Finance

This directive provides guidance to contracting authorities so that an employer/employee relationship is not inadvertently established when the intention is to have a service contract with a person or other entity.

Failure to follow the correct application of the directives could result in the Government being liable for income tax, payroll tax, source deductions and other statutory liabilities such as Workers' Compensation levies.

Appendix A of this directive provides details on the four primary common law tests used by the courts to determine if an employer/employee relationship exists.

Appendix B of this directive is a questionnaire on the characteristics of a proposed contract, designed to assist in determining whether the proposed contract should be classified as a service contract or an employment contract.

Scope

This directive applies to all departments of the Government of the Northwest Territories and public agencies listed in Schedules A, B, and C of the Financial Administration Act, excluding the Northwest Territories Power Corporation and the Workers' Compensation Board.

PERSONAL SERVICES CONTRACT OR EMPLOYMENT CONTRACT? THE FOUR PRIMARY TESTS

The courts have developed the following four categories of tests to help distinguish between an employment contract and a service contract.

1. CONTROL

   The foremost indicator of whether a contracted person is an independent contractor or an employee is the degree of control the employer exercises over the person carrying out the work. In an employment contract the employer has the authority to exercise control over what work or service will be done and over the manner of doing it, and this right of control exists whether exercised or not. If the skill required of an employee is great, control may be less significant than other factors in determining that the person is an employee.

   Control indicators include:

   1.1	Hours of Work The person must work during specified times. Where the nature of the work makes specified times impractical, a requirement that the person work during times determined by the nature of the work is still a form of control by the employer. A requirement that the person not work beyond a specified number of hours in a given time period is also a form of control.
   1.2	Hours of Service A person must devote a significant portion of their time to the work. This implicitly restricts the person from doing other work, indicating that the employer has control over the work or service.
   1.3	Premises and Equipment The person does the work on the employer's premises or, if the work is done elsewhere, the employer has the right to designate a route or to require work at a specific location e.g., park ranging, fire control. The employer supplies tools and equipment the person needs for performance of the work. These conditions are forms of control.
   1.4	Continuing Services If the contract implies continuing or recurring work, the relationship is considered permanent even if the work is part-time, seasonal, or temporary. Continuing or permanent service indicates employer's control.
   1.5	Established Routines and Schedules The person is required to follow established routines and schedules.
   1.6	Accounting for Actions The person must account to the employer for time spent on the work, e.g., through time sheets, regular written reports or regular verbal communication. This test may not be conclusive and should be considered in relation to the other control indicators. An independent contractor may be required to submit reports or account for time spent working. For example, contract conditions for non-continuos professional services may call for progress billings based upon reported progress or time spent. In these cases, time sheets, reports and invoices do not indicate control, but rather substantiate progress on the work of the contract.
   1.7	Compliance with Instructions The employer has control over how the work is performed. The employee is required to follow instructions and procedures laid out by the employer and does not have the authority to subcontract the work.
   1.8	Training The employer trains or requires the person to be trained for the work, indicating that the employer exercises control over the manner and means by which the work is performed. This indicator is more significant if the training is periodic or frequent.
   1.9	Length of Service The longer the time spent on the work, the greater the likelihood that the person doing the work should be considered an employee.
   1.10	Right to Discharge An employer's right to discharge a worker may indicate control over the person doing the work, although this is not conclusive. A contract authority normally has the right to terminate the services of an independent service contractor if the work does not meet contract specifications.

2. ECONOMIC REALITY - THE OPPORTUNITY FOR PROFIT OR RISK OF LOSS
   
   Several economic reality factors indicate that an employer/employee relationship (employment contract) may exist between the employer and a person.
    
   1. an absence of the person's opportunity for profit or risk of loss
   2. an absence of the person's investment in assets required for the performance of the work, e.g., equipment, furniture, etc.
   3. payment to a person based on a rate for time rather than on the completion of a specified project

   The status of independent contractor is indicated by a person incurring expenses for the purpose of gaining or producing business income.

3. INTEGRATION
   
   This test considers the employer's corporate organization as a whole, and may indicate an employment contract if the employed person and the work are integral parts of an established organization. For example, the person in question typically relies upon others in the organization for product or service and, in turn, they similarly rely upon the person.
   
   The courts have recently applied this test by determining whose business it is from the perspective of the person doing the work, not the contract authority. If the person performs services for a number of unrelated employers, the work may not be an integral part of a particular employer's business as much as it is the contractor's, indicating a degree of independence by the contractor.
4. SPECIFIED RESULT
   
   This test helps distinguish between an independent person performing specific work as an independent contractor and one in which a person's services as an employee are at the disposal of the employer without reference to a specific result. A main characteristic of an independent service contract is that the person works to a specified plan or intent and the contract ends when this plan or intent is completed or terminated by the contract terms. In an employment contract, the person is engaged and paid continuously and not necessarily toward a specified end result. Examples of specified results within service contracts are:
   1. "install software, not to exceed 35 hours by 28th Feb. 19xx;" and,
   2. "train five employees in the new software for four hours each day for five days."
   3. "train only between 10:00 A.M. and 3:00 P.M."
   4. an engineer's construction site inspection on a specified day
   5. a truck with driver provided for a specified period, or to carry a specified number of loads, or to move a specified tonnage.

   Although these examples might appear to call for the primary test of control (hours of work and service), the specified times express the nature of the service to be rendered, not the employer control typical in an employment contract. The employer has contracted for temporary hours or times as part of a specified end result.