There are generally two options available when seeking support for your business - hiring employees or contracting help. Many small businesses start out by hiring independent contractors. It is often the natural first step when you reach the point of needing intermittent help, and when you’re in the initial growth stage and ensuring the business is viable long-term. But what's the difference between the two??
Per the Employment Standards Act (ESA),[1] an individual is considered an employee when at least some of the following describe the relationship:
the work the individual performs is an important part of the business;
the business decides what the individual is to do;
the business decides how much the individual will be paid;
the business decides where and when the work is performed;
the business provides the individual with the tools, equipment, or materials to perform the work;
the individual cannot subcontract their work to someone else;
the business has the right to suspend, dismiss, or otherwise discipline the individual.
The Act considers the individual an independent contractor when at least some of the following applies:
the business can end the individual’s contract for services, but cannot discipline the individual;
the individual has the opportunity to make a profit and has a risk of losing money from the work;
the individual determines how, when, or where the work is performed;
the individual decides whether to subcontract some of the work.
So, which one should you choose? Here are some high-level pros and cons of each:
Employee Pros:
you have the right to control the details of their work performance, to train them how you want the job done, and to require them to only work for you (not your competitors).
as an employee of the firm, it may be easier to develop a strong, long-term relationship, which in turn may be more valuable and profitable for your business.
Employee Cons:
you must comply with employment legislation which dictates things like hours of work, compliance and safety responsibilities, and termination protocol.
you must comply with income tax, Canadian Pension Plan (CPP), and Employment Insurance (EI) remittances, and follow all ESA standards regarding things like vacation and holiday pay.
Independent Contractor Pros:
they provide their own tools and resources to get the work done, including computers and equipment.
fewer reporting and tax responsibilities, such as no requirement to collect or remit income tax, CPP, and EI, and no requirement to provide vacation and holiday pay.
Independent Contractor Cons:
you cannot control how, when, or where the work is done.
they can work for other firms that do similar work and set their own hours.
the relationship can be terminated at any time (which could also be a pro).
It must be noted that, while subcontracting may seem the more attractive option in some cases, there are limitations as to when it is the right option. For example, you may hire an independent contractor to avoid having to open a payroll account and remit taxes but require the person to work on-site and on certain days. In this case, the Ministry of Labour may deem that your independent contractor meets the definition of an employee under the ESA. The officers may then order your business to pay any outstanding overtime, vacation, and holiday pay they would have been entitled to as an employee. They may require you to pay any backdated income tax, EI, and CPP amounts, or even issue a fine to your business. This is a situation you want to avoid.
When bringing help into your business, it is very important to consider the type of help you need and the amount of control you ultimately want to have over the work being done.
Still not sure which approach is best for your business?
Set up a free discovery call and we can navigate your hiring needs together.
[1] https://www.ontario.ca/document/your-guide-employment-standards-act-0/employee-status