Employee or Subcontractor – the risky decision

Jan 31, 2016

Almost every beginning business manager comes to a point at which a company should answer the question of how to manage the relations with your “workers”. There are usually two options available for the business – to employ or to subcontract workers.

Unfortunately, in most cases new businesses base their decisions on simple financial considerations without weighing future implications and consequences of their decisions.

Usually there are the following set of considerations relating to the employment or subcontracting relations:

Employment relations impose various extensive liabilities on the employer:

  1. Payment of minimum wages in accordance with the Employment Standards act;
  2. Payment of 4% vacation pay;
  3. Payment of EI and CPP employer contribution (approximately 10% of wages);
  4. Payment for statutory holidays;
  5. Providing termination notice and a possible severance pay at the end of relations;
  6. Liability for the health and safety issues relating to an employee.
  7. Other financial and legal liabilities.

Subcontracting relations usually seem simpler and more attractive for the business. They have the following characteristics:

  1. In addition to the agreed upon compensation, there are no limits of minimum payment and no additional financial liabilities;
  2. No health and safety liability;
  3. Easily manageable and easily terminated;

Based on these considerations, many new and small-medium companies might decide to subcontract their workforce rather than to enter into employment relations. It seems easier, less expensive option with fewer liabilities imposed on an employer.

This decision might become a serious and costly mistake, which will impose substantial liabilities and financial exposure on the company down the road. The tests exploited by various governmental agencies (CRA, WSIB, Ministry of Labour) for determining whether the relations between a company and its workforce were those of an employment or a real subcontracting will not depend on the “title” that the parties applied to such relations. What really matters is the essence of the relations between the parties, the real scope of duties and responsibilities of each party.

Improperly built and defined relations might eventually lead to a situation in which, many years down the road, a “subcontractor” will be recognized as an employee, and a company will be liable to compensate such person for all those years of withheld financial rights.

At CBES.CA, we will assist managers in making a proper decision, and in structuring the relations in a way that will substantially improve the chances for the future determination of subcontracting and protection of the company’s interests and financial liabilities.

Please feel free to visit our website and contact us for further information and assistance.

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