Hiring an employee versus a self-employed worker

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It may be tempting at times, especially for a new business or start-up, to use self-employed workers (also called service providers or independent consultants) instead of hiring employees. It should, however, be an informed choice to avoid errors with potentially serious consequences.

Advantages

There are several non-negligible advantages to hiring self-employed workers.

The financial savings is among the most convincing. Even though self-employed workers generally charge a higher hourly rate than what an employee would be paid, usually it is still more expensive for a business to increase its payroll. Below are some of the charges and contributions related to hiring an employee:

  • Work space and equipment-related costs;
  • Contributions to Employment Insurance, the Québec Parental Insurance Plan, the Québec Pension Plan, the Health Services Fund, the Commission des normes, de l’équité, de la santé et de la sécurité au travail (labour standards, pay equity and occupational health and safety) (the “CNESST”);
  • Leave and vacation under the Act respecting labour standards;[1] and
  • Benefits provided in the contract of employment or collective agreement.

Most self-employed workers are also specialized in their field, which can reduce staff training costs.

Lastly, working with service providers can be particularly advantageous for a business whose operations tend to fluctuate, because it offers greater flexibility (short-term contract, casual work, etc.). Contracts with self-employed workers terminate in accordance with the contract terms agreed to between the parties and the business does not have to deal with legal consequences or certain costs related to lay-offs or dismissals.

The disadvantages

That being said, there are also certain disadvantages to using a service provider.

Among them is the business’s limited power to control how the work is performed. Contrary to an employee, who is subordinate to the employer and subject to its supervision, a service provider is free to decide on the means used to perform the contract.

Another disadvantage is that the contracts generally last for a short period, i.e. the duration of the project. The business-work provider might not be able to use the same service provider for a later project. The quality of the work can also vary from person to person. An employer/employee relationship may therefore be preferable for a business that wishes to maintain a certain uniformity or quality and ensure that its workers are available on a continuing basis.

It is also important to consider that service providers, contrary to employees, have no duty of loyalty to the business. This can have a number of implications, for example, the fact that they can work for a competitor.

Furthermore, the business will not own the intellectual property rights in the work created by a service provider, whereas an employer usually acquires certain intellectual property rights in the proceeds of work created by an employee in the course of employment.

Finally, one of the most significant disadvantages of using service providers is the risk of a worker’s status being incorrectly qualified. From a legal perspective, the parties cannot simply disregard the facts and “opt” for a particular status. The different government and administrative agencies (such as the federal and provincial tax departments, the CNESST and the Employment Insurance Commission of Canada) are not bound by the status the parties grant the worker. They will analyze the parties’ relationship based on its factual context using different criteria developed by the jurisprudence. Even though this analysis varies from one authority to another, the main criteria (this list is not exhaustive) are as follows:

  • Is there a relationship of subordination?
  • Are the work supplies or tools required for the task provided?
  • Does the worker bear the risk of profit or loss?
  • Can the worker freely choose the means of performing the work? and
  • Is the worker integrated into the business?

An employer, therefore, must ensure that the facts correspond to the desired relationship status binding it to the worker. In this regard, the more the business-work provider interferes with the work of self-employed workers, the greater the risk that they will be considered as employees by the government. If a government or administrative body questions the status of a worker and, after investigation, determines that the worker is or was in fact an employee, not a service provider, the business may have to pay all income tax arrears and contributions owing, in addition to a fine, with interest. It may also have to comply with all the applicable labour laws, including the provisions on benefits and sums owing for termination of employment.

Pitfalls to avoid

The development, even survival, of a new business or start-up, generally more financially precarious, can be jeopardized due to an incorrectly qualified status. You must therefore resist the temptation many have to treat a true employee as a self-employed worker. The penalties can be harsh so it is often preferable to presume an employer/employee relationship, or if the status is ambiguous, consider the worker as an employee.

You must be well prepared so that the worker’s status is as clear as possible, given the serious consequences for an incorrect qualification. Even though a start-up may have more limited financial means, the quality of the contract entered into should not be neglected, be it with a service provider or an employee. The contract should include clear clauses that are appropriate for the type of relationship contemplated. The contract should be drafted in accordance with the parties’ actual intentions, but also to properly protect the business. Ideally, the written contract should be signed before any services are provided, because that is when the business can reap the most benefits.

Conclusion

In any case, the decision to retain the services of a service provider or hire an employee must be well-thought out and planned. The business can seek the advice of a specialized lawyer beforehand, who can also prepare or review its contracts and policies (if any) in order to limit any risks related to putting in place a work team and increase any potential benefits.

Myriam Lavallée, CRIA and Jessica Parent


  1. [1] RlRQ c. N-1.1.