STC Montreal

By Michael Samotis, C.A., C.F.P.

An issue that is frequently faced in the software and technical writing businesses is the question of whether an individual is an employee or self-employed. Fortunately, there are guidelines that the federal and Quebec governments have issued to help in determining an individual’s employment status. In this article, I will describe these criteria and discuss the risks of being too aggressive with respect to considering employees as self-employed individuals.

The five criteria, which determine whether the relationship is that of an employee/employer or an independent contractor, are control, financial risk, ownership of tools, integration and specific results.

Control is recognized as the most important factor in determining the status of a worker. This is related to the time, place and manner in which the work is to be done. The amount of wages and salary to be paid and the right of the employer to hire or fire a worker are also determinants of control.

Financial risk, in an employer-employee relationship, means that the employer covers the business’s operating costs and assumes any risk of loss. A self-employed individual, on the other hand, may make a profit and assumes the risk of loss from his or her business.

With respect to ownership of tools, an employer provides the tools necessary to complete the employee’s duties. A self-employed individual provides his or her own tools.

Integration is looked at from the employee’s point of view. If the tasks performed by the employee are an integral part of the employer’s business, then an employer-employee relationship likely exists. If the services rendered are not part of the normal business activities, then it is likely that the person would be considered self-employed.

The specific-result criterion refers to whether the worker is involved in performing a specific project, thereby completing the contract. In this case, the person would be considered self-employed.

If there is doubt as to whether an individual is considered employed or self-employed, a ruling can be obtained from the Federal and Quebec governments.

A good reason to ensure that the employer-employee relationship is properly determined is the onerous amount of penalties. If an employer voluntarily omits remitting deductions at source, the penalty levied by the Quebec government on the employer could amount to 15% of the amounts not remitted plus interest. This penalty applies to all amounts to be deducted such as Quebec pension plan, Quebec health services tax, etc. A government auditor, aware of the above problems, may decide to probe further into a company’s business to see if there are other areas that are worthy of further investigation.

Michael Samotis is a chartered accountant and certified financial planner with Dundee Private Investors Inc. and can be reached at (514)737-9252, ext.219 or by e-mail.