EMPLOYEE OR SELF-EMPLOYED
EMPLOYERS, DID YOU KNOW.
If a payer considers a worker as a self-employed individual while the worker is in fact an
employee, the payer will have to pay both parts of EI premiums and CPP/QPP contributions for
the complete duration of the employment. Penalties and interest can also be charged. It is
therefore very important to correctly determine the type of employment relationship, are they
employees or do you have a relationship with another business?
Canada Revenue Agency sets out a method that should, in most cases, allow employers and
workers to determine the nature of their relationship. These methods include looking at the terms
and conditions of employment as they relate to:
1. Control
2. Ownership of tools
3. Chance of profit/risk of loss
4. Integration
Control
Generally, in an employer-employee relationship, the employer controls directly or not, the way
the work is done and the work methods used. The employer assigns specific tasks that define the
real framework within which the work is to be done. Even if the employer does not directly
control the worker's activities, but has the right to do so, the notion of control still exists.
Generally, the employer exercises control if he has the right to hire or fire, determines the wage
or salary to be paid, decides on the time, place and manner in which the work is to be done and
provides the training.
In a business relationship, the worker decides on where, when, and how the work will be
performed.
Ownership of Tools
In an employer-employee relationship, the employer generally supplies the equipment and tools
required by the employee. In addition, the employer covers the following costs related to their
use: repairs, insurance, transport, rental and operation (e.g. Fuel). Some exceptions may exist to
this condition for certain jobs such as mechanics, painters and carpenters.
In a business relationship, workers generally supply their own equipment and tools and cover
costs related to their use. When workers purchase or rent equipment or large tools that require a
major investment and costly maintenance it usually indicates that they are self-employed
individuals. They may incur losses when replacing or repairing their equipment.
Chance of Profit / Risk of Loss
Generally, in an employer-employee relationship, the employer alone assumes the risk of loss.
The employer also generally covers operating costs, which may include office expenses,
employee wages and benefits, insurance premiums, and delivery and shipping costs. The
employee does not assume any financial risk and is entitled to his full salary or wages regardless
of the financial health of the business.
In a business relationship, the self-employed individual may make a profit or incur a loss. He/she
also covers operating costs. There is no guarantee of a steady income because the self-employed
individual's income depends on the results achieved by the end of the contract.
Integration
Where the worker integrates the payer's activities to their own commercial activities, a business
relationship probably exists. The worker is acting on his/her own behalf; he/she is not dependant
on the payer's business and is considered to be self-employed.
Where the worker integrates his activities to the commercial activities of the payer, an employeremployee
relationship probably exists. The worker is acting on behalf of the employer and they
are connected with the employer's business and are dependant upon it.
Consider your plumber - would you pay your plumber overtime or holiday pay? This is a good
example of employee versus contracting with another self-employed person.
IF YOU'RE STILL NOT SURE.
If after analyzing the facts related to the four factors and you still cannot determine the nature of
the relationship between the payer and the worker, contact your tax service office to obtain a
ruling request form.
** Information obtained from www.cra-arc.gc.ca publication RC4110 (E)