Memorial University of Newfoundland
Guidelines: Employee or Independent Contractor
Introduction:
The purpose of these guidelines is to assist units in determining the correct
classification of payments made to individuals or business entities providing
services to Memorial University of Newfoundland. Essentially the options are
Employee or Independent Contractor.
Employee: The payment is classified as T4, income from employment, on the
basis that an employee/employer relationship exists (contract of service)
between the individual or business entity providing the service and the university.
Independent Contractor: The payment is classified as business income on the
basis that there is no employee/employer relationship between the entity
providing the service and the university (contract for services). The independent
contractor receiving payment may be an individual (who would receive a T4A), a
sole proprietorship, a partnership, or a corporation.
The determination of whether or not an employee/employer relationship exists is
often complex. Canada Revenue Agency has provided guidelines which outline
various tests to assist in determining whether a relationship is employment or
contractual. You may refer to RC4110 – Employee or Self Employed? for further
information.
These guidelines will review situations commonly encountered at Memorial
University, review the tests provided by Canada Revenue Agency (CRA) as
listed in the above-noted CRA guide, and will identify the problems that can occur
if payments are incorrectly classified.
These guidelines are provided for your use in determining the status of a
business relationship. If the situation you are presented with is not discussed
within these guidelines or you would like to discuss the situation further, please
contact:
Heather King, Manager of Financial Reporting & Analysis, Department of
Financial and Administrative Services (hjking@mun.ca).
Connie Hatcher, Acting Manager of Payroll, Department of Human Resources
(cwall@mun.ca).
Questions to Assist in Classifying a Business Relationship:
When determining the proper classification of a business relationship, all facts of
the situation have to be gathered and reviewed in light of the CRA guidelines.
Each fact has to be analyzed and weighed individually to see if it indicates an
employer/employee relationship or a business relationship and then all of the
facts have to be assessed and weighed collectively in the context of the
relationship as a whole. No factor by itself determines an employment
relationship – each factor as a component of the overall picture is viewed to
determine the nature of the total relationship between the worker and the
university.
The following questions should be answered to ensure you have all of the
information required to make an assessment of the relationship or to provide to
the departmental contacts noted above to assist in their determination of the
situation.
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Who sets the worker’s hours of work?
Where will the work be performed?
When will the worker actually perform the work?
What will the worker be doing?
How long will the work assignment take to complete?
Is the work being performed related to teaching and/or research?
Does the worker have a business registration number (or HST
registration number)?
What is the legal form of the worker (ie. individual, sole proprietorship,
partnership, or corporation)?
Is the worker also currently an employee of the university?
Does the worker use any of the university’s facilities to carry out the
work (ie. office space, equipment, clerical assistance, photocopying,
meeting rooms, laboratory space, etc.)?
Can the worker subcontract the work or hire assistants (ie. to either
complete the work or help complete the work)?
Is there a written agreement or contract with the worker?
What is the basis on which the worker will be paid (ie. flat fee, hourly,
etc.)?
Who determines the method and amount of pay?
Does the worker incur expenses in performing the services that are not
directly reimbursed by the university?
Is the worker entitled to any of the university’s benefit plans?
Who bears the risk of profit or loss?
Is the worker financially liable if he/she does not fulfill the obligations of
the contract?
Can the worker work for other payers while working for the university?
Does the university have priority over the worker’s time?
21.
What is the intent of the parties involved? (This intent has to be
reflected in the actual terms and conditions of the arrangement.)
Canada Revenue Agency Guidelines:
Canada Revenue Agency (CRA) has provided guidelines and tests to assist in
determining whether someone is an employee or an independent contractor.
The main tests are as follows:
Control:
Who controls the work being performed? Control is the ability, authority, or
right of the university to exercise control over a worker concerning the manner in
which the work is done and what work will be done. The determination of the
degree of control can be difficult when examining the employment of
professionals (ie. engineers, doctors, and IT consultants); because of their
expertise and specialized training, they may require little or no specific direction
in their daily activities. It is the right of the university to exercise control that is
relevant, not whether the university actually exercises this right.
The degree of control may be examined in light of the following:
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the university’s power to select the individual
the extent to which the individual is subject to supervision by a university
employee responsible for the work
the method and nature of compensation
the university’s right to determine the hours of work and where the work
will be performed
the extent to which the individual has the power to delegate the work to
others
the university’s right to dismiss the individual
the individuals right to work for other payers while working for the
university
Tools and Equipment:
This test examines the ownership of facilities and tools and the necessary
support services to complete the work. The university could provide space,
administrative support, supplies or equipment. If the individual depends on the
university’s assets and facilities, it would indicate an employee/employer
relationship.
