Hiring contractors is generally deemed necessary in most organizations for a variety ofreasons. The main reasons for hiring contractors are: where a company requires external resources to augment a core group of internal employees for a set period of time or when a company lacks a certain set of expertise that cannot be found internally. In any event with the Demographic shifts and the war for highly skilled talent still alive the hiring of contractors is a growing trend not a declining one.

Unfortunately many HR folks still may not view the use of contractors as essential. In fact many HR professionals are often unaware that hiring contractors is happening right under their noses. This is often since contractor hiring takes place at the decentralized line manager level and is handled through an invoicing scenario vs. a HRIS system. Now due to the volume of expenditure on contractors there is a growing trend of Contractor Program Management becoming the domain of Procurement versus HR.

I am hopeful that HR’s prerogative will soon change since there is a growing need for contractors to be included in companies overall Talent Management strategies vs. seen as an external short term occurrence. With this need in mind, HR and Procurement will need to work together to manage this essential source of Talent as partners in order to balance the spend management vs. talent management dynamic.

Most of the information published publicly focuses on how contractors can ensure that they are to be deemed “self employed” vs. an employee and not much has been published on how employers can help protect themselves and mitigate the risks of co-employment (i.e. having your contractors deemed employees of your company by CRA or another government body).

In saying that, employers should not dismiss information written so far when developing their policies around the hiring and usage of contractors. These writings are good “tests” that will help in understanding some of the clear differences in day-to-day working scenarios. Also, the more that both employers and contractors do to ensure proper classification of their employment status the better.

First let’s understand why employers would want to ensure that their contractors are NOT deemed employees by CRA. The following are some of the consequences or risks that employers face if they have the unfortunate situation of having their contractors deemed employees:

1.Government Payroll Deductions: Your Company would be responsible for the Government Payroll deductions. This not only includes the EI (Employment Insurance) and CPP (Canadian Pension Plan) retro actively, but also the Income Tax deductions that you as the “employer” would have been responsible to withhold. Therefore if that “Consultant” happened to be aggressive on their tax returns you may be deemed liable by the government. In most cases this equals big dollars.

2.Law Suits for Employee Benefits: Your Company could be liable for the retroactive benefits that that those contractors would have been eligible for if they were employees of the company during that period of time (i.e. benefits, termination, pension, etc.). The precedence setting case on this topic was Microsoft who got hit for over $97 Million in benefits in addition to the ongoing legal cost of defending themselves.

3.Reputational Risk:This would tarnish your company’s brand that it portrays in the market place. Headlines reading “improper accounting practices” or “leaves employees hanging without unemployment insurance” are generally not the branding that any company seeks out.

Many of you are saying to yourselves OK these are only risks if we get caught.

Guess What?

With the economic uncertainty, these are the times that there is a higher probability that you will be caught.

With people being let go and contractors being terminated this is the time when your “contractors” are applying for employment insurance and it is at this time when both the contractor and the government become aware that the situation may have not been managed properly and the government investigation starts.

If you currently do not have a contractor management policy in place I would recommend you have one in place before a CRA or EI audit takes place. It helps to have documented procedures and processes in place to display that effort has been taken to manage things properly.

To help you define or enhance your policy to mitigate risks when hiring and using contractors the following are some best in class ideas:

NOTE: Before getting into the checklist the best advice I could give any employer would be to: BE ORGANIZED and BE DISCIPLINED!

It’s great to develop policy but if no one takes them seriously, ensures completeness of process and your process is made up of lots of “exceptions” you are not doing anything to ensure that you will come up clean during an Audit. Ideas that could help reduce the Employer Risk of Co-Employment :

1.ContractDocumentation–There must be a documented contract in place (signed and stored in a secure place) that clearly outlines the relationship, the responsibilities and meets the test of defining an independent contractor relationship.

