benefits. One of these includes paying the employment insurance premiums, or EI premiums. In Canada, the employer is responsible for 50% of pension plan premiums. 

Hiring an employee also means working more with payroll and paying a severance package upon employee termination.

Contractor Advantages

Many businesses prefer to hire contractors for certain jobs due to the reduced paperwork and lack of payroll requirements. Companies also do not have to provide contractors with employee benefits such as EI premiums, retirement, vacation days, etc. 

Companies are not required to pay severance if terminating a contractor. However, if the individual is a dependent contractor, then a notice of termination is required.

Things to Consider

Independent contractors can work for multiple employers at the same time. They will also generally have more control over the equipment and work process. It is important to remember that by hiring a contractor, you are entrusting them with a large portion of the job’s responsibilities.

7 Group Healthcare Benefits for Small Businesses in Canada

Learn more about healthcare benefits in Canada in this article.

Group Insurance Plans for When You Have Employees

As previously mentioned, hiring an employee usually requires a business owner to be responsible for administering various benefits. One of the most common employee benefits that companies offer is a healthcare insurance plan. 

One of the most challenging decisions a business owner can make is deciding on a group insurance plan. How do you know which one has the best coverage? Which plan is the most cost-efficient option for your organization?

When you need help finding the ideal group insurance plan for your employees, our team at Group Enroll can help. We help Canadian businesses find various types of group insurance plans.

  • Life insurance
  • Dental insurance
  • Extended health care
  • Health Care Spending Account
  • And more!

By considering your company’s specific needs and objectives, we can pull together multiple quotes from different providers to give you a better idea of your options.

How It Works:

  1. Fill out the quote form.
  2. Group Enroll contacts you about your form and works with you to gather the necessary information.
  3. Group Enroll requests quotes from multiple providers.
  4. You get an email from us with the most competitive quotes for your business’s needs.

When it comes to running a business, you have many responsibilities to take care of. Let us at Group Enroll help you simplify your business operations by helping you find the best group insurance plan for your employees. 

Start the process by filling out the form or emailing Group Enroll at [email protected]. You can also find us at 10 Great Gulf Drive, Unit 5, Vaughan, ON, L4K 0K7.

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