Employee or Self-Employed?

Employee Status - How Can I Tell If I Am Self-Employed or an Employee?

Of all the questions asked of our firm, the issue of one’s status as an employee or self-employed is the most frequent and hardest to answer. It is hard to answer because there are no hard and fast rules to determine your status. There are no sections of the Income Tax Act that we can review. Instead, what makes an individual self-employed or an employee is established in case law. This means that you have to look at every case individually and hopefully from there you can make a determination.

For the most part, it is up to the party that hires the individual that must establish the type of relationship that exists. If they get it wrong, penalties and interest can be charged on late installments of CPP, EI and possibly tax. As well, the worker could be denied some deductions that they made as a self-employed worker that are denied as an employee. Alternatively, a self-employed worker would be denied EI benefits if they are terminated.

The courts have established five broad tests, if you will, to help determine your status. The tests are: intention; control; ownership of tools; chance of profit/risk of loss, and; integration.

The parties’ intentions matter a great deal; the Canada Revenue Agency (“CRA”) and the courts will consider whether there was a common intention between the payer and service provider. For example, both parties may not have the same intention where a self employed contractor was required to be self employed because the payer mandated it, CRA would be more likely to conclude an employment relationship existed in that situation.

Under control, you would be considered an employee if the employer has the right to hire or fire, determines the wage or salary to be paid, and decides on the time, place and manner in which the work is to be done. Also considered is whether the service provider can hire their own employees or subcontractors.

With ownership of tools, in an employer/employee relationship, the employer normally supplies the tools required by the employee.

With chance of profit, in an employer/employee relationship normally the employer is the only one that risks anything if a customer does not pay or if a product is not delivered.

In determining integration, an employer/employee relationship is often present if the worker is integrated into the commercial activities of the payer. In other words, the worker is really a part of the payer’s business.

So the stakes are high with this particular issue. And there are no complete answers. You can however ask for a ruling from CRA. Alternatively, CRA’s guide RC4110 “Employee or Self-Employed?” can also provide additional guidance.