Subcontracting Work or Hiring Assistants:
Can the worker subcontract the work or hire assistants to help with the work?
Alternatively, does the worker have to perform the services personally? This
factor can help determine a worker’s business presence because subcontracting
work or hiring assistants can affect his/her chance of profit and risk or loss.
Financial Risk:
Consider the financial risk taken by the worker. To do this, determine if there are
any fixed ongoing costs incurred by the worker or any expenses that are not
reimbursed. Usually employees will not have any financial risk as their expenses
will be reimbursed and they will not have fixed ongoing costs. However, selfemployed individuals usually pay fixed monthly costs whether or not work is
currently being performed.
Responsibility for Investment and Management:
Consider the degree of responsibility for investment and management held by
the worker. Is the worker required to make any investment in order to provide
the services? A significant investment is evidence that a business relationship
may exist.
Opportunity for Profit:
The absence of a chance of profit and/or risk of loss may indicate an employee
relationship (ie. where a fixed salary is paid and there are few expenses not
reimbursed by the university). Alternatively, the potential that unforeseen
expenses or additional time will have to be absorbed at the individual’s expense
without compensation may indicate an independent contractor arrangement.
To have a chance of a profit and a risk of a loss, a worker must have potential
proceeds and expenses and one could exceed the other.
Self-employed individuals normally have the chance of profit or risk of loss
because they have the ability to pursue and accept contracts if they wish, they
can negotiate the price for their services and have the right to offer those
services to more than one payer.
Again, it is important to note that it is not necessary for a person to meet all of
these tests and each test can be given more or less weight. The facts of each
situation must be weighed and a judgment call made.
Although an individual and the university may enter into a written agreement
stating that the individual is not to be considered an employee, this does not in
itself guarantee that the definition of independent contractor has been satisfied.
The nature of the relationship between the two contracting parties requires an
examination of every element of the relationship.
Types of Relationships:
Someone is an employee when:
 the university directs and controls how the work will be done
 the work must be done by that individual
 the university provides the facilities and other resources
 the university runs the risk of loss; the individual has no risk of profit or
loss
 the work is related to the university’s core business of teaching and
research
Someone is an independent contractor when:
 the individual specifies the work process, the university only specifies the
work outcome
 the work may be subcontracted out to others by the individual
 the individual provides the facilities, equipment and other resources
 the individual runs the risk of profit or loss
 the work is not related to the university’s core business of teaching and
research
Between these two clear-cut extremes there are many situations where it is much
less clear whether someone is an employee or an independent contractor.
If someone is an employee, the university:
 requires an offer letter documenting the duties and responsibilities to be
carried out, start and end dates, rate of pay and other conditions of
employment.
 classifies payments as T4 income and pays the individual through the
Department of Human Resources. This means that the individual will be
covered for Canada Pension Plan, Employment Insurance and Worker’s
Compensation and may be eligible for vacation pay.
If someone is an independent contractor, the university:
 requires that an agreement be signed with the individual specifying the
desired outcomes (not duties or responsibilities)
 classifies payments as T4A income and pays, upon receipt of an invoice
from the independent contractor, via the Department of Financial and
Administrative Services. This means the individual can deduct business
expenses from the income but is not eligible for Canada Pension Plan,
Employment Insurance, Worker’s Compensation, or vacation pay.
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requires the independent contractor to have his/her own Worker’s
Compensation coverage and appropriate insurance coverages. The
amount and specific coverages required may vary depending on the type
of work to be completed but would generally include property damage,
personal injury, bodily injury/death, products liability, professional
malpractice, etc. At a minimum the university would require $2 million
liability coverage.
must pay HST on amounts paid with the exception that, if the independent
contractor’s annual revenues are less than $30,000, a Small Trader’s
Certification Form may be completed and held on file.
Legal Forms – Individuals and Business Entities:
Individuals: An individual is specifically identified with a Social Insurance
Number and receives payments for services which are reported on a T4 (if
employment income) or T4A (if business income).
Sole Proprietorship: CRA defines a sole proprietorship as follows: “A sole
proprietorship is an unincorporated business that is owned by one person. It’s
the simplest kind of business structure. The owner of a sole proprietorship has
sole responsibility for making decisions, receives all the profits, claims all the
losses and does not have separate legal status from the business.” A sole
proprietorship can operate as an individual or as a registered unincorporated
business.