2.Contractor Classification–Within Canada there are various classifications of “self employed individuals including incorporations. In actual fact companies can deal with all classifications of contractors as long as they are administered properly. Having all of your consultants classified as incorporations is positive but not bullet proof in proving separation. There have been many cases that CRA has disqualified an incorporation based on the situation. From a talent management standpoint only dealing with Incorporations may restrict your company from dealing with certain resources that you would like to engage with. Key points to ensure your contractors are classified properly include having proper proof of the business entity and associated tax numbers and ensuring that proper payroll remittances are being done.

3.Proper Government Payroll Remittances–One of the keys to mitigating risk is to ensure that proper payroll remittances are being completed. If the Government is receiving its remittances then there is no reason for them to investigate a situation. In saying that it’s important to monitor that the contractors or the 3rdparty that you have engaged to administer the contractual relationships to ensure they are making the proper remittances on the contractor’s behalf. Having the contractors on your own employee payroll is a big NO NO. Although it will allow you to monitor proper government payroll remittances it will be potential evidence that this resource was acting as more of an employee than a separate contractor. Auditing each one of your contractors payroll accounts is burdensome and not a realistic option. Generally 3rd party companies that specialize in providing contractor and payrollingsolutions are your best bet to ensure completeness and real-time reporting. As an FYI these companies are not the ADP’s and Ceridian’s of the world although they may tell you they may be able to do it for you. Running them through ADP or Ceridian without a 3rd party administering the contracts is similar to running them through your own company payroll and should be avoided.

4.”Looks like a Contractor, Smells like a Contractor” Test -I will refer you to my previous post on this string that described some of the things that can define the day-to-day working relationship i.e. tools used, direction given, profit or loss risks, integration with your employee workforce, etc. Although these are often written to help guide the contractor it’s important to that these types of issues are addressed and adhered to when creating employer side policy.

5.Contractor Commercial Insurance -This sounds like a weird one. But it is actually a very clear test of self employment that gives proof to a self employed mentality of a contractor. If the contractor has paid money and taken the time to obtain commercial liability insurance and or errors and omissions insurance, the government sees that as a true effort in being made to be a separate enterprise. In saying that, in my experience I know only a very small percentage of independent contractors that have insurance or are willing to pay the large premium that this type of insurance may cost. Often some 3rdparties or staffing agencies will offer umbrella coverage under their policy. Although this sounds good it does not help mitigate the risk of co-employment. The contractor must have its own insurance to protect the employer and I advise that employers gain proof of this insurance when signing up a contractor. As a solution a few innovative 3rd party payrollingcompanies may be able to facilitate contractors in obtaining separate insurance at reasonable premiums and then tracking the proof of this insurance as part of their overall process.

6. Documented proof of Contractor Classification Education–One of the reasons the Government has put legislations in place concerning co-employment was to protect contractors/employees from unscrupulous employers that hire the resource as a contractor vs. employee in order to avoid paying taxes and benefits. When a process of educating the contractor is well documented to prove the contractor was well aware of the situation, the pros and the cons, as well as their responsibilities etc. the risk of being deemed in the wrong is lessened and it should hopefully help in avoiding an Enterprise wide audit of ALL contractors across the organization.

7.3rd Party Representation of Independent Contractors-One of the cleanest ways to ensure a separation between your contractors and your company is to have a 3rd party represent them and administer their contracts on your behalf. This passes the contractual employment relationship to the third party. In doing this please BEWARE that passing this responsibility on to a company that is not properly administering the contracts or completing government payroll remittances correctly does not protect you. Without proper administration and remittances as well as complete proof and documentation of the separation, CRA and other government bodies will look at the final end-employer (that usually has the deepest pockets) to investigate. Good 3rdparty firms will advise you on policy and methodologies to ensure risk is mitigated and follows up to manage the contracts and payrollingto ensured a disciplined complete approach is in place.

Whatever you decide to do –it is also wise to seek the advice or approval of appropriate legal counsel within your organization –every company is different and your legal counsel is there to advise you on what works for your organization.