Now you see them, now you don’t: Using contract staff

More and more companies are using contractors. In the high-tech sector, you’ll find just as many CFOs and CEOs of start-up companies who are “contractors” as are “employees.” In larger organizations, leadership development and training programs are often “contracted out” to independent contractors. One wonders where all the employees have gone. No doubt they’ve been hired on contract by your competitors.

Companies use contractors for a number of reasons. Using a contractor is often administratively easier than hiring and keeping an employee — you don’t have to worry about statutory deductions and remittances, about calculating vacation pay or about tracking hours of work and overtime. As well, using a contractor allows a company to bring in specific talent to perform specific jobs that need to be done. Often the individuals with the expertise a company needs operate only as independent contractors. In order to get their talent you have no choice but to hire them as contractors.

Using a contractor also allows a company to minimize its legal obligations in a way that is often not possible with employees. For instance, with a contractor, the only legal obligation is often just to pay whatever amounts the contractor invoices. The contract will often automatically terminate on a given date, when a specific project ends or when either party notifies the other that the contract is being cancelled.

When this is compared to using an employee — for whom myriad benefits and compensation details have to be attended to, and where terminating the relationship can be much more difficult and complex — it’s easy to see the allure of using contractors.

When considering using a contractor, it’s important to realize that the concept of a contractor is primarily a legal one. Just because an individual is a contractor doesn’t mean that the person is any less important or of less value to your company than an employee. On the contrary, contractors can be just as vital to an organization as employees. The difference is a legal one, where the term contractor refers to a legal characterization of the relationship between a company and the individual performing a service.

The law considers the relationship between employee and employer to be a special one, out of which many rights and responsibilities flow. For example, employees owe their employers a duty of fidelity and so are prohibited from working for competitors during their employment.

Employers aren’t able to dismiss employees without giving minimum notice (except for cause, of course). On the other hand, the law views independent contractors as “free agents,” free to contract with whomever they please and on whatever terms they can negotiate. As a result, the law imposes very few legal obligations on the relationship between a contractor and a company.

When used properly, contractors can be a great asset to a company. However, the difficulty arises when a company tries to use a contractor when what it really wants is an employee. Often a company will hire a contractor because it thinks that using a contractor will minimize the company’s legal liabilities and day-to-day administrative responsibilities, only to find out later that the law considers the contractor to be an employee. In these cases, the law can impose unforeseen and unpleasant consequences. If your contractor is found to in fact be an employee, your company may be responsible for the following:

•payment to the Canada Customs and Revenue Agency for back deductions (E.I. and C.P.P.);

•common law reasonable notice of dismissal;

•payment for overtime wages and vacation pay under minimum standards legislation; and

•workers’ compensation remittances.

It is therefore crucial that you not use a contractor when what you really want is an employee.

If you want someone who will work exclusively for you, full time, and for an extended period of time, what you probably want is an employee and not a contractor.

If you do decide to use a contractor, there are certain practical steps you can take to make the most out of a contractor and minimize unforeseen legal liabilities. The following is a helpful checklist:

•First and foremost, when deciding to use a contractor, make sure that you really want a contractor and not just an employee by another name. For example, when you have a discreet job that must be done within a specific time frame, this can be one of the most opportune times to use a contractor. Similarly, use a contractor when you need a specific set of skills that no one on your existing staff has.

•When negotiating the terms of the contract, try to ensure that the majority of the administrative tasks of the contractor’s business and costs of doing business remain with the contractor. For example, the contractor should take care of all remittances and deductions. Don’t reimburse the contractor for expenses. In the best of all worlds, you should just pay the contractor a lump sum when you are invoiced, and this should be the extent of your obligation. It should be up to the contractor to allocate the invoiced amounts as required by her business.

•Try to ensure that the contractor has other jobs on the go in addition to your own. If this isn’t possible (because the contract requires the contractor’s full attention), make the contract for a specified time or project only, and terminate it when the time is up or the project is completed.

•Maximize the control that the contractor has over the way she performs the job required. Since you’ve contracted with the person or firm for their expertise and skills, let them use them. The more you supervise someone’s work, the more the person begins to look like an employee and the less you get out of her.

•Make it a term of the contract that the contractor will obtain her own workers’ compensation coverage as a contractor, and that she must provide you with verification of the coverage before the contract begins. Not only will this ensure you are not liable for retroactive payment of WCB premiums, it can also minimize corporate liability for injuries suffered by the contractor while performing the contract.

The key is to consider at the outset whether you really want a contractor or an employee, and then to make sure that the contract with the contractor and the way the contract is performed reflect this.

Lucas Corwin is a lawyer with the labour, employment and human rights department of Fasken Martineau DuMoulin LLP in Vancouver. He may be contacted at (604) 631-4715 or [email protected]

When contracting is not the best option

In traditional industrial settings, a company’s assets have usually been seen as physical: property, fixtures and equipment. As the North-American economy becomes increasingly knowledge-based, companies are seeing that their assets are more often the intellectual skills and knowledge of employees. Key for most companies today is to retain those assets.

Inventions and other intellectual property created by employees during their employment legally belong to the employer. This is certainly of comfort to most employers, who want assurance that they get the benefit of ideas and inventions created by employees (who, after all, are being paid wages and are provided resources to perform their work). This is not the case, however with contractors. Unless specifically provided for in the contract between the company and the contractor, the rights to intellectual property created by a contractor during the contract will stay with the contractor.

In addition to the legal question of who owns intellectual property produced in the workplace, many companies are also faced with the practical issue of wanting to ensure easy and continued access to the brainpower of staff. It’s no secret that a considerable amount of a company’s institutional memory rests in the heads of its employees.

As a result, it may not always be in a company’s best interests to depend too heavily on contractors, who may only work for a short term and then leave the organization. Rather, there may be a greater benefit in having a longer-term employee perform the required work, even if that means a substantial investment in training the employee.

These legal and practical factors underscore the need for your company to fully consider whether it truly wants to use a contractor in a given situation. Where ownership of intellectual property is an issue, it may be best to have existing employees perform the work. If the work performed is central to a company’s business, having an employee perform the work may also ensure key institutional memory remains with the company, rather than walking across the street to a competitor.

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