Employers often ask if they should offer to put some or all of their contract workers on their employee benefit plan. On the surface, this seems like a harmless perk to offer your contract workers. In reality, it is a potentially dangerous practice, which in extreme cases, can lead to significant costs for both parties.
The Employed versus Self-employed Debate
Hiring contract workers, as opposed to employees, offers potential benefits, financial and otherwise, to both the company as well as the contractor. However, the growth of this kind of employment arrangement has attracted the attention of Canada Revenue Agency, which is concerned that employers and workers are trying to "have their cake and eat it too". You can't be an employee, or call someone an employee, when it is advantageous, and then call that same person a contract worker at other times. You must be consistent and forthright. To help sort out who is and who isn't an employee, Canada Revenue Agency (CRA) has established and published guidelines for people to follow. Ultimately, CRA will decide, based on all the available information, whether or not someone is an employee or self-employed. Following these guidelines can help keep companies from committing costly mistakes that may result in irreparable financial damage.
Possible Penalties Facing Employers
If it is determined that someone thought to be self-employed, is in fact an employee, the
employer can be charged with back payments and penalties for CPP, EI and possibly WCB premiums. These findings could trigger difficulties with CRA itself, such as GST, corporate and personal income tax audits. There have been instances where companies have faced bankruptcy because of the amount of back charges and penalties owed to these various programs and agencies.
How Insurance Premiums Can Affect the Process
The CRA guidelines use a series of questions to help determine whether someone is self employed or employed. Only two of the many questions actually refer to insurance specifically, but they are important. One question asks "Who pays for the required liability insurance?". The other asks "Who is paying for various benefits (vacation time, benefits, life insurance, etc.) usually offered to employees?". Both of these questions are trying to establish whether the worker has the potential for profit or risk of loss. Normally employers alone assume risk of loss. Employees usually are entitled to the same pay regardless of the success of the business. If the answer to these questions is that the worker is not responsible for their own benefits and liability insurance, it supports the argument that the worker does not look and act self-employed. They are therefore potentially an employee. Participation in the employer's benefit plan may or may not be enough on its own to have CRA determine someone to be an employee. Certainly the potential problems for both employer and worker make the practice ill-advised.
What Does the Insurance Company Say?
In most group insurance contracts, the loss of income benefits (WI, LTD) define insurable income as the amount for which you receive a T-4 statement from the plan sponsor. They do not recognize corporate revenue as income so if the worker is being compensated via a corporation, income flowing through it is not considered personal income from the plan sponsor. This income is therefore not insurable. The worker may believe they have group disability protection but in fact, they are paying for a benefit for which they are not eligible. Worse, if the person doesn't apply for their own disability coverage because they think they have this coverage, they will likely only discover this when their claim is denied or dramatically reduced. They are almost certainly uninsurable at that point and have lost their opportunity to own their own income replacement policy. Liability issues aside, is this something that you would want to see happen to your workers, even if it wasunintentional?
