Guide to the Determination of Employee/Independent Contractor Status

Transcription

1 Employee/Contractor Website Guide to the Determination of Employee/Independent Contractor Status Related Links: Introduction At times, services are provided to the University under arrangements other than regular employee appointments. The purpose of this guide is to assist in determining whether a worker must be paid as an employee or whether they can be paid as an independent contractor. Employee vs. Independent Contractor Procedure Independent Contractor Questionnaire (ICON) It is important to make an accurate determination of whether a worker should be paid as an employee or as an independent contractor based on the individual circumstances of each arrangement in accordance with the Canada Revenue Agency s (CRA s) employment classification guideline (RC4110 Employee or Self employed?). Failure to do so can result in substantial fines, penalties, and/or legal action due to non compliance with the Income Tax Act, Canada Pension Plan Legislation, Employment Insurance Act, and other employment related legislation. The CRA looks at 6 major factors when determining whether the terms and conditions of work to be performed constitute an employee/employer or independent contractor relationship: Control Looks at the degree of control the University has over the work being done Tools and equipment Looks at who generally supplies the tools/resources to do the work Subcontracting work or hiring assistants Looks at whether the worker must perform the work personally to accomplish the result outlined in the contract and whether the worker can hire helpers or assistants Financial risk Looks at the degree of financial risk taken by the worker, for example fixed ongoing costs incurred or any expenses that are not reimbursed Responsibility for investment and management Looks at the degree to which the worker is required to make an investment in order to provide the services Opportunity for profit Looks at whether the worker has an opportunity to realize a profit These factors have been integrated into an easy to use Independent Contractor Questionnaire (ICON) form that must be completed prior to the worker being engaged. Additional information regarding common payment types within the University setting and the consideration points can be found in the Employee vs. Independent Contractor Procedure. The Method of Payment by Service Type Matrix in this document can be used as a first step in determining whether a worker can potentially be paid as an independent contractor. Notes: 1. The fact that a worker has his/her own business (and has a business and GST/HST number), or is employed by a business that provides services, does not in itself prove that an independent contractor relationship exists. The question can only be settled by examining the whole of the various elements which constitute the relationship between the parties. 2. Workers who do not have the required liability insurance and WSIB coverage (or proof of exemption) will be considered employees. Contents Determining Employee/Independent Contractor Status: o Independent Contractor Questionnaire (ICON) o University of Waterloo Determination of Employee/Independent Contractor Status Procedure Definitions

2 Additional Resources Frequently Asked Questions (FAQs) Determining Employee/Independent Contractor Status Departmental Responsibilities: IMPORTANT: It is imperative to begin this process with enough lead time to ensure all of the steps are completed before work is to begin. There are significant consequences to the University for failing to comply with CRA legislation; everyone involved has a duty to do what they can to mitigate the risk and exposure to the University. 1. Prior to officially engaging the worker, if a worker s status is unclear, or they have requested to be paid as an independent contractor, access the Independent Contractor Questionnaire form (ICON). 2. Complete the questions appearing in orange text from the University s point of view. 3. Send the ICON questionnaire (electronically) to the worker to complete their portion of the questionnaire (questions in black text). 4. Obtain the completed ICON from the worker and review the answers for consistency and the results (i.e. the determined status). a. If the results indicate the worker is an employee, your Human Resources Advisor can provide guidance on how to proceed. b. If the results indicate the worker appears to be an independent contractor, and The value is under $5,000 in annual billing, and the work is not consulting*, you can proceed to engage the worker as an independent contractor provided the required liability insurance and Workplace Safety and Insurance Board (WSIB) coverage** is in place. * Bill 122 demands 3 quotes for all consulting work, regardless of the dollar value. Procurement & Contract Services must be contacted for assistance with the contract competition process. The value of the contract will be over $5,000 in annual billing, contact Procurement & Contract Services for assistance with the contract process. Please note that proof of liability insurance and WSIB coverage** will also be required for any workers engaged through Procurement & Contract Services.

