Employees vs. Contractors: What You Need to Know Before Growing Your Team | Calgary Accountant
If you’re a business owner who’s thinking about hiring and growing a team, congrats! I'm so excited that you’re ready to make this step and get the support you need to avoid overwhelm and burnout in your business (because who wants that, right?). Before you start posting your job opportunity for the world to see, there’s a few important things you need to know about employees vs contractors. Let’s dive in!
How to Know You’re Ready to Grow Your Team
Before we dive into the difference between employees and contractors, it’s important to know when you might be ready to grow your team. For some business owners, this can be a super daunting thing. It requires you to give up control, let others into your business, and trust them to treat your business like their baby (like you do!). For others, you might be ready to outsource and hire help as soon as your business starts growing and gaining momentum.
Here are 4 common reasons why a business owner might be ready to grow their team:
You’re feeling burnt out and putting projects off.
Your business no longer feels exciting to you, therefore you’re putting off projects and losing steam… fast. In fact, your business feels like more of a burden and something that you “have” to do, instead of your passion that you “get” to do. Hello… that’s not what you started your own business for, is it? This all leads to burn out and major procrastination.
You’re too busy and turning down work.
You just can’t seem to find enough hours in the day and constantly feel like you’re spinning on a hamster wheel. Your work-life balance is out of whack, making you a little bitter and a lot overwhelmed. You start turning down work because you simply cannot take on anything else in your schedule or your brain.
Your business is stagnant.
After growing consistently over time, your business has reached a place where it’s stagnant or even starting to slip backwards. You feel stuck between wanting to continue to grow (duh, don’t we all?) and feeling like you can’t fathom taking on more projects or clients in order to grow.
You need someone with a specific skill that you don’t have and don’t want to learn.
There’s a gap in your knowledge and you desperately need someone with a specific skill to come into your business and work their magic. You don’t have the time, energy, or desire to learn that skill, but you can’t grow without it.
If any of these reasons resonate with you, then it is time to start thinking about growing your team.
Hiring Employees vs Contractors
When it comes to growing your team, there’s often a lot of confusion out there about the difference between employees and contractors. It’s important to ensure that the business owner clearly understands the differences between the two when they start the hiring process. Not fully understanding these differentiating factors can lead to steep consequences in the future.
Factors to Consider When Hiring an Employee vs Contractor
Degree of Control
When classifying an employee or contractor, the most heavily weighted factor is the degree of control that you have over the team member and the work you’re asking them to complete.
As a general rule of thumb, the more control you have over the team member and their work, the more likely they are to be classified as an employee.
Conversely, the less control you have, the more likely they are to be classified as an independent contractor.
Ownership of Tools
A worker who owns and supplies the tools and softwares required to complete the agreed upon work is most likely considered a contractor.
A worker who is supplied with these items by an employer is most likely considered an employee.
Chance of Profit / Risk of Loss
A contractor usually profits by completing work in a timely, quality manner. On the other hand, they may lose profits if their work expenses exceed their income.
An employee is usually paid an agreed upon amount for their time spent working, regardless of the expenses incurred or the risks of the business.
Exclusivity
A worker who operates their own business is free to work with any client they want to and is typically classified as a contractor.
A worker who is required to dedicate time to one company or that is required to enter into a non-competition agreement is most likely an employee.
Dependance on the Organization
A contractor likely has many clients on their roster. Therefore, they aren’t dependent on one client or organization to provide them income.
If a worker is completely dependent on one client or organization, this becomes more of an employee/employer relationship.
Intentions of the Parties
The wording of a business owner and contractor or employee’s intentions in their written contract will be a key factor in determining what the classification of the worker is. The wording around who is responsible for remittance of certain sales tax for their services also helps determine what the classification is.
When Do Issues Arise?
If a business owner fails to get the employee vs contractor classification right, issues are likely to arise when a contractor fails to pay their taxes and gets audited. They may claim they were an employee and that those taxes should have been deducted, but they weren’t because the business owner classified them as a contractor.
In this case, the business owner must provide evidence that the relationship was one of a contractor instead of an employee-employer relationship. It’s important to know that just because a contract states “Independent Contractor” doesn’t mean you can get away without any proof of the factors mentioned above.
If a judge determines that a business owner has falsely classified a worker, it can lead to costly penalties and payments of back taxes as well as severance pay in the event that the worker was terminated. Then, you’ll likely have the expense of hiring a lawyer to help you navigate the muddy waters, which means more legal fees.
This is why it is essential that you understand the difference between employees vs contractors when growing your team. These two relationships have very different needs in terms of contracts and clauses.
Clauses You Need in Your Contracts
Aside from the typical clauses needed in your contracts, such as the term of the working relationship, payment terms, scope of services, etc., it’s important to include clauses that speak specifically to either the contractor or employee relationship.
These clauses may include:
Deduction of taxes
Severance pay
Confidentiality
Governing law
Term/termination
Time tracking
Rollover hours
Rush hours
Copyright ownership
Intellectual property ownership
Release and limit of liability
Communication guidelines
Hours of service
All in all, if you aren’t sure which classification a worker is, it’s always best to check in with a lawyer or accountant in order to avoid the penalties, stress, and expensive fines associated with getting the classification wrong.
It’s also important to seek legal advice in terms of your contract in order to make sure you have all the clauses you need and have the worker classified correctly in writing.
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