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How contractor status impacts hiring costs in Canada

Mar 10, 2020

Alex MacKenzie
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Alex MacKenzie
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As organizations around the world struggle to overcome workforce challenges created by emerging technologies and shifting demographics, employers doing business in Canada are also re-examining the traditional employee/employer relationship model.

And they're augmenting it with a more flexible option: The contingent workforce.


30 per cent of the country's total workforce is already made up of temporary talent.


While contingent workers come with many cost-saving benefits, it’s important that employers take the worker's status into account when negotiating rates, as the status of the worker has legislated requirements that the employer must abide by. These requirements can add costs and introduce risk into your business if you don't get things right. 

In Canada, there are four different statuses that a contingent worker can present themselves as for an engagement, and each status is unique. 

As many organizations choose to use staffing agencies to help find and engage contingent workers on their behalf, below you will find a breakdown of the different statuses workers present themselves as and how they might impact your costs.

Incorporations & Partnerships
When the individual that the staffing agency is engaging through a contract for service is either an incorporated contractor or a partnership, the individual is engaged in a business to business relationship with the staffing agency, and as such, any requirements to be compliant with employment standards belong to the contractor's corporation rather than the staffing agency. What this means is that the staffing agency does not have any employer burden for this contractor.

When you are hiring through a staffing agency, the rate you should be charged is as follows:


Client Bill Rate = Rate to Contractor + Staffing Agency Fee


Sole Proprietors
A Sole Proprietorship is defined as an unincorporated business owned and operated by one individual. 
 
If a Sole Proprietor is paid through a staffing agency, the Sole Proprietor is responsible for remitting their own taxes, however, under certain conditions, the staffing agency may be responsible for deducting and remitting Employment Insurance (EI) premiums and Canadian Pension Plan (CPP) contributions, unless the agency has a ruling from the CRA which does not require them to do so (CPT1 ruling).  Sole Proprietors are not required to receive any benefits such as statutory holiday and vacation pay; however, as mentioned above, Sole Proprietors working through a staffing agency can qualify for EI. 

Depending on the results of the CPT1 ruling and the location of the work, the staffing agency may have EI, CPP and even Employer Health Tax (EHT) contributions that it needs to make. 

In those cases, the rate that you would be charged when hiring through a staffing agency is as follows: 


Client Bill Rate = Sole Proprietorship Rate + Employer Burden + Staffing Agency Fee


 Temporary Workers (T4)
Temporary Workers, often referred to as T4's, are temporary employees of the client or staffing agency.  When T4's are employed by a staffing agency, the staffing agency is required to deduct and remit EI, CPP and income tax at source. The T4 will also receive statutory holiday pay and vacation pay from the staffing agency. 

The employer burden will be similar to that of a Sole Proprietor; however, it will also include Employer Health Tax (EHT), stat holiday pay, vacation pay and Worker’s Compensation insurance.

When hiring through a staffing agency, the rate you will be charged is as follows:


Client Bill Rate = T4 Pay Rate + Employer Burden + Staffing Agency Fee


Ensure you account for status when negotiating rates!
Understanding that different statuses have different employer burden obligations is just the first step toward getting things right. It's important to consider how you're factoring the worker's status into your negotiation process. 

When you consider the contractor landscape in Canada, the majority of professional contractors present themselves as Incorporated Contractors; however, do not assume that every contractor you're looking to hire is Incorporated, as that can be a costly mistake!


You must first determine the status of the contractor before talking about rates to ensure you're accounting for the burden in your calculations.


While contingent workers add a tremendous amount of flexibility to an organization, it's important that employers engage them properly, as a flexible workforce can open organizations up to a myriad of tax, financial, legal and branding risks on top of those associated with employer burden.

To learn more about how competitive organizations are managing contingent worker risk, download our free white paper: A Checklist for Contingent Worker Risk:DOWNLOAD CHECKLIST

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