3 Before work commences: 1. Obtain from the worker proof of insurance coverage and a copy of their WSIB Clearance Certificate (or proof of exemption from WSIB). 2. Obtain from the worker a signed copy of the ICON form showing the independent contractor determination. Ensure departmental signatures are obtained. 3. Retain a copy of the signed ICON, along with the proof of insurance and WSIB coverage (or proof of exemption), within the department as back up in the event of an audit. 4. Provide the worker with a copy of the signed ICON and advise them that a copy must be attached to all invoices submitted. 5. Ensure a contract for service outlining the terms and conditions between the University and the worker (or their company) is in place. Procurement & Contract Services can provide guidance with the contract. 6. Invoices for contracted services should include the worker s CRA business number and/or HST/GST number. Where the worker is registered for HST/GST this amount must be shown separately on the invoice. 7. If the independent contractor is being paid from a research grant, then the invoice and/or Casual/Additional pay request form (as noted on step 8) needs to first be sent to the Office of Research, Research Finance for compliance review. 8. Where payment is being made in the name of the worker (to a person), a Casual/Additional pay request form should be attached to the invoice (including the signed ICON form) and submitted to Human Resources (Payroll) for payment. The AFF should show object code 6300 for Consulting*(see above note regarding Bill 122), or object code 6096 for a Fee for Service. Invoices submitted without all the required supporting documentation and approvals will not be paid until the required documents are received. 9. Where payment is being made in the name of the worker s company/corporation, the invoice (including the signed ICON form) should be submitted to Finance, Accounts Payable for payment. Invoices submitted without all the required supporting documentation and approvals will not be paid until the required documents are received. ** Consistent with Policy 52, independent contractors are required to hold comprehensive general liability insurance of no less than one million dollars ($1,000,000) per occurrence and may be required to carry professional liability insurance containing such terms, and for such amounts, as the University from time to time deems advisable. The independent contractor is also required to be registered with WSIB (or provide proof of exemption where applicable). If the worker does not carry the required insurance or cannot provide a valid WSIB Clearance certificate (or proof of exemption from WSIB), they must be engaged as an employee. Contact your Human Resources Advisor for assistance. Additional guidance regarding insurance requirements can be obtained from the Secretariat and Office of General Counsel. Should a worker who is determined to be an employee through this process disagree with this status, they have the option of completing and filing a CRA CPT1 form Request for a Ruling as to the Status of a Worker under the Canada Pension Plan and/or Employment Insurance Act. If a worker is requesting a ruling, the University should be informed as the CRA will generally require input on the working arrangement from both parties. Should work commence prior to a ruling being made, the worker will be paid as an employee until a ruling is made by the CRA and a copy provided to the University. Rulings obtained from the CRA will be considered binding. NOTES:

4 1. The process must be completed for each service arrangement. If the nature of the service changes, a new ICON must be completed. 2. The ICON questionnaire is a tool to assist in the determination of employee/contractor status and should in no way be construed as providing tax advice. 3. Judgment should be applied when reviewing the ICON. If additional relevant facts come to light after the ICON is completed and signatures obtained, an independent contractor determination may be revised or reconsidered by the University at any time up to and including the point of payment. 4. Where doubt exists as to the validity of the answers provided, or the accuracy of the determination once completed, additional guidance should be sought. Concerns can be ed to icon@uwaterloo.ca. Definitions Employee: An individual who performs services for an employer under a contract of service. The employer has the right to decide where, when and how the work is to be done. Payment is made through the payroll system and requires withholding of source deductions by the University (income taxes, Canada Pension Plan Contributions (CPP), and Employment Insurance Premiums (EI)). Earnings, taxes, taxable benefits, etc., are reported on a T4 at year end. Independent Contractor: A worker who contracts to do work for another entity according to his or her own processes and methods; the contractor is not subject to the payer s control except for what is specified in a mutually binding agreement for a specific job. The Independent Contractor Questionnaire (ICON) must be completed to assist in verifying independent contractor status. Independent contractors, like any vendor the University transacts with, are required to maintain appropriate liability insurance and WSIB coverage (or provide proof of exemption). Consulting: The provision of expert or strategic advice that is presented for consideration and decision making. As per Bill 122 and University Policy 17, all consulting arrangements must have three competitive quotes, regardless of dollar value. Additional Resources CRA Guidelines RC4110 Employee or Self employed? Policy 52 Private Corporations [FS] Policy 49 Extra-University Activity (Faculty Members) [F] Policy 26 Provision for University Overhead in Sponsored Research Activities (grants, contracts and other research support) [G] Policy 69 - Conflict of Interest [FS] Policy 17 Quotations and Tenders [G] Frequently Asked Questions (FAQs) Why do I need to follow this process? What happens if I don t follow the process?