Partnership: CRA defines a partnership as follows: “A partnership is an
association or relationship between two or more individuals … who join together
to carry on a trade or business. Each partner contributes money, labour,
property or skills to the partnership. In return, each partner is entitled to a share
of the profits or losses in the business. The business profits or losses are usually
divided among the partners based on the partnership agreement.” The operation
of a partnership is similar to that of a sole proprietor.
Corporation: A corporation is a legal entity incorporated within the laws of
federal or provincial jurisdiction. The corporation can be either a private
corporation (owned by one or more individuals) or a public corporation (issues
company shares to the general public). The corporation is usually identified by
an operating name followed by the words “Limited” or “Incorporated”.
Insurance Requirements:
The Director of Enterprise Risk Management is responsible to ensure that
appropriate insurance is in place before work is initiated. The following
insurance(s) is required to be obtained by companies/individuals contracted by
the university to perform services for it.
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Proof of Insurance. The company/individual is required to provide proof of
appropriate insurance coverages (by providing a certificate of insurance).
The amount and specific coverages required may vary depending on the
type of work to be completed but would generally include property
damage, personal injury, bodily injury/death, products liability, professional
malpractice, etc. At a minimum, the university would require $2 million
liability coverage. The Director of Enterprise Risk Management should be
consulted to determine the appropriate insurance coverages for each
contract.
Release. The company/individual must agree to release the university
from responsibility for any and all claims arising out of or connected with
the contract.
Indemnity. The company/individual must agree to indemnify the university
against any claims from third parties that arise out of or connected with the
contract. Essentially, if someone names the university as a party to a
lawsuit arising out of the contract, the company/individual would defend
the university and pay any settlements from the suit.
The university requires the company/individual to add the university as an
additional insured on its/his or her insurance policy.
These requirements must be incorporated into the written contract with the
company or individual.
Types of Services Provided to the University:
There are many different types of services provided to the university in the
following areas: teaching, research, consulting, artistic performances, noninstructional services, etc. Please see Appendix A which outlines each type of
payment and the appropriate classification of the payment.
Signing Authority for Contracts for Services:
The Vice President (Administration and Finance) has delegated signing authority
for such contracts to Deans of Faculties, to Directors of Schools (who report to
the Vice-President (Academic) and to Directors of Administrative Departments.
This signing authority may not be further delegated by Deans or Directors.
Adjudication Process:
The university wishes to provide flexibility to individuals providing services to it
and to assist departments in getting their work done, however, the university
must comply with the Income Tax Act and there are serious repercussions if it
does not. Disputes can arise through a tax audit of an individual tax payer or
through an audit of the university.
If CRA does not agree that a situation was properly established as an
independent contractor relationship, the university will be required to remit both
the employee and employer amounts related to Canada Pension Plan and
Employment Insurance as well as being assessed interest and penalties.
Frequent offenses of the same nature would result in more substantial penalties
and interest and possible incarceration of the responsible individual involved.
Upon determination by the university of an employment or an independent
contractor relationship, If an individual disagrees with the university’s assessment
of his/her status, the individual can request a ruling from CRA to have his/her
status determined. The CRA Form CPT1, Request for a Ruling as to the Status
of a Worker under the Canada Pension Plan or Employment Insurance Act is to
be completed. Both the worker and the university will provide information to CRA
to assist in its ruling. The request for a ruling should be conducted prior to the
individual beginning to perform the work.
Standard Independent Contractor Agreement:
The standard agreement is provided in Appendix B.
This agreement has been reviewed by legal counsel. All agreements should be
reviewed by legal counsel prior to execution.
If using this standard agreement as a template, please note the following:
Section 1 - SERVICES should have as much detail as possible. A clear and
thorough description of the services to be performed is required. Details on the
time frames, reporting mechanisms, etc., should be included.
Section 3 – CONDITIONS should have a detailed description of the payment
schedule and clearly indicate whether HST is applicable.
For example, interviewers will be required to submit invoices only upon
completion of a specific number of interviews. Or work can be broken down into
“phases” with payment being issued upon completion of each phase. The
payments should be negotiated as far apart as possible with payments not being
more often than monthly.
The contractor and the Dean/Director should sign two copies of the agreement,
one to be provided to the contractor and one to be retained by the university.
Appendix B
INDEPENDENT CONTRACTOR AGREEMENT
THIS AGREEMENT dated as of the ________ day of __________________, 20____.
BETWEEN:
[INSERT NAME OF CONTRACTOR]
(the “Contractor”)
- and -
Memorial University of Newfoundland
(the “University”)
This Agreement will confirm the agreement between the University and the Contractor in regard
to [insert project title here].
