“Penalties” isn’t a word most employers like to hear. Unfortunately, they’re probably more common than you’d like to think. They’re especially common for international companies with Canadian operations, partially because their staff members are less likely to be familiar with the nuances of Canadian employment legislation and payroll taxes.
Employee misclassification penalties are one particularly common type of problem international employers bump into. The good news is they’re relatively easy to avoid.
What Are They?
Employee misclassification penalties arise when an employee is judged to have been misclassed for tax purposes. For example, you may have classed an employee as a contractor, but then the CRA reviews their employment and suggests they’re actually a full-time employee instead.
Most often, employee misclassification penalties arise when employers classify their employees using one definition while the CRA decides the employee falls into a different category.
The Linguistic Divide
Most often, employee misclassification happens because of a simple misunderstanding of terminology. It’s particularly common for international employers for this reason. In your home country, an “independent vendor” may be defined one way, and you applied that definition to your Canadian employees. However, in Ontario, an “independent vendor” is defined differently, and your employee doesn’t fall into this category.
Employee misclassification is the result.
Sometimes, employers willfully misclassify employees in an effort to avoid payroll taxes or to gain other benefits. An example would be letting an employee go, then hiring them back to do the same job as a “contract worker.” The CRA would identify this as misclassification because the employer has the employee doing the same job, just with a different classification. The employer appears to be abusing classification categories for their own advantage, to the employee’s disadvantage.
How Can You Avoid Misclassification Penalties?
The answer to this question appears to be quite obvious at first. If you don’t want to face employee misclassification penalties, make sure you classify your employees correctly! Since the cause of employee misclassification penalties is employee misclassification, using the correct categories will prevent penalties.
Of course, this is easier said than done in most cases. Most employers, particularly international employers, just don’t realize they’re misclassifying their employees. The “linguistic divide” issue, where different jurisdictions use different definitions of the same terms, causes confusion. Misclassification is often unintentional.
The remedy for this problem is knowing the definitions of each different employee class in the jurisdiction where you’re operating. Just because you class an employee one way in the United States doesn’t mean it will be the same in any part of Canada.
Work with a PEO
It’s a tall task to ask your HR employees to learn the ins and outs of up to 11 different definitions for one employee. The job might be the same across provinces, but each province may have a slightly different definition or require a slightly different classification.
Working with a professional employer organization (PEO) can help alleviate this stress. The PEO’s staff is familiar with these definitions already. They can help you identify the correct way to classify different employees across different provinces. They can even help you manage the payroll implications of each classification.
The PEO is also familiar with Canadian employment legislation, so they’ll be able to tell you how to go about hiring, letting go of, and rehiring employees in the right way.
You Don’t Need to Pay These Penalties!
Avoiding employee misclassification penalties is relatively simple. Review your employees’ classifications and adjust them if necessary. If you need help or clarification, a PEO is a great resource.
You can avoid these penalties before they even happen. Your business doesn’t need to pay these penalties so long as you avoid them before they occur.