Staff Business Relationship Employee or Self-employed? Part 2 of 2

Many shop owners think that they can treat their employees, namely, their technician as a self-employed individual. They perceive it would benefit both, namely the business from reduced costs, and give the employee some tax breaks. Canada Customs and Revenue Agency is very clear on its assessment of this status as its analysis is set up to give the “trend”of the relationship.

In part one “Control” and “Ownership of Tools” was discussed in relation to how Canada Customs and Revenue Agency (CCRA) tests the trend to see if a technician has “Employee” status or “Self-Employed” status.

It is important to understand that theses articles are only a tool to assist you in determining if a technician is an employee or self-employed individual. If you are still in doubt contact your tax services office in your region.

In part two we are going to examine the final two tests, namely “Chance of profit/risk of loss” and “Integration”.

CHANCE OF PROFIT/RISK OF LOSS:

You have to examine the technician’s financial involvement to determine if the technician has a chance of making a profit, determine if risks incurring losses due to bad debts, damage to equipment or materials, or unforseen delivery delays and covers operating costs.

Generally, in an employer-employee relationship, the employer alone assumes the risk of loss. The employer also covers operating costs, which may include office expenses, employee wages and benefits, insurance premiums and delivery and shipping costs. The employee does not assume any financial risk, and is entitled to his full salary or wages regardless of the financial health of the business.

The income of an employee paid by piece or on commission does not depend on the losses or profits of the employer’s business. The employee is paid the same per-unit amount no matter how many pieces the employer requires him to produce or sell.

In a business relationship, the self-employed individual may make a profit or incur a loss. He also covers operating costs. There is no guarantee of a steady income because the self-employed individual’s income depends on the results achieved by the end of the contract or term.

The following questions will help determine if the technician has a chance of making a profit or risks incurring losses.

1. Who covers the costs of damage to equipment and materials?

2. Who covers the costs of liability insurance?

3. Who covers office expenses?

4. Who covers rental costs?

5. Who covers delivery and shipping costs?

6. Who covers costs related to bad debts?

7. Who assumes responsibility for ensuring that guarantees relating to materials are honoured?

8. Who assumes responsibility for the performance of the work?

9. Who guarantees the quality of the work?

10. Who covers the costs incurred by the technician in carrying out the work?

11. Who covers the costs of the technician’s benefits (paid vacation, sick leave, life insurance premiums etc.)?

If you answered “Payer” to most of these questions, it means there is little involvement on part of the technician, and that his/her income does not depend on the results achieved at the end of the contract or term. An employee-employer relationship exists.

Finally if one is not able to determine the nature of the relationship between payer and the technician with the first three factors, one has to pursue the final analysis called “integration” which should settle the question.

Integration has to be considered from the point of view of the technician, not the payer. Where the technician integrates the payer’s activities to his/her own commercial activities, a business relationship probably exists. The technician is acting on his/her own behalf, he/she is not dependent on the payer’s business and he/she is in business for him/herself.

Where the technician integrates his/her activities to commercial activities of the payer, an employee-employer relationship exists. The technician is acting on behalf of the employer, he/she is connected with the employer’s business and is dependent on it.

The following questions will help determine if the technician is in business for him/herself and, thereby, if an employer-employee relationship or a business relationship exists.

This last analysis consists of a global review of the first three factors.

1. What was the answer to most of the questions related to the control factor?

2. What was the answer to most of the questions related to the ownership of tools factor?

3. What was the answer to most of the questions related to the chances of profit/risk of loss factor?

If you answered “payer” to these questions, it indicates and is reasonable to conclude that an employer-employee relationship exists.

Still in doubt? If after analyzing facts relating to the four factors, you still can not determine the nature of the relationship between the payer and the technician, contact your tax services office in your region where you can obtain a ruling request form.

As you can see, CCRA has a distinct process to determine the status of the relationship. These are the rules! If a payer considers a technician as self-employed individual while the technician is in fact an employee, the PAYER will have to pay both parts of EI premiums and CPP/QPP contributions for the COMPLETE DURATION OF THE EMPLOYMENT. Penalties and interest can also be charged and these penalties and interest are not allowed as an expense deduction to the business. It is therefore very important to correctly determine the type of employment relationship. In my 29 years of experience in this industry 99.9% of all technician’s relationship with the business fall into the category of employer-employee.

Do not second guess these four tests as CCRA does not take lightly to anyone, or any business, trying to play with fire with rules that establishes an employer-employee relationship.

Robert (Bob) Greenwood is President & CEO of E. K. Williams & Co. (Ontario) Ltd. and Automotive Aftermarket E-Learning Centre Ltd. Bob has 29 years of industry-specific business management experience. He has developed shop business management courses for independent Service Providers recognized as being the most comprehensive courses of their kind available in Canada. Bob is the first Canadian Business Management Consultant and Trainer to be recognized for his industry contributions when he received the prestigious Northwood University Automotive Aftermarket Management Education Award in November 2003. E. K Williams & Co. (Ontario) Ltd. offices specialize in the independent sector of the automotive aftermarket industry preparing analytical operating statements for management purposes, personal and corporate tax returns and business management consultation. Visit them at www.ekw.ca and sign up for their free monthly management e-newsletter. Automotive Aftermarket E-Learning Centre Ltd. is a leading edge company devoted to developing comprehensive shop management skills through the e-learning environment. Visit www.aaec.ca and take the free overview. Bob can be reached at (613) 836-5130, 1-800-267-5497, FAX (613) 836-4637 and by E-Mail: greenwood@ekw.ca or greenwood@aaec.ca