How to Avoid Creating Employer-Employee Relationships

Read these quick tips to help you determine whether your requirement is truly for a contractor, or would work better with hiring an employee. Detailed information follows.

  • Employees should perform all on-going operational work. Contractors are better suited to perform time-limited work that is task- or solutions-based (The Temporary Help Services Supply Arrangement can be used, where at least one of the mandatory situations applies).
  • Avoid creating subordination (direct, detailed control) with a contractor. For instance, do not specify the exact hours of work for any contractor; pay every contractor a per-diem or a lump sum on completion, not by the hour or month.
  • Do not involve contractors in managerial (HR) duties.
  • Avoid integrating contractors into the office. For instance, do not list contractors on internal or external contact directories; do not provide contractors with office nameplates; do not add contractors to organization charts, nor to internal e-mail system or distribution lists.
  • Avoid long-term contracts that provide a steady income stream directly to one individual.

This advice is largely for services contracts with a small business, where one or a handful of individuals runs the business and performs the work.

When Procurement Specialists create a professional services contract between ESDC and an individual or small business, ESDC’s goal is not to hire employees (public servants). Instead, ESDC wants to pay the contractor to achieve a specific purpose or deliverables. Afterward, the relationship ends (unless the ESDC Procurement Team amends the contract, to extend it).

Although we do not want to create an employer-employee relationship, certain work arrangements can actually create an employer-employee relationship under common or civil law. This costs the department, because contractors (or even tax agencies) can sue to obtain missing employee benefits.

Government contracting policy also states that contracting authorities must avoid creating employer-employee relationships in professional service contracts (TB Contracting Policy, 16.3).

This document should help guide you when preparing Statements of Work. If a Statement of Work sounds more like a request for an employee, or for on-going operational work best done by an ESDC employee, consider whether you should hiring staff (or casual employees) instead.

This is not legal advice. If any purchase you work on raises a red flag, contact your supervisor, your procurement specialist and/or ESDC Legal Services for guidance.

What is an “employer-employee relationship?”

In an employer-employee relationship, the worker is the employee, and the payer is the employer (ESDC). This relationship usually includes:

  • Subordination – Employee takes all orders/work from employer, with little choice.
  • Integration – Employer is integrated into the employer’s business. For instance, an employee might have a dedicated workstation, and/or a @gc.ca e-mail.
  • Employee benefits – Benefits such as vacation leave or health insurance.
  • The employee receives a salary or per-hour wage, not payment for deliverables or milestones.

Within the public service, this must usually include a formal Letter of Offer that complies with the Public Service Employment Act. Hiring tasks belong with Human Resources, not Procurement.

In a contractor-client relationship, the worker is an independent contractor, and the payer is the business owner or client (ESDC). Under this relationship:

  • The parties should have a formal, written contract for services.
  • The worker works toward specific deliverables or results (milestones), per the written contract.
  • The client only pays the worker after it receives the deliverables or meets the milestones.
  • The worker has other independent work/income, and does not depend solely upon the client.

What is the problem?

It is possible to create a legal employer-employee relationship by mistake. Even if ESDC has a legal contract that calls the worker an “independent contractor,” a federal court (or the Canada Revenue Agency) can still rule that the relationship is actually an employer-employee relationship under common or civil law.

Potential consequences to creating an employer-employee relationship include:

  • Employment Insurance and Canada Pension Plan debts, as well as debts for other benefit;
  • Liability for the workers’ actions, should the employee cause damages (an employer is legally liable for certain actions of its employees); and,
  • Reputational risks.

It is also against Treasury Board Contracting Policy for a Contracting Authority to sign such a contract: “contracting authorities cannot sign contracts with individuals that would, in the absence of the Public Service employment regime, create employer-employee relationships according to the rules of the common law” (TB Contracting Policy, 16.2).

Therefore, you must confirm the work in question is in fact a type of work that a contractor can reasonably do, and not work that properly requires a full-fledged employee.

What should I look out for?

Here are some “red flags” that indicate a potential employer-employee relationship:

  • Direct, detailed control of worker activities. The key word is subordination: the payer gives orders and the worker follows them without negotiation. The worker does not have much authority to decide how to do the work. She or he does the work directly, instead of hiring more staff or working with subcontractors. The worker takes on the work without requesting extra payment or amending its agreement/contract with the employer.
  • No financial risk. An independent contractor always takes some financial risks, chasing profit and avoiding loss by completing deliverables/milestones as quickly and efficiently as possible. An employee will receive his or her regular pay regardless, with relatively little financial risk.
  • Integration of the worker into the payer’s business. Is the worker fulfilling a limited-time need as listed in a contract, or doing typical work for the long term (on-going operational work)? Does the worker have a genuinely separate business? Does this business advertise to find new clients? Does it have its own website, office, etc.? Does the worker maintain separate contact information (e-mail address, phone number) or rely largely on one main client’s systems?

What should I do?

When you prepare Statements of Work for professional services with individuals or small businesses, consider the above points. (This is not as important with large corporate contracts.)

One possible alternative is to choose a human resources (hiring) solution, such as casual employment.

What about Temporary Help Services?

The above focuses on contracts with individuals, or small businesses, for professional services. Temporary Help Services (THS) contracts are a special circumstance as they are usually used to bridge the time gap between staffing processes (long-term solution) and immediate operational needs.

The ESDC Procurement Team follows normal THS procedures (PWGSC supply arrangement). When PWGSC’s THS system is used properly, all THS workers may have an employer-employee relationship with their temporary help agency, but not with ESDC.

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