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Protect your Practice: Are Your Independent Contractors Really Employees?

Hiring practitioners as independent contractors is a common healthcare practice. The distinction between an independent contractor and an employee is crucial as it impacts the legal rights and responsibilities of both parties. The classification carries significant implications in terms of legal obligations, tax requirements, and overall business operations. 

Navigating this complex terrain can be challenging from a Canada Revenue Agency (CRA) perspective, and many practice owners continue to stumble into costly mistakes due to misconceptions and errors in classification.

An employee is engaged by a practice owner under an employment agreement and the practice owner exercises control over the employee’s work and tasks, specifying how, where, and when the work is carried out. Additionally, the practice owner is responsible for withholding income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums from the employee’s wages and remitting them to the CRA. Owners are also obligated to provide certain benefits to their employees, such as vacation pay, sick leave, and statutory holidays.

Conversely, an independent contractor is a worker who offers services to clients under a service contract. Independent contractors have more autonomy over their work, including how, when, and where the work is completed. They are accountable for paying their own income taxes and CPP contributions and are not entitled to benefits such as vacation pay or statutory holidays. Hiring an independent contractor can be more cost-effective for the business as they are responsible for their taxes and benefits. However, hiring an employee can offer more stability and oversight over the work performed.

Protect your Practice from the Risks of Misclassification: Misclassifying a worker as an independent contractor instead of an employee can lead to severe repercussions for the practice owner. The CRA may impose fines and penalties for failing to remit the appropriate taxes, and the owner might be bound to reimburse wages and benefits owed to the misclassified worker. It’s essential for owners to carefully assess the factors determining a worker’s classification and seek legal or HR advice if needed.

5 Tests for Determining if You Have Misclassified Your Practitioners: In Canada, there is no one definitive test used to establish whether an individual is an independent contractor or an employee. The classification is determined in consideration of various factors that indicate the level of control the practice owner carries over the worker. 

The Supreme Court of Canada has devised a common law test based on the degree of control the practice owner exercises over the worker. 

This test considers multiple factors:

  1. Control – The degree of control the worker and the owner have over the work being carried out, encompassing the aspects of where, when, and how the work is completed. An independent contractor will have more control over when and how they perform their work, whereas an Employee is provided instruction and has less control.
  2. Ownership of tools and equipment – Independent contractors typically use their own tools and equipment to perform their work, whereas employees are often provided with tools and equipment.
  3. Chance of profit and risk of loss – Who bears the financial risk of loss and the chance of profit? Independent contractors will often bear the financial risk of loss and can earn a profit based on their performance and decisions. This contrasts with employees, who typically have more stability in their income and are not directly exposed to the same level of financial risk and reward.
  4. Integration into the employer’s business – Independent contractors typically operate as separate entities from the practice without being fully integrated into the day-to-day operations of the practice. Employees are considered integral parts of the practice, working within the structure, following policies, and often receiving benefits and direction. 
  5. Exclusivity – Exclusivity pertains to the expectation that independent contractors maintain multiple streams of income and do not exclusively commit themselves full-time to one practice, while employees are generally dedicated to working solely for one practice.

These factors are not exhaustive, and the court evaluates all relevant factors to determine the nature of the worker’s relationship with the practice and its owner.

Common Misconceptions and Mistakes: Despite clear legal distinctions between independent contractors and employees, many practice owners fall into the trap of misclassifying workers, either unintentionally or deliberately. Here are some of the most common misconceptions and mistakes:

  1. Misunderstanding the Legal Criteria

One of the most prevalent errors is failing to grasp the legal criteria used to differentiate between independent contractors and employees. This can lead to misclassification and potential legal repercussions, including fines, back taxes, and lawsuits.

  1. Relying on Titles or Agreements

Simply labeling a worker as an IC in a contract or agreement does not automatically establish their status. The actual working relationship and the degree of control exerted by the employer are critical factors when testing and determining classification.

  1. Ignoring Misclassification Risks

In attempt to reduce costs and administrative burdens, some practice owners may intentionally misclassify employees as independent contractors. However, this practice can result in severe penalties from employment standards.

  1. Overlooking Compliance Requirements

Practice owners may overlook the various compliance requirements associated with hiring independent contractors, such as ensuring proper documentation, adhering to tax regulations, and maintaining clear records of payments and services.

Mitigating Risks and Costs: To avoid misclassification and ensure compliance with labor laws, practice owners can take proactive steps to mitigate risks and costs:

  1. Conduct a thorough assessment of the working relationship to determine the appropriate classification of workers.
  1. Seek legal advice or consult with an HR professional to ensure compliance with relevant laws and regulations.
  1. Implement clear and detailed contracts outlining the terms of engagement for independent contractors.
  1. Maintain accurate records of payments, services rendered, and any agreements with independent contractors.
  1. Regularly review and update classification decisions to reflect changes in the nature of the work or the relationship.

Accurately classifying workers as either independent contractors or employees is crucial for compliance and operational efficiency. Misclassification can lead to significant legal and financial repercussions, including fines and back taxes. 

As a practice owner, it’s essential to understand the criteria that differentiate employees from independent contractors and apply them diligently. Regularly reviewing your classification practices and consulting with legal or HR experts can help mitigate risks. 

Ensuring proper classification not only protects your practice from potential liabilities but also fosters a fair and transparent working environment. Ultimately, taking the time to get this right contributes to the long-term success and stability of your healthcare practice.

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