Did You Give in to the Temptation to Treat Your Associate as an “Independent Contractor”?
Mariana Bracic, B.A. (Hons), J.D. – Founding Lawyer, MBC Legal
Jon Walton, B.Sc., C.C.O.V.I. – General Manager and Sales Representative, MBC Brokerage
Do you have an associate? Are you hiring one soon? Is your associate on an employment agreement? Or did you make it an “independent contractor” agreement?
Whether you treat your associate as an employee or an independent contractor will not only affect you during your practice ownership but also when you prepare to sell your practice. There is a temptation to treat associates as independent contractors, which is understandable. But it should not be done hastily. In our experience, most owners fail to measure carefully enough the pros and the cons of the issue because they do not understand the full ramifications. There is no one decisive test to determine whether an individual is an independent contractor or an employee; a number of factors must be carefully considered. We have seen associates being successfully treated as independent contractors, as well as failed attempts that have cost the practice owner many tens of thousands of dollars, either during ownership, or during the sale of their practice.
As specialized health-care-practice business valuators, consultants and brokers, we view associates being independent contractors and employees quite similarly with respect to practice value and marketability. Both are considered a risk to your business. The magnitude of this risk is determined by the actions you take as principal to protect yourself from future issues that could arise.
Is the associate a major earner for the practice? Is the associate on a high-quality, written and signed agreement clearly stating terms and expectations? Well-advised buyers (and buyers are increasingly surrounded by a team of competent advisors—bankers, accountants, employment lawyers, corporate lawyers— and therefore very well advised) will also ask whether this associate is actually an independent contractor, or will the CRA and the courts rule them to be an employee? Bear in mind that over 90% of the time that the CRA investigates independent contractor designations, they determine that the individual was actually an employee.
Another problematic area is doctors using serial, one-year contracts, renewed over and over again. Many doctors feel a false sense of security that they are protected through this yearly contract renewal. Courts tend to see this as a way of circumventing common-law termination entitlements and readily disallow it. The following are some of the indicators that the CRA, the Courts, or other tribunals will look for to determine that an individual is truly an independent contractor:
1. The Contractor is registered with the CRA with a business and (where applicable) HST numbers, and charges HST to the principal.
2. The independent contractor agreement is clear that the principal is free to stop assigning further work at any time, as is the contractor free to refuse jobs from the principal.
3. The contractor is entitled to determine who actually performs the work and can hire its own employees independently of the principal’s hiring standards.
4. The contractor has separate office premises and pays all associated costs.
5. The contractor is free to perform work for other principals, and actually does.
6. The contractor is not integrated into the principal’s work environment and provides their own tools and equipment.
7. The contractor meets the principal’s deadlines, but chooses their own actual working hours.
8. The contractor does not get an hourly rate or a salary, but rather sets a flat price for jobs, and pays all their own costs associated with each job.
The above eight points are only a small window into the areas examined when deciding whether an associate is an independent contractor, or an employee. (To learn more, see the checklist, “Employee or Contractor” on the Articles and Videos page at www.mbclegal.ca.) The more checks you can place under one of the two columns (independent contractor or employee), the more confident you can be in the way the courts and CRA will likely rule. This is not a matter to be taken lightly. If the CRA rules in favor of an “employer and employee” relationship, as principal, you could be ordered to pay retroactively for many years all the uncollected EI and CPP premiums, unwithheld taxes, plus the penalties and the interest.
With the extremely high number of women entering the industry every year, issues also tend to arise when an associate becomes pregnant. Often, the push to characterize the relationship as one of “independent contractor” and principal (vs employer and employee) was driven by the associate him- or herself. The associate understandably wishes to be able to receive favourable tax treatment from being allowed to deduct expenses against their income. As you can imagine, however, when the designation between independent contractor and employee is blurred, and there is significant economic incentive to “switch sides” (for example, because an associate may find herself pregnant and may wish to derive the benefit of employment insurance benefits,) the result is all-too-often a demand letter to the practice owner (from the CRA or an employee-side lawyer, or the Ministry of Labour) demanding many tens of thousands of dollars.
Do not allow this to happen to you! Before hiring an independent contractor, or to ensure you have actually hired an independent contractor, seek professional help by contacting an employment lawyer specializing in the medical professional industries. (Our Legal Division would love to hear from you!) With proper guidance, as the principal, you can accurately set out the terms and conditions of your working relationship in a written contract, helping to reduce the risk this individual instills on your practice. Not only will this protect you from extremely costly legal problems during your ownership, it will also increase the saleability, sale price, and the overall transferability of your practice and legacy.