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EHT in practice: employer-employee relationships scenarios

Is Company A’s part-time worker an employee or a self-employed contractor?

Information and Disclaimer

*This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued.

Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter.

Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided.

In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.

Interpretation Letter* (December 2013)

I refer to your letter dated XXXX regarding Company A and the Employer Health Tax (EHT) in which you requested an interpretation as to whether remuneration paid to Company A’s one part-time contract staff should be included in Company A’s total Ontario remuneration for EHT purposes.

Facts

From the information you provided in your letter and our telephone conversation, I understand the following:

  • Company A is a full-service architectural company that specializes in the design of retail buildings such as shopping centres and other retail outlets
  • The part-time worker:
    • previously worked full-time for Company A
    • recently switched to working part-time for Company A while developing his own business on the side designing homes for private clients (“residential business”)
    • is expected to work 24 hours per week and is expected to give priority to Company A’s work
    • receives direction from Company A (e.g., how files are organized and what client meetings to attend)
    • has to perform the services personally; he cannot subcontract the work and is therefore not able to profit from subcontracting the work
    • is covered by Company A’s liability insurance when doing work for Company A but carries his own professional liability insurance for his residential business
    • is registered with and holds a certificate of practice from the Ontario Association of Architects
    • has his own software at home that he uses when he works from home but typically works in Company A’s office and uses Company A’s phone, computer etc.
    • is not entitled to additional remuneration such as vacation pay, sick pay or bonuses, severance pay on termination of contract, or benefit plans which are normally only offered to employees
    • is reimbursed for travelling expenses
    • does not have a written contract with Company A and may quit the job without obligation
    • is hired on a part-time, recurring basis for a specified or indeterminate period of time rather than a specific task
    • may be identified with Company A by appearing on Company A’s organization charts or website, using Company A’s letterhead and forms, and using an e-mail address associated with Company A.
  • Company A has the right to:
    • direct, scrutinize and effectively control many elements of how and when the work is performed
    • plan the work to be done and determine what jobs the worker will do
    • determine where the work is done
    • approve contracts negotiated by the worker
    • require the worker to comply with its instructions or policies including safety standards
    • instruct the worker on how to perform the work but does not need to as he is a professional
    • set an expectation regarding the number of hours worked and standards for quality and quantity of work
    • determine and control the method and amount of pay but in practice it is mutual.
  • You were not certain but believed that the part-time worker:
    • has a business license
    • has a telephone line, website and e-mail address for his residential business
    • might operate his residential business through a corporation.

Applied legislation

Employers are required to pay EHT based on remuneration paid to employees who report for work at a permanent establishment of the employer in Ontario, and to employees who do not report for work at a permanent establishment of the employer but whose remuneration is paid from or through the employer’s permanent establishment in Ontario.

Although the terms ‘employer’ and ‘employee’ are defined in the EHT Act, the Act does not define the circumstances under which an employer-employee (EE) relationship exists. To determine whether an employer-employee relationship exists, many factors have to be taken into consideration, including the terms and conditions of the worker’s employment and common law principles.

The fact that an individual may be employed on a part-time or casual basis has no effect on whether the individual is considered to be an employee or a self-employed individual for EHT purposes. The key question is whether or not the person is engaged to perform services as a person in business on his or her own account, or as an employee.

In order to determine whether a worker is an employee under a contract of service or self-employed under a contract for services, reference must be made to common law principles based on precedents set by court decisions. The terms and conditions of the worker’s employment are examined and analyzed as they relate to the following four factors:

  • control,
  • ownership of tools
  • chance of profit/risk of loss, and
  • integration.

It is important to note that one factor alone is not conclusive in the determination.

Control

The control test is used to determine whether a person is in a position to order or require not only what work is to be done, but also how it is to be done. Generally, in an employer-employee relationship, the payer controls, directly or indirectly, the way the work is to be done and the work methods used. The payer assigns specific tasks that define the real framework within which the work is to be done. The payer exercises control if he or she has the right to hire or fire, and decide where, when and how the work will be done. If such is the case, then the payer clearly exercises control over the worker, who may then be considered to be an employee for EHT purposes. It is the right of the payer to exercise control that is relevant, not whether the employer actually exercises this right.

In this situation, the worker is a qualified architect (a highly skilled professional) and there is little need for training or supervision. Although the worker is free to build his own residential business on the side, he is expected to work 24 hours per week for Company A, is expected to give priority to their work, is personally responsible for the work he agrees to take on and cannot hire a substitute to perform the work. As noted in the facts listed above, Company A has the right to direct, scrutinize and effectively control many elements of how and when the work is performed.

The control test suggests that the worker is an employee.

Ownership of tools

In an employer-employee relationship, the employer generally supplies the equipment and tools and covers the costs related to their use such as repairs and insurance.

Company A provides the worker with office space and a computer, telephone and so forth. Although the worker has his own software at home that he uses when he works from home, he typically works in Company A’s office.

