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Employment law: Independent contractor arrangements

Many British Columbia business owners choose to use the services of independent contractors instead of employees. There are benefits for both parties with such a work relationship, but there can also be severe consequences if the independent contractor arrangement is improperly executed. 

Hiring contractors can benefit the cash flow of a company because these workers receive no benefits and pensions, and they are responsible for their own contributions to the Canada Pension Plan and income tax payments. Thus, the employer is not required to deduct income tax, pay a share of pension, or account for Employment Insurance when calculating payroll. Furthermore, the company will not have to finance any life and health insurance and pension plans, nor pay for the independent contractor’s training.

Hiring contractors also allow the business owner to manage labour costs in tough times by more easily adjusting the workforce at a given time. There are also some benefits for workers who offer their services as independent contractors. The primary benefit is tax-related, in that the contractor can deduct all his or her business expenses, lowering tax liability. Workers may also seek the flexibility and self-employment of an independent contractor arrangement. As a result, business owners and workers may choose independent contractor relationships to benefit both parties.

However, the distinction between an employee and an independent contractor is often blurred. If the Canada Revenue Agency finds that such a worker was in fact an employee, the employer will be responsible for remitting unpaid taxes, CPP and EI, along with penalties and interest. The employee will have to repay to the CRA all business expenses that were deducted; if the arrangement continued for several years, this remedy could be financially devastating. The employer could face further liability under the BC Employment Standards Act or in the common law of employment.

British Columbia business owners who choose to consult with an experienced employment law lawyer before appointing independent contractors may avoid these unanticipated legal and financial consequences.

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