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Contractor vs. Employee | The Key Differences and Why it Matters

Contractor vs. Employee | The Key Differences and Why it Matters

What’s the difference between an employee and a contractor?

So if you’re bringing on talent for your small business and don’t know whether to bring on a contractor or an employee, please pay close attention to this video because the distinction is massive and it can cost your business thousands of dollars not to mention a whole lot of headache whether you call the person who’s working for you and employee or contractor.

An independent Contractor

An independent contractor is somebody who works for themselves is essentially their own boss.
They are responsible for generating profit for taking care of the expenses associated with their business. They determine their own work.  They send you an invoice you pay them and then they’re on their way.
They’re not your employee they come and they work for you from time to time.
As soon as the work is done.
The contract is over.

An Employee

Whereas if we look at an employee, it’s a very different beast and employees somebody who’s hours are determined by their boss. They receive a regular wage their Possibilities are directed by their supervisor and in general they are not in control of their working hours or how they get the work done or what tools they use to execute the work and so in any analysis that’s done by the Canada Revenue Agency.

They’re going to take a look at what the actual nature of the work that’s being done and how it’s being done to determine whether that person is a contractor or an employee.

So now, let’s take a look at the benefits and drawbacks of hiring a contractor or an employee.

So when you hire a contractor, it can be a lot simpler because you simply sign off an agreement to work with that person. You can control exactly how long you want to work with that person for what the terms of ending the relationship might be and you don’t have any responsibilities to this person after the end of the contract.

In other words, there’s no severance pay to be paid out in short the contractors only protected by what is set out in the terms of the contract whereas the drawbacks and benefits for employees.

So employees are governed by the employment standards Act of BC and that act sets out a number of protections for employees.

So number one, there’s a minimum wage number two severance pay so employees are going to be expected to be paid out severance pay after a certain period of time of being employed by your company and number three there’s CPP and EI I remittances and also income tax withholding that you may be obligated to hold from your employee and remit to the government.And the benefits of having an employee over a contractor is stability. So if you have employees, there’s generally an expectation that they’re going to be with you, a certain period of time.

Whereas a contractor they’re always thinking about their next hustle their next client. And so they may not have the same degree of loyalty to you or your business.

However, there are ways to incentivize independent contractors. They can buy into a stock option plan issued by your company.
So if your company is incorporated then you can issue you options to contractors that vest over a certain period of time that is they become mature and eligible to be converted into actual shares in the company and that way independent contractors can be incentivized to stick around with your company and continue to provide value for your company over the long haul that also applies to employees as well employees are also eligible to purchase stock options final point on this note if your business hire somebody who is already Incorporated that does not necessarily mean that they are going to be classified as an independent contractor simply being incorporated is not enough.

So if you hire somebody who has a corporate entity and they are acting as an employee there still an employee.

So in this area of law, there is quite a bit of ambiguity. So the best thing to do when you’re bringing on somebody’sto speak with a lawyer and ask them to take a look at the actual nature of the relationship that the employee or the contractor is going to have with your company and to draft an agreement that reflects that relationship.

So if you have any other questions about this distinction, please feel free to reach out drop me a comment and please subscribe!

 

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