Effective Date: April 1, 2016

Applicable FAM Policies: 705 - Procurement

Applicability: GNWT Departments and Public Agencies

This interpretation provides guidance on the general tests in distinguishing between a personal service contract (contract for service) and a contract of employment (contract of service). This helps to ensure that an employer/employee relationship is not inadvertently established when the intention is to have a contract for services with a person or other entity. Failure to follow the correct application could result in the government or public agency being liable for source deductions for income tax and other statutory liabilities such as Canada Pension Plan Contributions and Employment Insurance Premiums.

INTERPRETATION

The courts have developed the following four categories of tests to help distinguish between an employment contract and a service contract. These are consistent with the factors Canada Revenue Agency uses in the determination of employment status.

1.            CONTROL

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. When examining the factor of control, it is necessary to focus on both the payer’s control over the worker’s daily activities and the payer’s degree of influence over the worker. Control indicators include:

Hours of Work

The person must work during specified times. When 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.  Also, a requirement that the person not work beyond a specified number of hours in a given time period is a form of control.

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.

Premises

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.

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.

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-continuous 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.

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.

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.

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.

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.            TOOLS AND EQUIPMENT

Consider if the worker owns and provides tools and equipment to accomplish the work. Contractual control of, and responsibility for, an asset in a rental or lease situation is also considered under this factor. What is relevant is the significant investment in the tools and equipment along with the cost of replacement, repair, and insurance. A worker who has made a significant investment is likely to retain a right over the use of these assets, diminishing the payer’s control over how the work is carried out. In addition, a significant investment in tools and equipment and the maintenance and replacement costs associated with these assets may place the worker at the risk of a loss.

Self-employed individuals often supply the tools and equipment required for a contract. As a result, the ownership of tools and equipment by a worker is more commonly associated with a business relationship.

However, employees sometimes also have to provide their own tools. The courts have acknowledged that because a worker is required to provide tools of the trade, this does not in itself mean that the worker is a self-employed individual. For example, many skilled tradespeople such as auto mechanics have to supply their own tools, even if they are full-time employees.

Indicators showing that the worker is an employee

• the payer supplies most of the tools and equipment the worker needs. In addition, the payer is responsible for repair, maintenance, and insurance costs.
• the worker supplies the tools and equipment and the payer reimburses the worker for their use.
• the payer retains the right of use over the tools and equipment provided to the worker.

3.            THE OPPORTUNITY FOR PROFIT OR RISK OF LOSS

Consider whether the worker can realize a profit or incur a loss, as this indicates that a worker controls the business aspects of services rendered and that a business

relationship likely exists. To have a chance of a profit and a risk of a loss, a worker has to have potential proceeds and expenses, and one could exceed the other.

Employees normally do not have the chance of a profit and risk of a loss even though their remuneration can vary depending on the terms of their employment contracts. For

example, employees working on a commission or piece-rate basis, or employees with a productivity bonus clause in their contract can increase their earnings based on their

productivity. This increase in income is not normally viewed as a profit, as it is not the excess of proceeds over expenses.

Employees may have expenses directly related to their employment, such as automobile expenses, and board and lodging costs. Normally, expenses would not place employees at risk of incurring a loss because it is unlikely that the expenses would be greater than their remuneration.

Self-employed individuals normally have the chance of profit or risk of loss, because they have the ability to pursue and accept contracts as they see fit. They can negotiate the

price (or unilaterally set their prices) for their services and have the right to offer those services to more than one payer. Self-employed individuals will normally incur expenses to carry out the terms and conditions of their contracts, and to manage those expenses to maximize net earnings. Self-employed individuals can increase their proceeds and/or decrease their expenses in an effort to increase profit.

This factor has to be considered from the worker’s perspective, not the payer’s. It is, for the most part, an assessment of the degree to which the worker can control his or her proceeds and expenses.

Employees may share in profits but do not suffer losses incurred by the payer’s business.

The method of payment may help to decide if the worker has the opportunity to make a profit or incur a loss. In an employer-employee relationship, the worker is normally

guaranteed a return for the work done and is usually paid on an hourly, daily, weekly, or similar basis.

Similarly, some self-employed individuals may be paid on an hourly basis. However, when a worker is paid a flat rate for the work done, it generally indicates a business relationship, especially if the worker incurs expenses in doing the work.

Indicators showing that the worker is an employee

• The worker is not normally in a position to realize a business profit or loss.
• The worker is entitled to benefit plans that are normally offered only to employees. These include registered pension plans, and group accident, health, and dental insurance plans.

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. The employee’s job will be an integral part of an employer’s business.

Examples of specified results within service contracts are:

1.    "install software, not to exceed 35 hours by 28th Feb. 20xx; and, train five employees in the new software for four hours each day for five days."

2.    "train only between 10:00 A.M. and 3:00 P.M."

3.    an engineer's construction site inspection on a specified day

4.    a truck with driver provided for a specified period, or to carry a specified number of loads and 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.

If it is determined that an employer/employee relationship would exist, the proposed contract is inappropriate.  Either revise the contract or initiate proper staffing actions as directed in the Human Resources manual.