5 Who is driving the process and who is responsible? What is the definition of an independent contractor? What is the definition of an employee? If the person I am hiring has their own business (with GST/HST number), does that mean he/she is an independent contractor? How does the ICON questionnaire work? Are independent contractors required to hold liability insurance and/or Workplace Safety and Insurance Board (WSIB) coverage? Are foreign workers subject to the same process outlined above? Question: Why do I need to follow this process? Answer: It is important to make an accurate determination of whether a worker should be paid as an employee or as an independent contractor in accordance with the Canada Revenue Agency s employment classification guideline (RC4110 Employee or Self employed?). Failure to do so can result in substantial fines, penalties, and/or legal action due to noncompliance with the Income Tax Act, Canada Pension Plan Legislation, Employment Insurance Act, and other employment related legislation. Question: What happens if I don t follow the process? Answer: Invoices that are sent to Finance or Payroll without an accurately completed and signed ICON (questionnaire) will be returned back to the department. If an ICON is not completed, the worker will be treated as an employee with the payment being made via payroll with applicable deductions taken at source (Income tax, CPP, EI, etc.). Question: Who is driving the process and who is responsible? Answer: This is an institution wide process that is governed by the Secretariat. All employees within the departments and Faculties are required to contribute to the University s compliance. Everyone who is involved in the process of engaging a worker is responsible for ensuring that all of the facts and circumstances related to the relationship between the University and the worker are disclosed and that the ICON questionnaire is completed accurately and to the best of their knowledge and abilities. Question: What is the definition of an independent contractor? Answer: An independent contractor is a worker who contracts to do work for another entity according to his or her own processes and methods; the contractor is not subject to the payer s control except for what is specified in a mutually binding agreement for a specific job. All workers will be considered employees until the Independent Contractor Questionnaire (ICON) is completed to verify independent contractor status. Independent contractors, like any vendor the University transacts with, are required to maintain appropriate liability insurance and WSIB coverage (or provide proof of exemption). Question: What is the definition of an employee? Answer: An employee is an individual who performs services for an employer under a contract of service. The employer has the right to decide where, when and how the work is to be done. Payment is made through the payroll system and

6 requires withholding of source deductions by the University (income taxes, Canada Pension Plan Contributions (CPP), and Employment Insurance Premiums (EI)). Earnings, taxes, taxable benefits, etc., are reported on a T4 at year end. Question: If the person I am hiring has their own business (with HST/GST number), does that mean he/she is an independent contractor? Answer: The fact that a worker has his/her own business (and has a business and HST/GST number) or is employed by a business that provides services does not prove that an independent contractor relationship exists. The major considerations (see Determining Employee/Independent Contractor Status) must be assessed using the ICON questionnaire to verify independent contractor status. Question: How does the ICON questionnaire work? Answer: The ICON questionnaire is based on Canada Revenue Agency s guidelines for determining employee vs. independent contractor employment status. The questions are based on the following factors: Control Looks at the degree of control the University has over the work being done Tools and equipment Looks at who generally supplies the tools/resources to do the work Subcontracting work or hiring assistants Looks at whether the worker must perform the work personally to accomplish the result outlined in the contract and whether the worker can hire helpers or assistants Financial risk Looks at the degree of financial risk taken by the worker, for example fixed ongoing costs incurred or any expenses that are not reimbursed Responsibility for investment and management Looks at the degree to which the worker is required to make an investment in order to provide the services Opportunity for profit Looks at whether the worker has an opportunity to realize a profit Responses provided by the University and the worker are scored and weighted based on formulas built into the questionnaire in order to support a determination. Question: Are all independent contractors required to hold liability insurance and/or Workplace Safety and Insurance Board (WSIB) coverage? Answer: Consistent with Policy 52, independent contractors are also required to hold comprehensive general liability insurance of no less than one million dollars ($1,000,000) per occurrence and may be required to carry professional liability insurance containing such terms, and for such amounts, as the University from time to time deems advisable. The independent contractor is also required to be registered with WSIB (or provide proof of exemption where applicable). If the worker does not carry the required insurance or cannot provide a valid WSIB Clearance certificate (or proof of exemption from WSIB), they must be engaged as an employee. Contact your Human Resources Advisor for assistance. Additional guidance regarding insurance requirements can be obtained from the Secretariat and Office of General Counsel. Question: Are foreign workers subject to the same process outlined above? Answer: Yes. In addition, where work is performed in Canada by non residents, there can be CRA requirements to withhold income tax. Each situation must be assessed on a case by case basis.