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Employee or Contractor is a Matter of Perception

Employee or Contractor is a Matter of Perception

To the government, whether someone is an employee or a contractor is a matter of perception. When the Government sees a person that looks like an employee, acts like an employee, and pretends to be an employee, they will take the stance that, that person is in fact, an employee.

Some Corporate Businesses, for economic reasons, have been forced from time to time, to lay off valued employees. In the corporate world, it’s called ‘downsizing’. Downsizing, layoffs, fired – whatever you want to call it, they’re all the same thing, people have lost their jobs. It happens.

The poet, James Whitcomb Riley said, “When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck.” Others have said similar things, but this isn’t a debate about ducks or who said what and when. It’s about perception.

We’ve recently experienced mass layoffs due to the COVID-19 pandemic. While many have lost their jobs, many employees have been forced to work from home.

Understandably, many of these ‘work from home’ employees have suddenly seen the economic advantages of this arrangement, the most notable of which is – the lack of the daily commute.

Whether it is due to an economic motivated layoff or employees suddenly realising the benefits of working from home, there will no doubt be a surge in the number of people seeking self-employment. The temptation for these people is to then seek work from their former employer.

Ironically, this arrangement also appeals to the employer.

Those very same companies, then turn around and contract these people.

What’s the benefit to the company?

The benefit is two-fold. First, the company already knows the talents and qualifications of these people. And second, by contracting these people, all the responsibilities and related costs associated with employing these people, are suddenly gone.

Of course, it also appeals to the newly inspired ‘Freelancer.’ Besides the obvious benefit of not having the spend hours each morning and evening stuck in traffic, or sardined in a train or bus, these Freelancers still have a source of income, plus they can also deduct ‘business’ expenses associated with their contract. Bonus!

Here’s where it gets messy

All these wonderful savings and benefits don’t just fall out of the sky. Remember – there is no magic money. So what just happened?

It’s the Government that is out of pocket – that’s what just happened – and the Government will take exception to this new arrangement. They will turn to James Whitcomb Riley’s insights and argue – if a person looks like an employee, acts like an employee and works like an employee, they will take the stance that, that person is, in fact, an employee. Consequently, they will deny any and all expense claims. They will also seek to collect employee deductions, etc., from both the Freelancer and from their former employer.

So how can you avoid this mess?

To be a creditable Freelancer, you first need to put a few things in place. You should have a signed written contract between yourself and your former employer – now known as your client. You must then demonstrate that you regularly invoice that client and that you charge the appropriate and applicable sales taxes.

NOTE – To collect sales tax, you must first apply for a Sales Tax number.

You must also demonstrate that you have complete control of your own hours. No more 9-5 stuff. This means you should keep a log of your hours even if you are not billing by your time. In addition, you must keep a thorough accounting of your business activities, including client notes, income and expenses.

AND HERE IS THE CLINCHER – you would be advised to show that you also have other clients.

To be fair, despite evidence to the contrary, the Government is not entirely stupid, and if you treat them right and given the right circumstances, they can be reasonable. For instance, they won’t necessarily expect you to immediately manifest multiple clients. Even they know that is impractical.  However, DO NOT take their apparent complacency lightly. You would be advised to go to the length of documenting all solicitations for business (sales calls), to verify that you are indeed a Freelancer and not just another of James Whitcomb Riley’s ducks.

While it’s not urgent, it may help to also register your business as a Sole Proprietor, just to demonstrate your intent. This is because Freelancing may not be enough in this particular situation.

Of course, you can put all this off indefinitely, arguing that this does not apply to you, but the effort it takes is nothing compared to that which you will experience in an audit. Government Auditors rarely demonstrate any sense of humour in such matters.

See more details at Canada Revenue Agency

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Good luck with your Business
Michael

© Copyright 2020 – Michael A. Coates – All Rights Reserved

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