Employment vs. Contracted Services

Introduction

The Canada Revenue Agency (CRA) has interpreted the Income Tax Act in order to define what constitutes an employment arrangement and what constitutes contracted services, and the University of Regina must comply with the requirements or be subject to penalties.  The following document outlines the general guidelines that will be followed by the University of Regina to determine if an arrangement is for employment or contracted services and to identify the appropriate payment.

This policy applies to all payments made to individuals and businesses for services provided to the University, including honorarium payments and/or guest lecture/speaker payments.

Definitions

• Difference between a T4 and T4A
  • Where the term "T4" is used, that means that the payment is subject to statutory deductions for income tax, Canada  Pension Plan (CPP) premiums, and employment Insurance (EI) premiums.  Where the term "T4A" is used, that means that the payment is taxable and will be reported to the CRA (Canada Revenue Agency) on a T4A slip, but that other statutory deductions are not applicable.

Policy

The University of Regina is required to ensure that employees and contractors are paid appropriately.  If this does not occur, the University may be subject to fines and penalties from Saskatchewan Employment Standards and the Canada Revenue Agency.

The decision of whether an employee/employer relationship or contract for services relationship exists should be made before work has begun.

Individuals who are hiring employees and contractors are responsible for:

• Ensuring that employees and contractors are hired appropriately;
• Ensuring that, where there is an employee-employer relationship, income earned (employment income) is subject to statutory deductions such as income tax, Canada Pension Plan (CPP) premiums, and Employment Insurance (EI) premiums; and
• Ensuring that the University does not enter into an agreement with an individual that states that the individual is not to be considered an employee if the particular circumstances of the relationship are not consistent with this statement.

Consequences for Noncompliance

University employees are expected to ensure that the University does not knowingly violate Canada Revenue guidelines and/or Saskatchewan Employment Standards. University employees are liable for any hiring or contracting decision made on behalf of the University. Non-compliance could lead to significant costs and additional risks and liabilities for the University, the applicable department or faculty, and the individual providing the service.

Failure to disclose the accurate information when determining the status of the arrangement may result in the immediate termination of the engagement. University employees who knowingly violate this policy could be subject to disciplinary action, up to and including termination of the member’s position with the University.

Processes

Determination of Employment Relationship

The Canada Revenue Agency (CRA) has established four (4) criteria which may be used to distinguish a contract of service (employment) from a contract for service (contractor): Control; Ownership of Equipment and Tools; Opportunity for Profit and Risk of Loss; and Integration. The four (4) criteria will not necessarily be given equal weighting in determining the type of relationship.

Generally, someone is an employee when:

• The University directs and controls how the work will be done.
• The University provides the facilities and other resources.
• The University runs the risk of loss.
• The work is related to the University's core business of teaching and research.

Generally, someone is an Independent Contractor when:

• The individual determines the work process to meet the University's established outcome.
• The individual provides the facilities, equipment and other resources.
• The individual runs the risk of loss.
• The work is not related to the University's core business of teaching and research.

Roles and Responsibilities

It is the responsibility of the department or faculty engaging the individual or business to determine, in consultation with applicable University departments, whether the services to be supplied to the University should be arranged as an employment relationship or as a contract or can be paid as an honorarium.

Payment Process

Employment relationships are processed and paid with all required deductions through the payroll system in Human Resources.

Contract for Services

Contract for Services and related payments are processed through Supply Management Services.

1. Control

Control looks at the ability to determine where, when, and how the work is done.

Employment

• An individual is employed under a contract of service (employment) if the person for whom they work is entitled to direct and control themselves with respect to the final result of the work and the method employed (for example, the time, place and manner of doing the work);
• It should be noted that it is not necessary for control to be actually exercised; it is very important, however, to determine whether or not the employer is entitled to exercise control;
• Even if there is no direct control, the mere fact that there is a relationship of subordinate to superior may be sufficient to establish that a contract of service (employment) exists. A relationship of subordinate to superior exists when a person performing a service is subject to the will and authority of another;
• The criterion of control has been broken down into a number of elements:

1. the authority to select the person hired;
2. the authority to pay a salary or remuneration;
3. The authority to exercise control not only over what is done but also over the manner in which it is done;
4. the authority to determine the hours of work;
5. the authority to delegate;
6. the authority to determine the work methods used; and
7. the authority to lay off and dismiss employee(s).

Contract

• The self-employed contract worker or independent contractor is required to produce a given result within a set period of time; the payer is not normally involved in the performance of the work, and therefore has no control over it;
• An independent contractor is a person who undertakes to produce a given result in the manner which they deem most appropriate; while performing the work, they are not under the orders or control of the person for whom they are doing the work, and they can use their own initiative in matters that are not specified or determined at the outset;
• Under a contract for services (business), the person for whom the work is being done exercises general supervision. They can and should see that the work is completed in accordance with the agreement, but it is not up to them to give orders to the contractor regarding the manner in which the work is to be done.

