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A Beginner's Guide to Worker Classification

Posted by Shannon Dowdall

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Jun 22, 2016 9:00:00 AM

A_Beginners_Guide_to_Worker_Classification.jpgA lot of businesses that are starting to look into worker classification end up with a lot of questions: Should you classify your worker as an employee or independent contractor? What benefits are an employee entitled to? What is the cost-benefit ratio?

Worker classification has become a hot-button topic in the last few years, as agencies including the CRA (Canada Revenue Agency) are starting to implement policies to cut down on business misclassification. This can be frustrating for a number of businesses that don’t have cut-and-dry guidelines, or simply don’t have prior knowledge of how they should classify their workers and how they should process the necessary paperwork. With this guide we’ll give you some answers to those frequently asked questions and help save you and your business from making some costly mistakes.

Basic Classification Guidelines

Thankfully, the Canadian Revenue Agency has an online guide which provides criteria to determine how to classify your workers, and the responsibilities you’ll have as an employer towards your workers, depending on whether they can be classified as self-employed or an employee. While the real difficulty is in the nitty gritty details of worker compliance, there are avenues that you can take to alleviate the burden of having to sift through all the legal documentation. For example, you have the option of requesting a ruling through the CRA, and there’s always the option of partnering with a PEO.

In terms of deciding which worker is more beneficial to your business in its current state, there are a few things to consider: If you’re a company that requires the ability to change size depending on the project (such as an IT company) then you’re going to need to adopt a business strategy which favours having a core team and a set of independent contractors. Scalability is useful in that it allows a company to be able to accept a large project opportunity and adjust resources depending on the needs of the project (i.e independent contractors). Similarly if the work is seasonal, businesses can scale down the workforce to adjust for those slow months. Other situations which might require the use of independent contractors is if there is a specialized skillset, which your business might require occasionally, but you don’t want to hire full time.

An employee is generally going to be hired when you have the infrastructure to support a stable workforce. Raymond Grainger, Founder and CEO of Mavenlink, suggests that if the billable time of current full-time employees is at or above 85 percent and the profit margins are at least 50 percent, those are good indicators that the company is ready to add another full-time employee. The employee is going to be supervised by a manager and more resources are going to be spent processing the appropriate paperwork for that employee. Often, the employee is also going to expect to be provided the necessary equipment by the business to do their job.

Partnering With A PEO

The danger of misclassification is real, and often has financial consequences for a business that for example, hires a worker as an independent contractor, but uses them in the same capacity as they would an employee. Thankfully, the importance of classification is become more and more well-known. With a bit of research, it’s clear that classifying properly saves you money and your reputation in the long run, particularly if you utilize an appropriate business strategy.

That’s why it often helps to partner with a PEO when dealing with worker classification. A PEO is going to have access to the resources that you need, and will work with you and your company to hire the appropriate workers, following strict worker classification compliance. It’s their job to ensure that you’re getting the appropriate staff for your business strategy, and they will do all the payroll and HR services that you would normally do in-house, for a monthly flat rate fee. Having determined whether you want to adopt a scalable business plan or not, partnering with a PEO can save you a lot of hassle, and guarantee that you won’t be met with a government audit and face the steep consequences of worker misclassification.

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Topics: Worker Classification

3 Things People Don't Understand about Worker Classification

Posted by Corinne Camara

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Mar 4, 2016 9:00:00 AM

3_Things_People_Dont_Understand_about_Worker_Classification.jpgWorker classification is a major hot button issue in the business world right now, and has been for the last few years. As agencies across the nation begin to tighten their policies and crack down on misclassification issues, a lot of businesses have found themselves in the awkward position of wanting to comply, but not fully understanding everything there is to know about worker classification.

Luckily, the broadest points are also the most important and we've compiled a handy list of the most common misconceptions and concerns when it comes to classifying employees.

1. Contractors vs. Employees

While not everyone can clearly see the differences between a traditional employee and an independent contractor, the distinction is important. While some courts are still scratching their heads over more nuanced differences, others are more dramatic, making it easier to make the correct identification.

An independent contractor is generally expected to provide their own supplies such as computers or construction equipment, whereas an employee is usually provided with these tools by when they begin working for the company. Likewise, a contractor tends to be responsible for the maintenance and repair of these tools. On the other hand, an employee can expect that their work materials to be maintained by the company.

An employee generally works with a great deal more oversight than their counterpart, and is mostly unable to subcontract any of their work to another. A contractor, however, tends to work within their own schedule, checking in when required. They can freely use other talent to complete aspects of their work depending on the contract.

