The risks of treating employees as self-employed contractors

The CBC reported this week that Shaw Communications was found to have broken the federal Canada Labour Code, in relation to two persons who formerly worked at one of its smaller Vancouver business units. The business unit treated the two as self-employed contractors when they should have been paid as regular employees. In both cases, the employer was required to pay additional wages on a retroactive basis.

The interesting point made in this CBC story was that both employees waited to complain to the federal government until after they left Shaw. Both allege this practice – wrongly treating employees as being self-employed – was widespread, but no one wanted to complain for fear of repercussion.

What’s the message for employers in this story?

From this story, it seems employers are at the greatest risk of an employment standards complaint when the employment relationship ends. It’s widely recognized that employment standards compliance all across Canada is complaint based. In other words, the trigger for enforcement action is an employee complaint. Unlike source deductions, it seems no government in Canada has an ongoing program of auditing employment standards compliance, without an employee first filing a complaint.

One means that employers can use to protect themselves against such post-employment complaints is to get departing employees to sign a waiver. For example, this is commonly done when lump-sums are paid to employees who have initiated wrongful-dismissal claims. However, an employee who signs a waiver, absolving the former employer against all claims related to the former employment or dismissal, does so in exchange for the settlement package itself. In other words, the waiver is part of an enforceable contract, under which the employer pays money to settle the employee claim. To ensure these are enforceable, employers should always have waivers reviewed by a lawyer.

By contrast, employers can’t expect to receive similar waivers from employees who quit on their own or aren’t given any form of retiring allowance. Without consideration in the form of a settlement package or retiring allowance, a waiver would just be a promise, not an enforceable contract.

The CBC story noted that there was more than just employment standards compliance at stake. In both cases, the employer had not made source deductions for income tax, CPP or EI on behalf of these two employees. However, unlike the various employment standards authorities, the CRA does actively audit compliance for source deduction requirements.

Employers expose themselves to a series of risks, if they fail to take source deductions from people they wrongly treat as being self-employed contractors. These risks include CRA assessments for the original source deduction amounts not taken or remitted, plus penalties and interest on these amounts. Further, where employers treat people as being self-employed it’s probable no year-end tax slips, such as T4s, or Records of Employment would have been issued. While Service Canada has rarely, if ever, penalized an employer for failing to issue an ROE, the CRA has certainly penalized employers for failing to issue T4s on time. Depending on how careful they have been, corporate officers and members of the employer’s board of directors may also be personally liable to the CRA for such source deduction amounts, penalties and interest.

Normally, the costs of CPP and EI are shared between employees and employers. CPP is shared equally; while employers pay normally pay 1.4 times the EI premiums paid by employees. Where the employer has failed to deduct either CPP or EI at source, and the employer is assessed for both employee and employer portions by the CRA, the employer may not be able to recover the employee portion. Such recovery can’t be made from subsequent payments, if, as is likely, the person is no longer working for the employer. Even if the person is still an employee, both CPP and EI legislation prevent employers from recovering the employee share from subsequent payments, where the subsequent payments are 12 months or more after the date of the initial payment concerned. For example, if an employer failed to deduct CPP or EI from a payment to an employee, dated March 12, 2012, then March 11, 2013 is the last day the employee portion could be recovered at source by the employer.

Further, CPP and EI related assessment amounts can be collected from employers, who initially failed to deduct them at source, even if the persons concerned paid either or both portions on a T1 return. Self-employed persons pay CPP at twice the rate of employees – 9.90%, not 4.95%. If a person was wrongly treated as self-employed and paid CPP at 9.90% on filing the T1, the employer can still subsequently be assessed the full employer and employee portions by the CRA. This is apart from any penalties and interest that may be assessed by the CRA, for the initial failure to deduct and remit.

Alan McEwen is a payroll consultant and freelance writer with over 20 years’ experience in all aspects of the industry. He can be reached at armcewen@cogeco.ca, (905) 401-4052 or visit www.alanrmcewen.com for more information. This article first appeared in Canadian HR Reporter and Canadian Payroll Reporter on March 14, 2013.

 

 

 

 

About Alan R. McEwen

HRIS/Payroll consultant and freelance writer
Gallery | This entry was posted in Best Practices, Employment Standards, Source Deductions and Reporting and tagged , , , , , , . Bookmark the permalink.

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