In the past few years, The Canada Revenue Agency has held a magnifying glass on the staffing industry due to past abuse of ‘encouraging’ workers to become independent contractors so the agency could avoid paying employer taxes or to meet the client’s expectations for a cheaper bill rate.
Misuse of placing independent contractors who didn’t qualify to be paid as such, triggered audits of staffing firms across Canada who received not only fines and a reprimand but caused those agencies who are compliant in there qualification process when engaging with independent contractors to be under the watchful eye of the CRA.
Many agencies are now in fear of placing independent contractors at all - even if they do meet compliance. This leaves the contract staffing agency unable to service their clients who look to their competitors to provide candidates with that level of expertise that only a qualified independent contractor can provide.
The importance of employment agreements and independent contractor agreements are of paramount significance when placing candidates for temporary and contract staffing orders. Many employers and recruiters find it frustrating that many employees use the title of self-employed worker until it no longer suits them when their business relationship ends with the contract. In this case, many independent contractors will come back and request employment insurance benefits or severance pay when they are simply not entitled to them as independent contractors.
Contract Staffing Firms: Use the Four Point Test
The Canada Revenue Agency has a four point test method to help contract staffing agencies decipher between a self-employed individual and an employee; control, ownership of tools, chance of profit/risk of loss, and integration. Let’s look at each of these from an independent contractor perspective vs. an employee perspective:
For further reading on this issue see Lexology.com “Independent Contractors: A Different Perspective” by Blaney McMurtry and William D. Anderson:
“Mr. Rennie was a helicopter maintenance engineer and maintained helicopters owned by VIH Helicopters Ltd. Both Mr. Rennie and VIH Helicopters considered Mr. Rennie to be an independent contractor. Other similar individuals chose to be employees. Mr. Rennie took the position that it was to his advantage not to be an employee. For the purpose of filing his income tax returns Mr. Rennie reported business income and deducted the expenses associated with running his business. In matrimonial proceedings with his former spouse, affidavits were filed which expressly stated that Mr. Rennie was self-employed, which apparently suited his purposes during those proceedings too. Upon termination of his business relationship with VIH Helicopters, however, Mr. Rennie came to the opposite conclusion and stated that he was really an employee. Mr. Rennie sought certain legal remedies available only to employees under the Canada Labour Code.
In its decision, the Court clearly disapproved of Mr. Rennie’s duplicity in referring to his relationship with VIH Helicopters as an independent contractor for some purposes, but as an employee for others. The court decided before answering the question of whether Mr. Rennie was or was not an employee at law first whether or not Mr. Rennie was “estopped” from asserting that he was an employee. That is: (1) did Mr. Rennie lead VIH Helicopters to understand that their relationship was not that of an employer and employee? (2) Could he change his position?; and, (3) Did VIH Helicopters alter its legal position to its own detriment as a result?”
Needless to say the court ruled that Mr. Rennie was in fact a self-employed individual and could not pick and choose his status between self-employed and employee now that his contractor agreement had ended. Candidates and recruiters have to weigh their options carefully as both titles come with their own set of pros and cons. Staffing firms engaging in the services of independent contractors should be well aware of the rules and regulations and have a solid process in place to ensure their compliance when placing them.