The ownership of tools test suggests that the worker is an employee.

Chance of profit and risk of loss

Generally, if an employer-employee relationship exists, the employer alone assumes the risk of loss and covers operating costs including office expenses, employee wages, insurance premiums, and delivery and shipping costs. The employee assumes little or no financial risk and is entitled to his or her full salary or wages regardless of the financial health of the business.

The worker appears to have little chance of profit or risk of loss when performing services for Company A. He cannot profit from subcontracting the work, is covered by Company A’s liability insurance when doing work for Company A, is reimbursed for travelling expenses and may quit the job without obligation. He does not incur any fixed costs with respect to working for Company A as they provide him with office space and the necessary equipment, software and supplies.

The worker carries his own liability insurance for his residential business and likely has a chance of profit and risk of loss when providing services to his residential customers. That, however, is a different business and is not relevant to the determination of his relationship with Company A.

This test supports the existence of a contract of service (employment relationship).

Integration

The integration or organization test examines whether the tasks performed by an individual form an integral part of the business as opposed to merely being accessory to the business. The test also determines whether the individual is in business in his or her own right and provides services to other businesses as an independent contractor. An employee is not perceived as operating his or her own business, but rather as being an integral and necessary part of the payer’s business.

Many facts were provided with respect to the worker’s business designing homes for private clients. He has a business license, telephone line, website and e-mail address for his residential business and might operate his residential business through a corporation. These facts, however, pertain only to the worker’s residential business and not to his relationship with Company A and the services that he provides to Company A for its clients.

Looking instead to the worker’s relationship with Company A, he performs the same tasks as he did when he was a full-time employee of Company A. His services are integral to Company A’s core function rather than being merely ancillary to its operations. Rather than being hired for one specific job or client, it is anticipated that his services will be needed on an ongoing part-time basis. He represents Company A when performing tasks for them and meeting with their clients and may be identified with Company A by appearing on their organization charts or website, using Company A’s letterhead and forms, and using an e-mail address associated with Company A.

It is our view that the integration test favours an employee status when applied to Company A’s business.

Conclusion

Based on the above analysis of the common law principles, it is our opinion that the worker is providing services to Company A as a part-time employee under a contract of service and that Company A is required to pay EHT on his remuneration.

The fact that the worker operates his own residential business on the side is not relevant to the determination of the relationship between Company A and the worker.

Is the worker an employee of Company B or a self-employed contractor?

Information and Disclaimer

*This interpretation letter was issued based on the specific circumstances or situation of a taxpayer or vendor and the law and tax policy in effect at the time the ruling was issued.

Specific facts relevant to your situation may change the application of the tax. In accordance with the Freedom of Information and Protection of Privacy Act, all confidential and identifying information has been removed from this interpretation letter.

Please be aware that any statute or policy referred to in this letter may have been superseded. Where a letter contains links to a publication, the link is to our current publication on that subject, regardless of the date that the ruling was originally issued, and the current publication may not be reflective of the information originally provided.

In no event shall the Government of Ontario be liable for any damages whatsoever arising out of, or in connection with, the use of the information contained herein.

Interpretation Letter 09-0043, June 2009

We refer to your correspondence regarding whether a certain worker is considered an employee or a self-employed contractor of Company B for Employer Health Tax (EHT) purposes.

Facts

The information provided by you through our discussion and copy of employment contract, is as follows:

  • Company B receives commissions as an exclusive marketing agent for several XXXX selling their products through XXXX.
  • The worker in question was appointed as Marketing Administrator (MA) to fill in for an employee on maternity leave for 55 weeks commencing XXXX.
  • The position was located in Company B’s head office in XXXX, and reported to the Communications Director.
  • The predetermined compensation amount was paid every two weeks, plus GST.
  • Either party could terminate the contract with two weeks’ notice with no further claims against the other party.
  • The worker was not eligible to participate in Company B’s benefit program.
  • The worker was reimbursed for all authorized travelling and other out-of-pocket expenses incurred in connection with duties of employment.
  • The worker was required to comply with all policies included in Company B’s Employee Handbook.
  • The contract requires the worker not to be employed or engaged in any other capacity without prior permission by Company B.
  • The worker did not work for Company B before or after this contract term.
  • The worker signed binding contracts to participate in XXXX shows on behalf of Company B after receiving approval from her supervisor.
  • The amount paid to the worker was included for EHT purposes.