When an employee is given a task, they're expected to complete it, regardless of the challenges. An independent worker has the option of turning down specific tasks and working on a piece-by-piece basis, a freedom not afforded to many employees. Naturally, with that freedom comes some compromise—an independent worker might suffer under an unstable economy, or a poor work month, while an employee is generally given a great deal more security at their job. That's specifically why worker classification is so important and, incidentally, why many companies feel the urge to misclassify.

2. It's Not All That “Cost-Friendly”

Why would companies misclassify at all? That's a good question, one that comes up on a regular basis. A traditional employee can cost a lot money—premiums that go towards pension plans, employment insurance, overtime, and vacation pay. That's another area where contractors differ, since they're usually exempt from those charges and often perceived as cheaper labour. That means that some businesses have been known to engage in wrongful worker classification on purpose, in order to save money—all the benefits of an employee with none of the responsibility.

Apart from being illegal, it comes with major ramifications as well. Since the Canadian Revenue Agency put a higher emphasis on worker classification issues, many companies have been fined with heavy levies, and expected to pay all owed taxes, remittances, premiums, and more to their employees and the government with interest to boot. This means it becomes a great deal more expensive to misclassify in the first place, which might leave some companies thinking twice about the temptation.

3. It Can Create Major Legal Problems

Sometimes it’s just an honest mistake, but regardless of whether it's accidental or on purpose, worker misclassification can have devastating consequences. Even when you set aside the dire financial cost, a company caught in a sketchy situation will also find themselves open to massive legal suits that can damage their record and reputation. More and more businesses have been consulting experts for help. Take all the necessary measures to stay compliant and secure.

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Topics: Worker Classification

What to Do If You're Worried about Worker Misclassification

Posted by Ray Gonder

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Dec 30, 2015 9:00:00 AM

What_to_Do_If_Youre_Worried_about_Worker_Misclassification.jpgWorker misclassification is a very hot button issue for 2015 and has been since it was first broached as a general subject only a few years ago. Due to changes in laws, not to mention vast shifts in business when it comes to types of workers, it's on the mind of every company and has a lot of people stressing out over what seems to come down to bureaucracy.

Worker misclassification, in short, is when a worker is officially labeled as an employee or as an independent contractor, depending on their role within the company and contract. Issues of misclassification can be accidental, and usually are related to mistakes in paperwork or misunderstanding of official designations since there are some rather blurry lines involved. Other companies, hoping to save on taxes associated with full-time employees, misclassify purposefully and by doing so, are breaking the law.

So what can we do about it? It's a complicated situation and the thought of having to dig through back filings to ensure everything is correct is daunting, but it might also save you from legal trouble down the road. Let's start by learning the differences.

Employees vs. Independent Contractors

According to the Canadian Revenue Agency, they look for four main things when it comes to the classification of workers. These are general rules, and don't always apply to each individual worker you have, but are excellent guidelines for helping better understand the differences between them and helping to avoid worker misclassification.

Control: A traditional employee is generally supervised by a manager or other boss, and usually works according to a set standard or process that is laid out by the business at hand. This can apply to certain programs, operating systems, operations and other things that they do on a regular basis. On the other hand, an independent contractor has a great deal more flexibility, generally speaking. They don't often have direct oversight and often prefer to use their own processes to do the job required of them. Unlike an employee, they can usually accept or refuse work at will and are able to work for other clients simultaneously in the meantime.

Risk: Independent contractors, by nature, take on more risk than their traditional counterparts, in terms of financial success. They are rarely guaranteed an amount of work per term, which means if a business has a slower month and doesn't need their services as often, they will take a financial hit. Naturally, if the business is doing well, they do as well. An employee, however, is generally protected under that business, meaning they make the same amount of money (and get the same hours) regardless of the position a business is in.

Subcontracting: Perhaps one of the starkest differences between an employee and an independent contractor is the contractor’s ability to subcontract their work when necessary. This could mean delegating a portion of a project to a more specialized worker or, in a bid for time management, getting someone else to fill in some of the details. An employee, however, doesn't have that ability and is rarely able to delegate their work without express approval from a higher up.

Tool Ownership: The most distinctive difference comes down to tool ownership. Employees are provided with the necessary tools and employers are generally on the hook for any repairs or maintenance required. Independent contractors are generally expected to maintain their own tools and workspace, often providing things like laptops, programs, power tools, or whatever else is needed to do the job.

Engage an EOR

This is where a lot of companies have begun partnering with employers of record (EORs). In the wake of the CRA's crackdown on worker misclassification, outsourcing that responsibility is a perfect way to ensure your worker classification is perfectly compliant and in order.

