Employee versus Independent Contractor

It appears - based on his very confused “manifesto” - that when Robert. Stack flew his plane into the IRS’ offices in Austin Texas earlier this year one of the focuses of his rage was the tax treatment of consultants versus employees, and the wrongs he perceived had been done to him in his dealings with the IRS.

While I know none of you will take drastic action, be advised that the tax consequences if an individual is found to be an employee when both parties were operating on the assumption that she or he was an independent contractor can be severe: all of the employment related deductions and taxes associated with an employer employee relationship are back-owed, often with penalties, and to the extent the individual filed using certain business deductions she or he will also be reassessed. In short, it will be painful for the organization and for the individual.

Why not avoid the issue in the first place? Short term specific assignments are not the concern. It is when an individual is working chiefly for one organization for a longer period of time when the problems arise.

Here are some guidelines to bear in mind:

Degree of control

If the individual reports frequently to a manager within an organization and operates only upon instructions given by the organization, then that is indicative of being an employee. An independent contractor is given guidance as to what his or her mandate is and what the deliverables should be, but is expected to work more autonomously.

When working on a independent contractor basis, both the organization and the individual should make it clear that the arrangements are not exclusive and the individual is permitted to work for other organizations provided that she or he adheres to obligations of confidentiality and protection of proprietary information.

Work Space and Tools

An independent contractor can be provided with temporary office space and access to office systems and equipment – in fact some organizations for security reasons insist that only a computer issued and controlled by their IT group be used for company business - however office space arrangements should not be longer term. Further, if an organization does require that people use computers issued and controlled by them, that equipment should only be used for the work the contractor does for that organization and she or he should have his or her own technology and office space elsewhere.

Compensation

A contractor can be put on a retainer for specified services and deliverables, and there can be additional compensation that rewards specific achievement (e.g. an additional fee on completed sales), or the compensation can be strictly results-based (a fee based on a successful sale or completed task). However an independent contractor’s compensation should not be comparable to the compensation plans for an organization’s employees, nor should it reward the contractor based on overall corporate financial results.

Integration of activities into the business

Bringing in a consultant for a limited period of time who specializes in one or two areas of an enterprise’s business to help organize and/or take the business to the “next level” is not indicative of employment. However if she or he remains for too long and/or starts to take over the actual management of the proposed solutions that she or he has provided, then you are straying into employment territory.

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There are a number of fail safes that can be built into these arrangements to keep the status clearer, but they only work if they are adhered to. No matter how you "paper it", if it looks like a duck, and it walks like a duck, Revenue Canada will start hunting!