General

• The general right to supervise and reject unsatisfactory work does not in itself constitute sufficient control for purposes of establishing an employer/employee relationship;
• Giving instructions to someone regarding deliverables does not constitute control over the manner in which the work is done.

2. Ownership of Equipment and Tools

If the worker owns the equipment and tools used in the work, they are more likely to be deemed to be an independent contractor. If not, they are more likely to be deemed to be an employee.

• Ownership of tools is not in itself a determining factor - the fact that a person uses their own equipment when performing their work is not sufficient to conclude that they are self-employed;
• It must be remembered that in certain occupations it is customary for employees to use their own tools;
• The fact that the employer provides the tools, materials, and facilities simply means that they probably exercise control over the worker.

3. Opportunity for Profit and Risk of Loss

If the worker is taking financial risks in relation to the contract, they are more likely to be seen to be in business for themselves. Under a contract for services (business), an independent contractor or self-employed worker usually assumes the opportunity for profit and risk of loss by agreeing, before they are engaged, to establish the overall cost of the work they are to do. Since they own the tools and instruments and are solely responsible for the manner in which the work is done, the self-employed contractor assumes all risks of loss resulting from events that occur during the course of the work which were not, or could not be, foreseen when the contract was negotiated. If, on the other hand, the work is completed sooner or more easily than expected, the contractor's profit will be greater.

An employee's earnings are not usually contingent, as they do not assume any risk of loss or benefit from any chance of profit arising from the work they perform (paid no matter what). If they are not taking any financial risks, they are more likely to be seen to be an employee.

4. Integration

This criterion relates to whether or not the worker is in business for themselves. A self-employed person integrates the work for a particular contract into all the other work they do. They set their priorities and schedule their time and activities in a manner that meets the needs of all their clients. An employee, on the other hand, is required to set their priorities and schedule their time and activities in a manner that meets the needs of one particular client, their employer. They integrate themselves into the work of the employer.

• Under a contract of service (employment), a person is employed as part of the business. The services performed this person are an indispensable and integral part of that business;
• Integration is a secondary criterion that can be used to determine whether or not a contract of service (employment) exists in cases where some element of control is present;
• It is imprudent to consider integration an essential factor, as many subcontractors perform work that is an integral part of the activities of the contractor who pays them;
• In summary, this criterion is not in itself a conclusive or determining factor; it should be applied only in cases where there is an element of control, but owing to the absence of certain other factors, it is difficult to conclude that a contract of service exists.

Summary

In an effort to determine if a contract of service (employment) or a contract for service (self-employment) exists, the following questions can be used. If the majority of the answers are ‘yes’, then it would favour a contract for service. If the majority of the answers are ‘no’, then it is likely an employee.

1. Does the person have other sources of income and are they able to work for other companies?
2. Can they hire employees or subcontractors to assist them in this project?
3. Have they accepted any risks or liabilities?
4. Does this project have a foreseeable end rather than an indefinite term?
5. Do they provide their own supplies and equipment?
6. Are they ineligible for employment benefits provided to employees of the payer?
7. Can the payer survive without their services because they are not an integral part of the business?
8. Do they issue invoices to the University, charge GST if applicable, and pay expenses such as Workers' Compensation?
9. Do we control when, where and how they perform the work?

Summary Chart of Treatment of Payments

1. Academic Appointments

1. all individuals appointed under the collective agreement are considered employees of the U of R, including sessionals, overloads, and admin stipends
   Type of Payment: Payroll T4
2. in the case where an individual is seconded from another entity such as another educational institution or government and where the contract is with the other institution
   Type of Payment: Accounts Payable

2. Non-Credit Short Courses and Special Seminars/Workshops

1. when the course is recurring or intended to be recurring and is related to the regular academic programs (i.e. skills workshops)
   Type of Payment: Payroll T4
2. b. for full-time employees of the U of R and others, where the course is not related to the regular academic programs but where the service is all instructional (i.e. Centre for Continuing Education (CCE) non-credit course instruction)
   Type of Payment: Payroll T4
3. where the course is not related to the regular academic programs and a business entity (non U of R employee) invoices the U of R
   Type of Payment: Accounts Payable

3. Guest Lecturer/Speaker

Factors to distinguish a guest lecturer from a part-time lecturer include the following:

• No ongoing responsibility to the participants or students attending
• No marking or grading responsibility
• Lectures are infrequent, usually non-credit and in most cases not part of a regular course
• Fee charged to those attending
• No appointment with the University
• No office facilities or support staff provided
• University has little control over the content of the lecture other than with respect to the topic
• Lecturer is paid a single fee for giving the lecture and payment is made at that time
• Lecture or lecture series of limited duration

Part-time instructors: in most of the tax cases, the courts do not distinguish between a part-time and a full-time lecturer. The fact that the individual might be self-employed elsewhere has little influence in regard to whether or not the individual is an employee. The difference between a contract and an employee is distinguished by the nature of the part-time teaching rather than the status of the individual as employed or self-employed.