SERVICES
1.
The services to be provided by the Contractor to the University are as follows:
(a)
[insert comprehensive description of services here]
(the “Services”).
2.
The term of this Agreement shall commence on [insert start date] and end on [insert end
date], and is subject to earlier termination as set out in Sections 11 and 12 hereof.
CONDITIONS
3.
4.
Upon receipt of invoice, the Contractor will be paid for the Services as follows:
(a)
[insert description of payment schedule];
(b)
[insert whether HST is applicable, and if so, insert HST registration number]
The Contractor is solely responsible for making any arrangements and for paying any and
all expenses incurred in connection with providing the Services (including telephone,
office supplies, document copying, facsimile transmission, postage and all types of
insurance).
5.
The Contractor shall be solely responsible for all legally required employer and employee
contributions and deductions for the Contractor and any staff including Worker’s
Compensation, Canada Pension Plan, Employment Insurance and federal and provincial
income taxes. The Contractor shall provide proof of registration, indicating “clear
standing” status with the applicable Worker’s Compensation agency.
6.
As a condition of this Agreement, the Contractor will be required to comply with all
University policies.
7.
Should the Contractor gain access to personal information, as that term is defined under
The Access to Information and Protection of Privacy Act (Newfoundland and Labrador),
the Contractor shall, and anyone acting on behalf of or through the Contractor shall,
ensure that the said personal information is kept confidential and is not disclosed without
the written consent of the University.
8.
The Contractor warrants that it is a corporation/partnership/sole proprietor [chose one]
wholly owned, directly and indirectly by persons resident in Canada. Further, the
Contractor warrants and represents that it is duly registered and qualified to do business
wherever necessary to carry out the terms of this Agreement. Acceptance of this
Agreement does not constitute employment by the University or employment under The
Employment Insurance Act. The status of the Contractor shall at all times remain that of
an independent contractor.
9.
All materials including, but not limited to, documents, raw data, research, processes,
technology, programs and inventions conceived or produced in the performance of this
Agreement shall belong to the University.
10.
(a)
The contractor shall procure, provide proof of (certificate of insurance) and
maintain throughout the term of this contract, and at its own expense, $1,000,000 /
$2,000,000 (chose one: $2 million is required in all cases where the contract involves
travel, accommodations, physical activity, alcohol, or interaction with minor aged
person(s) or any other potentially vulnerable person(s)) Comprehensive General Liability
Insurance coverage against bodily injury (including death), personal injury and property
damage for loss or damage arising out of the activities contemplated by this contract;
(b)
The Contractor indemnifies and saves harmless the University, the University’s
officers, employees and agents against any and all liability, loss, damage, cost or expense
which the University may sustain, incur, suffer or be required to pay by reason of the
Contractor’s breach of this Agreement or act or omission in the performance of the
Services.
11.
This Agreement may be terminated as follows:
(a)
By the University where:
(i)
in the reasonable opinion of the University, the Services provided by the
Contractor are unsatisfactory, inadequate, or are improperly provided;
(ii)
in the reasonable opinion of the University, the Contractor has failed to
comply with any substantive term or condition of this Agreement;
b)
(iii)
the Contractor is dissolved or becomes bankrupt or insolvent;
(iv)
the Services are provided in connection with a project for which the
University has been awarded funding from an external source or for
which the University receives payment for the provision of services to a
third party, and that project or contract has been terminated or funding
or payment reduced;
By mutual agreement of the parties, expressed in writing.
12.
Upon termination of this Agreement, the Contractor shall cease to provide any further
Services. The University shall be under no obligation to the Contractor other than to pay,
upon receipt of an invoice and satisfactory supporting documentation, such compensation
as, in the reasonable opinion of the University, the Contractor may be entitled to receive
under this Agreement for work completed to the satisfaction of the University up to the
date of termination.
13.
This Agreement, or any of the rights or obligations thereunder, shall not be assigned in
whole or in part by the Contractor without the prior written consent of the University.
14.
This Agreement contains the entire agreement between the parties. There are no
undertakings, representations, or promises, express or implied, other than those contained
in this Agreement.
15.
This Agreement can only be amended by mutual written consent of the parties.
IN WITNESS WHEREOF the parties hereto have affixed their signatures as of the day and year
first written above.
_______________________________________
Contractor’s full name
Per:
Witness
______
(Authorized signatory for Contractor)
Title: __________________________________
Memorial
Newfoundland
University
of
Per:
Witness
(Authorized signatory)
Title: __________________________________