Your answers to the written questionnaire provided the following additional information:

  • Company B was responsible for planning the work and for deciding how the worker should carry out the work.
  • Company B set standards and objectives to be met by the worker.
  • The worker was subject to supervision.
  • Company B provided training to the worker.
  • No written reports were required from the worker.
  • The worker was included in Company B’s liability insurance for all staff.
  • The worker was not required to perform the services personally (this was clarified to mean that she received assistance to set up shows, etc.).
  • The choice of assistants was subject to Company B’s consent.
  • The assistants were paid by Company B.
  • The work is carried out at an establishment that is under Company B’s supervision.
  • None of the work was carried out at the worker’s home.
  • The worker had an office at her disposal at Company B’s establishment.
  • Company B set the work schedule, verified the worker’s times of arrival and departure and verified the number of hours worked.
  • There was a commitment of exclusivity to Company B by the worker.
  • The worker was not required to seek Company B’s consent if the worker wished to work for another principal (although this is contradicted by the employment contract).
  • The worker was not required to pay any expenses while carrying out the work.
  • The worker was not obliged to pay union dues.
  • The worker was remunerated by cheque after submitting an invoice including GST.
  • The worker was not paid overtime.
  • Company B did not provide the worker with equipment, tools or materials.

Applied legislation

All employers are required to pay EHT on the total Ontario remuneration paid to their employees.

Although the terms "employer" and "employee" are defined in the EHT Act , the Act does not define the circumstances under which an "employer-employee relationship " exists. The nature of the relationship distinguishes an employee from a self-employed contractor.

A contract of service, or employer-employee relationship, likely exists if the employer:

  • decides where, when, and how the work is to be done
  • establishes the employee’s working hours
  • determines the salary amount
  • supervises the employee’s activities, and
  • assesses the quality of the employee’s work.

Thus, an employer-employee relationship generally exists when a worker agrees to work for an employer on a full-time or part-time basis for a specified or indeterminate time period in return for wages or a salary. The employer has the right to decide where, when and how the work is to be done.

A contract for service, or business relationship, generally exists when a worker agrees to complete specific work for a payer in return for payment. The self-employed worker is not normally required to perform the services personally.

In addition to the above general guidelines, in order to determine whether the MA is an employee or a self-employed contractor, further reference must be made to common law principles based on precedents set by court decisions. The terms and conditions of the worker’s employment are examined and analyzed as they relate to the following four factors:

      • control
      • ownership of tools
      • chance of profit/risk of loss and
      • integration

It is important to note that one factor alone is not conclusive in the determination. Analysis of the common law principles as applied to the MA’s relationship with Company B is summarized below.

Control

In an employer-employee relationship the employer controls, directly or indirectly, the way the work is done and the work methods used. The degree of control exercised by the employer may vary depending on the type of work to be done and the employee’s experience and skill. Generally, the payer exercises control if he has the right to hire or fire, determines the wage or salary to be paid, and decides on the time, place, and manner in which the work is to be done.

According to the employment contract as well as the answers to the questionnaire, Company B controlled how, where and when the MA’s work had to be performed, provided training to the worker, and had the right to discontinue the contract with two weeks’ notice. The MA was required to devote herself exclusively to Company B’s business and not be employed or engaged in any other capacity without the prior permission of Company B. However, the MA was not required to file written reports to Company B.

These test results favour an employer-employee relationship.

Ownership of tools

In an employer-employee relationship, the employer generally supplies the equipment and tools required by the employee. In addition, the employer covers the following costs related to their use: repairs, insurance, transport, rental, and operation.

According to the employment contract, Company B reimbursed the MA for all authorized travelling and other out-of-pocket expenses incurred in connection with her duties of employment. However, per our discussion, there were no tools and equipment required for this position.

This test is inconclusive.

Chance of profit/risk of loss

In an employer-employee relationship, the employer alone assumes the risk of loss. The employer also generally covers operating costs which may include office expenses, employee wages and benefits, insurance premiums, and delivery and shipping costs. The employee does not assume any financial risk and is entitled to her full salary or wages regardless of the financial health of the business.

While the MA did not receive any fringe benefits and was not paid for vacation, she was not required to make any investment or outlay of capital and was paid a set salary amount over the 55-week period.

This test supports an employer-employee relationship.

Integration

The integration test examines whether the tasks performed by an individual form an integral part of the business (employer-employee), as opposed to merely being an accessory to the business (independent contractor). The test is applied from the perspective of the employee and the question which is addressed is "Whose business is it?"

The MA did not appear to be operating a business separate and distinct from that of Company B. She performed the tasks related to the day-to-day and long-term operation of Company B previously carried out by the employee who was away on maternity leave. During the 55-week period, she worked for Company B on a regular basis and was remunerated accordingly. The temporary position is essentially not different from that of the permanent employment position she was filling in for.

This test supports an employer-employee relationship.

Conclusion

Overall, the application of the common law tests favours an employer-employee relationship.

Based on the information provided, it is our opinion that the MA was an employee of Company B during the term of her assignment. Therefore, Company B was required to include her remuneration for EHT purposes. As you have indicated that her salary was included in the total Ontario remuneration amounts reported for years XXXX and XXXX, no adjustments are required to be made. Please note, we have not reviewed the amounts reported in preparing this interpretation and as such these are subject to normal verification procedures.

Updated: March 29, 2022
Published: March 29, 2022