Contract Employment of Professional Members

Appendix A
Appendix B

TERMS OF ENGAGEMENT

3.1 CATEGORIES OF EMPLOYMENT

The nature of work in our society has changed from a situation predominated by an employer-employee relationship to one where a wider variety of commercial relationships are the norm. This relatively rapid change in working relationships has ramifications extending beyond the immediate parties involved to include tax authorities (taxation issues), as well as the general public, insurers, and the courts (issues of liability and the spreading of risk).

In general, there are probably three work-related situations that APEGGA members will find themselves in:

· a traditional employer-employee relationship
· a "contract employee" situation where the member dedicates most or all time and effort in the service of the employer
· a truly independent contractor situation, where work is done for the client (employer) outside of any type of employer-employee relationship.

It is important for the member to recognize the differences between these three situations and the subtleties that result. Revenue Canada will likely treat the contract employee in the same way as a traditional employee from the point of view of withholdings (CPP, EI, WCB) and may disallow income splitting or deductions from revenue for vehicles, computer and office equipment, etc. that an independent contractor would be entitled to make.

Revenue Canada and Alberta Labour provide regulations and checklists to determine category of employment. The current issues of these documents were referred to in developing this section of the guideline; however, it is the responsibility of the individual to obtain and comply with updated statutes and guidelines which most directly apply to the specific nature of engagement. The terms and conditions set forth by federal and provincial governments are currently in review and revision, in response to the increasing percentage of the workforce engaged in contract employment relationships. Appendix B provides a checklist developed from industry and government documents, but is to be used as a guideline only.

The nature of the relationship between the client-employer and the contractor-employee will also determine who should obtain and maintain Professional Liability insurance for the member's actions. These issues can only be resolved by determining the nature of the relationship and receiving appropriate advice from legal and insurance specialists. The member is advised to address these considerations when negotiating with the client or employer.

The following list identifies the common types or descriptions of employment which are the basis for categorization using the Appendix B checklist and the definitions in the above paragraphs.

Advisor -
a person, especially a specialist or firm that offers official or professional advice to clients.

Commercial Contract -
Involved in work that is intended for the mass market.

Contract Employee -
A person who works for a company in return for financial compensation, but does not receive the same benefits (training, holiday pay, etc.) as employee's (salaried, full time, hourly etc.).

Employee -
A person who works for a company in return for financial and benefit compensation.

Fixed Price -
To put fee into a stable or unalterable form.

Hourly Employee -
Employee paid by the hour as a unit.

Independent Contractor -
Free from the influence, guidance, or control of another or others; self-reliant.

Personal Contract -
Concerning a particular person and his or her private business.

Proprietorship -
One who owns or owns and manages an unincorporated business.

Retainer Fee -
The fee for engaging the services of a professional adviser for an indeterminate period of time.

Salaried -
Fixed compensation for services, paid to a person on a regular basis.

Secondment -
To release from a regularly assigned position for temporary duty with another unit or organization.

Specialist -
One who is devoted to a particular occupation or branch of study or research.

Third Party Agency -
One other than the principals involved in a transaction.

3.2 BUSINESS OPERATION

This section provides an introduction of employment and business terminology and issues that will govern the responsibilities of the employer and employee in areas of taxation, employment standards and Workers Compensation coverage. The statutes are frequently in a state of revision and members are strongly advised to reference current applicable documents of Revenue Canada, Alberta Labour and Worker's Compensation.
3.2.1 Accounting, Tax and Legal
The APEGGA member should consult the services of professionals in these disciplines to determine the specific needs for the particular business and employment relationship. Starting with the right information should preclude costly and time-consuming problems, in addition to ensuring proper compliance with prevailing laws and practices.
Operation of a business practice requires proper systems and procedures such as invoicing, payroll, cash-flow, Revenue Canada remittances etc. which will also serve to determine classification by Revenue Canada. Care and attention is prudent in setting up the structure prior to engagement for professional services.
3.2.2 Revenue Canada

Revenue Canada looks at employment as Contract of Service or Contract for Service under the Income Tax Act.

· Contract of Service (employee, contract employee) is defined as an individual who agrees to work for the employer for either a specified or intermediate period of time, in return for a salary, and in the case of employee, benefits.
· Contract for Service (Independent contractor) is defined as an arrangement where specific work stipulated in the contract is completed. There is usually a clearly defined task and the contracting party may or may not do anything individually (i.e. the contractor is free to sub-contract or hire others to do the work).

In determining the type of contract, Revenue Canada looks at four basic criteria.

· the degree of control exercised by the employer, especially with respect to hiring/firing, setting pay scales, and determining how, when, and where the work will be done. The control test is the single most important test to be applied in determining employee or contractor status.
· ownership of the tools required to do the work
· the chance of profit and the risk of loss
· the extent to which the work done by the employee is integrated into the employer's business.

The Company contracting services may be at risk if Revenue Canada deems the Independent Contractor or Contract Employee an Employee, as the Company could be liable for payroll deductions (EI, & CPP).

3.2.3 Employment Standards Branch

Employment Standards Branch (Alberta Labor) looks at several issues. They are:

· Business relationship
· Taxation
· Autonomy.

The Company may be held liable for vacation pay, overtime and minimum severance pay if the independent contractor was found to be an employee.

Alberta Labor has published a useful checklist to determine whether a person is likely working in the capacity of an employee or as a bona fide sub contractor.

3.2.4 Workers Compensation Board

The protection available to a service user under the Workers' Compensation Act may not be available where the person providing the service is an independent contractor. Employees covered by the Workers' Compensation Act cannot sue where compensation is available under that legislation.

Contracts may stipulate that an Independent Contractor is required to maintain his/her own Worker's Compensation Board Account. For individuals who are a Director of a corporation of any size, it is strongly advised that WCB be contacted to determine the extent of coverage available to the Director, as it may be severely limited, thereby necessitating procurement of independent coverage from other sources.

3.2.5 Canada Pension Plan

The Independent Contractor is responsible for his/her own payment, or the company using the services may be exposed for non-collection of Canada Pension Plan payroll deductions.

3.2.6 Employment Insurance

The Canada Employment and Immigration Commission may, pursuant to Section 18 of The Unemployment Insurance Regulations, deem him or her to be an employee for the purposes of payment and deduction of unemployment insurance premiums.

3.2.7 Liability And Indemnification
Other insurance such as Comprehensive General Liability coverage is advisable in most circumstances. Responsibilities with respect to payment of taxes and payroll taxes should be reviewed with qualified legal and accounting personnel during setup of an employment relationship not clearly viewed as a full-time employee.