How Is Contractor Tenure A Real Workforce Misclassification Risk?
Independent Contractors Offer Specialized Services to Business...Is There a Risk Associated With the Length of Their Service?
Payment Services Corporation processes both employees and independent contractors. Close to 60% of our contractor base are independent today and we have been maintaining this number for the last 18 months. Clearly, during tough economic times, organizations will supplement peak business needs with the use of independent contractors. Specialized skills are also required during these economic times which also contribute to the high percentage of independents.
Supplementing peak business needs is what the use of independent contractors should be for and therefore used for a limited time period. Now if your business is thriving, that is fantastic news, and, an opportunity to go out and hire the permanent resources required to service your growing business. Many corporations today will have a tendency of extending their existing independent contractors beyond the limited time suggested. The ideal amount of time varies depending on the level of risk the contractor presents to the corporation. There is no set time provided by the CRA. If the independent contractor is misclassified then no time is a good time and it is a good idea to look into a PEO solution. If the independent meets 90% of the criteria of being a true independent then you can probably go beyond the 1 year never surpassing the 2 year mark. If the independent meets 50% of the criteria then you want to make sure he is filling a very short term contractual need way below the 1 year mark. Again, a misclassified independent contractor presents a great risk! Another risk is the lack of proper tenure management. How is Contractor Tenure Real Risk?
- With an independent contractor the corporation can avoid the payroll, withholding and reporting responsibilities, that they would normally pay for an employee, as well as benefits expenses, the employer portion of the Canada Pension Plan (CPP) and Employment Insurance (EI) remittances, and potential liability related to Worker’s Compensation Board issues. If audited the corporation would be at risk to pay back the government due to misclassification issues. The longer the independent has been there the higher the costs.
- The corporation doesn’t have to worry about including the independent contractor in their benefits program, vacation program and any other available perks made available to the permanent employee. If audited the corporation would be at risk to pay back the government due to co-employment issues. The longer the independent has been there the higher the costs.
- Along with the co-employment risk there can be integration issues. The fees involved are often to pay the government but in this case the corporation can also be asked to hire the independent as a permanent employee, integrating them into a role that meets or exceeds their present position and be asked to meet the obligations that another permanent employee has acquired with the same tenure.
In summary, the corporation should make use of the great skills independent contractors bring to the table for a limited time period. When business grows and a consistent business need exists then a decision to hire that contractor as a permanent employee or go out and recruit for a permanent employee is wise.
Is this a potential issue within your company? Are you aware of what risks you may be exposed to? What about the penalties and fines associated with workforce misclassification? We'd love to help, contact us today if you have any doubts or questions.