What Are You Leaving to Chance by Handling Payroll on Your Own

Topics: Worker Classification

Why You Need to Prioritize Worker Classification

Posted by Ray Gonder

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Dec 21, 2015 9:00:00 AM

Why_You_Need_to_Prioritize_Worker_Classification.jpgThere's been so much talk of worker classification in the recent months, as the Canadian Revenue Agency unrolled new rules, new systems for differentiation and has begun cracking down – especially on businesses that make use of a lot of independent contractors. It's not just small business that can suffer from these crackdowns – large companies have also found themselves suffering from these fines, penalties and lawsuits. If there's a silver lining, it's this: it has opened our eyes to the dangers of misclassifying workers and we can begin to identify where they went wrong.

1. Legal Compliance

First and foremost, worker classification is about compliance with the law. The CRA has very stringent guidelines about what makes up an independent contractor versus what makes up an employee, and while they look simple, they're often confusing when it comes to issues with blurred lines. All employees are entitled to protection under the Employment Standards Act in their province and most labour laws apply to them, which puts each business on the hook for complying with them. Because worker classification can be nitpicky, however, some of those laws apply to contractors as well and this is where people get confused.

While a contractor typically sets their own hours and works outside of the office, sometimes they work within the office from 9 to 5, like a regular employee. They may often provide their own tools, but businesses sometimes provide them as well. A full time employee is generally someone who works regular hours but sometimes they work from home, and at odd times of the day. Because of this, many companies accidentally fall into the trap of misclassification without even knowing it and for that reason, an emphasis is needed on clarifying those differences once and for all. If you're able to remain legally compliant, you can protect your business and your workers from harsh fees, levies and even jail time, none of which are beneficial or look good on your brand.

2. Cost Savings

While some companies misclassify purposely in a way that will save them on critical and non-negotiable taxes, others simply make mistakes and those mistakes could be costing them money. Even outside of fines, if one has classified a worker as an employee when they're not, they're unnecessarily paying out overtime, vacation pay, feeding into the Canadian Pension Plan and Employment Insurance and myriad other fees associated with an employee. This can be a huge burden, especially for smaller companies who have finer margins. By ensuring your worker classification is wholly correct, you're able to avoid spending all that unnecessary extra money, which is never a problem.

3. There's Help

In recent years, the number of businesses making use of independent contractors has raised, hence the higher emphasis on worker classification making its way into the business mind. Because of that, more companies are finding themselves faced with these classification issues than ever before. While the prioritization of worker classification is critical, it sounds easier said than done for many, especially when they want to focus on their own business’s operations instead. Luckily, because of this shift, more organizations than ever have been able to find and partner with Professional Employer Organizations (PEOs) who can carry this burden on their behalf.

A PEO tackles worker classification for a living, constantly updating on all the new laws and regulations that apply to business across the country. Because they specialize in labour and employment standards, regardless of the province or region they're operating within, they can ensure compliance and cost savings without your company having to go to the trouble of hiring an expensive team of legal experts, or navigating the intricacies of the CRA. Consider having someone else take care of all the classification frustrations for you, and instead, focus on your own goals without fear of legal retribution.

What Are You Leaving to Chance by Handling Payroll on Your Own

Topics: Worker Classification

Why You Should Outsource Your Worker Classification

Posted by Stacey Duggan

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Dec 11, 2015 9:00:00 AM

Why_You_Should_Outsource_Your_Worker_Classification.jpgWorker classification is something the Canadian Revenue Agency has been cracking down on in recent months, and it's been making a lot of employers nervous. The fact is, because of the rise in independent contractors, the issue of classification has been getting more complicated and many businesses find themselves suffering for simple lack of information.

Thankfully, there are organizations like EORs (often known as PEOs in the United States) that make their living helping companies avoid this kind of trouble and stay compliant while they're at it. Here are a couple of very important reasons why you should consider outsourcing your worker classification.

Classification Definitions

There are two main types of worker these days: employees, which are considered to be the more traditional type, and contingent (or independent) workers who are growing in number every year. It's these two groups that classification generally refers to and while sometimes the differences seem obvious, other times companies are left feeling uncertain.

Generally, an employee is someone who works for a company and is provided all the tools they need for the job by that company. This may include their office supplies, computer or anything else required. An employee is also bound by whatever working hours, salary and pay schedule the company lies out and this may even include preferred methods for doing certain tasks, on-the-job training, uniforms, etc. An employee also doesn't generally have the ability to delegate or subcontract a job without direct permission from their employer first.