1. The guest lecturer/speaker must be engaged specifically for that individual's expertise on a particular topic, rather than as a substitute for a regular instructor.
2. where the guest lecturer is a Canadian resident
   Type of Payment: Payroll as honorarium T4A
3. where the guest lecturer is a non-resident
   Type of Payment: Payroll T4A-NR - tax withheld - non-resident unless the recipient obtains a waiver from the CRA

4. Consulting

Consulting does not include teaching.

1. U of R employee hired as a consultant:
   1. for additional services which are of the type of service provided in the normal course of duties under the existing employment contract (even if a different department)
      Type of Payment: Payroll T4
   2. where the type of service is clearly beyond the terms of the existing contract but where an employee/employer relationship is deemed to exist
      Type of Payment: Payroll T4
   3. where the type of service is clearly beyond the terms of the existing employment contract but a contract for services exist
      Type of Payment: Payroll T4A
2. Non-employees who deal at arm's length
   1. individuals where an employee/employer relationship exists
      Type of Payment: Payroll T4
   2. ii. individuals where an employee/employer relationship does not exist
      Type of Payment: Payroll T4A
   3. business (limited company, incorporated company, professional corporation)
      Type of Payment: Accounts Payable

5. Artistic Performances

1. individual performers where the University determines the nature of the performance
   Type of Payment: Payroll T4
2. individual performers where the University does not determine the nature of the performance
   Type of Payment: Payroll T4A
3. groups where the individuals are part of an arm's length performing group and payment is made to that group rather than to the individuals
   Type of Payment: Accounts Payable

6. Partners of Firms

1. where the contract is between the University and the partnership and the course subject matter is directly related to the business of the partnership. The partnership would invoice and payment is made directly to the partnership (e.g. accounting courses taught by a partner in an accounting partnership or law courses taught by a partner in a legal partnership)
   Type of Payment: Accounts Payable
2. where the contract is between the individual and the University, the course subject is not related to the partnership and the payment is made directly to the individual
   Type of Payment: Payroll T4

7. Proprietors

1. where the proprietorship has a number of professional or highly trained employees and the contract is between the firm and the University, and the course matter is related to the business of the firm, and the invoice is from the proprietorship
   Type of Payment: Accounts Payable
2. where the proprietorship has only one professional or highly trained individual, the status of the individual should be the determining factor
   Type of Payment: Payroll T4A
3. where the proprietorship is registered for GST purposes
   Type of Payment: Accounts Payable

8. Employees of a Firm (Business Entity)

1. where the contract is with the employee
   Type of Payment: Payroll T4
2. where the contract is with the firm and the firm invoices the University
   Type of Payment: Accounts Payable

9. Research

1. research forming part of the faculty's regular academic appointment with the University
   Type of Payment: Payroll T4
2. sabbatical leave research grants
   Type of Payment: Payroll T4A

10. Miscellaneous

1. University employees where the type of service provided is in the normal course of duties under the existing employment contract
   Type of Payment: Payroll T4
2. where only an individual's time is purchased and specific tasks are assigned
   Type of Payment: Payroll T4
3. full-time staff where the fee is predicated upon quantity produced (i.e. number of interviews completed, pages typed, assignments graded, lectures written, appearances on television or radio)
   Type of Payment: Payroll T4A if an individual; Accounts Payable if a Business (limited company, incorporated company, professional corporation)
4. if the work is done away from the University, the person is expected to pay their expenses, is free to use the services of others and is simply required to produce a completed product
   Type of Payment: Payroll T4A if an individual; Accounts Payable if a Business (limited company, incorporated company, professional corporation)
5. individuals operating as professional businesses, such as health care, accounting or legal professionals, who invoice the University; includes professionals who normally bill for their services (i.e. dentists, chartered accountants, lawyers - normally called Professional Corporations or Professional Partnerships)
   Type of Payment: Accounts Payable
6. royalties – e.g. University Press publishing royalties
   Type of Payment: Payroll T4A

Types of Payment through Payroll must be done through PeopleAdmin or one of the Banner workflows.

Types of Payment through Accounts Payable must be done by submitting an invoice to Accounts Payable in Financial Services.

Related Information

• Income Tax Act
• T4 – Information for Employers
• T4 – Information for Payers
• T4A-NR – Summary of Fees, Commissions, or Other Amounts Paid to Non-Residents for Services Rendered in Canada