A staffing agency can be hit with significant tax liabilities and penalties for the misclassification of employees and independent contractors. These consequences can be devastating to a staffing agency’s bottom line. It’s a fatal error made by many businesses— but the staffing industry, particularly those based in the U.S., seems especially susceptible. They believe it’s simply easier to classify a worker as an independent contractor and send him a cheque, rather than delve into the world of Canadian payroll legislation and regulations, which can be complicated to navigate through. But wanting to avoid the hassle now can create bigger legal headaches down the line.
Who Is an Employee?
When you classify a contract or temporary worker as an employee, you are required by law to withhold taxes from their paycheques as well as pay employer taxes including worker’s compensation. A person is considered an employee if you, as the employer, retain the right to control and direct what work is done and how it is done. An employer-employee relationship exists, regardless of whether or not the employer actually exercises the control over the employee or not—the important factor is that he does in fact hold that power.
Other Types of Workers
On the other hand, classifying a worker as an independent contractor means that the worker has total control over the methods and means by which the work is performed—the employer only has power over the end result. There are also different tax regulations for workers classified as consultants and those classified as temporary workers. It’s important to know the difference so you don’t get into any legal trouble down the line.
Factors for Classification
It can be difficult to know whether a worker is an employee or an independent contractor, and what the different tax regulations and factors are for each. Behavioural control, financial control, subcontracting, ownership of tools, degree of financial risk, responsibility for investment, profit or loss opportunities, and the parties’ relationship must all be considered during worker classification and their degrees of importance varies from case to case. For example, if an employer provides training, it’s an indication that he wants the job done a certain way, which would be a behavioural factor consistent with the worker classification of an employee, rather than an independent contractor.
Outsource HR and Payroll Solutions
If you’re in doubt, and you fear tax liabilities and penalties for mistakes, consider outsourcing your HR and payroll solutions to a Canadian professional employer. These companies are experts in tax regulations and they can make sure your worker classification is always correct and compliant to the current laws in Canada.
Independent contractors are valuable in today’s workforce. But they also come with some risk when it comes to worker classification. Legislation is constantly changing, and a Canadian professional employer can help minimize your risk of misclassification and errors in tax paperwork through the undertaking of a risk assessment. If you’re classifying employees as independent contractors, government officials will be more likely to target you for an audit—so your paperwork must be exceptionally detailed and accurate in order to protect your staffing agency against potential tax liabilities and penalties.
Failure to report your employees properly on your taxes can cost you big time. Don’t let misclassification be the downfall of your staffing agency. Whether you’re just confused by the language and terms of the laws or you’re trying to illegally maximize on the financial advantages of a contingent workforce, misclassification can be devastating.
Working with a Canadian professional employer with a focus on the Canadian staffing industry such as The Staffing Edge, can greatly minimize your risk. After all, these back office partners know what they’re doing—they’re experts and they know the intricacies of the country’s labour and tax laws. They can assess your risk, make sure you’re compliant, and save you tons of money through proper worker classification.