On the other hand, an independent contractor usually enjoys more flexibility – for example, many of them work from home or from private offices. They mostly provide their own tools for the job, using their own software, programming languages, supplies or hardware and are generally expected to pay for any maintenance and repair on those tools themselves. Many contractors work different hours than regular employees, and unless they sign a contract to the contrary, are allowed to work for other companies in the interim. Uniquely, a contractor is allowed to subcontract their work if they have a time crunch or need the help of someone with a specific expertise.

Legal Complications

One of the main motivations for outsourcing worker classification is simply to avoid the legal hassle. Many companies find themselves highly tempted to misclassify their workers simply to avoid taxes or expensive administrative costs but this involves breaking the law, which is usually a great deal more expensive and always a hit to the reputation. Any misclassification, whether purposeful or not, can lead to a great deal of money being spent on fines and penalties and in particularly egregious cases, can also lead to jail time. Because the CRA is taking worker classification more seriously than it has before, this has lead to a lot of companies scrambling to research the new laws associated and keeping their human resources departments busy ensuring that everything is up to code.

The fact is it's a large drain on resources that could be better spent focusing on your business goals. With the ridiculous amount of paperwork and administrative tasks involved in worker classification, many companies are beginning to realize that they can actually save money by partnering with an employer of record service that can do all the hard work for them and leave them to enjoy smoother operations.

An employer of record (EOR) is a specific organization dedicated to this kind of research, and that makes them the experts. They stay up to date on all legal shifts and changes and ensure that you're 100% compliant, taking the nerve-wracking guess work out of worker classification altogether. Consider taking some stress out of your organization and instead, freeing yourself up to do what you do best.

What Are You Leaving to Chance by Handling Payroll on Your Own

Topics: Worker Classification

What You Need to Know about Worker Classification

Posted by Stacey Duggan

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Dec 7, 2015 9:00:00 AM

What_You_Need_to_Know_about_Worker_Classification.jpgWorker classification can seem rather cut and dry when you've been in the business of hiring workers for a long time. Naturally, when you fill out your tax forms, almost all of your workers can be identified as either employees or as independent contractors and this makes a large difference in terms of how you pay them, how you pay your taxes and what you are required to offer them in terms of legality. With new kinds of workers entering the field, however, classification has become more important than ever – the CRA (Canadian Revenue Agency) has begun clamping down on businesses that aren't careful enough, and that can result in audits, fines, penalties, lawsuits and even jail time.

As contingent workers increase in popularity, this issue particularly hurts workforce managers and other companies that make use of independent contractors, which is why it's so important to research and abide by compliance. Thankfully, this information isn't difficult to find and we have a list of a few major things you need to know about worker classification.

Employees vs. Independent Contractors

There are a lot of dramatic differences between employees and independent contractors, but there are also some nuances a lot of businesses simply aren't aware of. Because of those subtleties, worker classification can get more challenging and a simple mistake can lead to breaking the law.

An employee is generally supervised by a manager or department head and often required to sign more documentation to ensure the business has an extra layer of security and control. This could mean non-solicitation clauses in their agreement, something an independent contractor will rarely sign. On the other hand, independent contractors generally don't have the same oversight when it comes to their work, and can turn down specific projects as they please. They are also generally able to work for competing businesses at the same time, though you can get them to sign a non-disclosure agreement for security.

A contingent worker or contractor generally supplies their own equipment, like laptops or tools, is responsible for their own workspace (whether at home, or on-site) and will pay out of pocket to maintain or repair anything of theirs that breaks. This also means they may use their own operating systems or organizational methods that differ from the company, but still work within it. An employee on the other hand is expected to use the tools and workspace provided to them and most repairs are paid for by the company – that said, some jobs require employees to provide their own tools, such as trade jobs. Employees are also unable to subcontract any work they have, but independent contractors often use this method – either to catch up on extra work or to enable them to complete jobs with varying aspects, some of which may differ from their area of expertise.

A great benefit to being an employee comes with an unstable market. Employees make the same regardless of the economic climate, while a freelance worker may find themselves rather profitable in high seasons but risking financial losses in slow seasons.

As you can see, there are a great deal of differences between employees and independent workers and all of these are the basis for appropriate and legal worker classification.

Misclassification

Some companies simply make mistakes that lead to worker misclassification and while that's certainly understandable, it can be expensive and complicated. However, due to various tax laws and payroll legislation, other companies have been tempted to skirt those issues altogether and end up misclassifying on purpose, which is a much graver issue. In the end, it doesn't really matter whether it was purposeful or simply an accident – the penalties are the same and it can hurt your business in more ways than one. Consider hiring an EOR (or PEO) to handle compliance issues for you and take the load off.

7 Signs It's Time to Outsource Payroll

Topics: Worker Classification

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