What you need to know about hiring your first employee

August 5, 2014

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Hiring a new employee is an exciting process for a new business. Unfortunately, many new businesses operate with loosely based and poorly defined employment relationships as they seek to meet the needs of their quickly growing operation. Not knowing the rights and responsibilities associated with an employment relationship can lead to serious problems for the business down the road. Here is what you need to know when you start hiring.

Employee vs. independent contractor

It is important for new businesses to understand the differences between an “independent contractor” and an “employee.” Legally, an independent contractor is viewed as being “self-employed” and working on a contract basis for numerous employers. Whether someone is viewed as being an independent contractor or as an employee depends on the actual nature of the relationship.

Factors that will affect the determination of whether an individual (worker) is an employee or an independent contractor include the level of control the payer has over the worker’s activities, the degree of financial risk the worker takes, and the worker’s opportunity for profit.

Businesses must be aware of these differences, as the CRA is taking an increasingly strong stance against businesses that erroneously classify their employees as independent contractors.

The importance of this difference is that an employer’s rights and obligations vary markedly from an independent contractor relationship to an employee relationship. When working with an independent contractor, an employer’s main obligation is to pay the individual. When working with an employee, a business is subject to a very strict set of rules and guidelines that define the dynamics of this relationship.

Some differences between an independent contractor and an employee are as follows:

  • Independent contractors are not required to be paid termination pay
  • Businesses do not have to do EI, CPP and income tax deductions and remittances for independent contractors
  • The availability of tax credits may differ depending on whether you work with employees or independent contractors
  • Independent contractors are often not covered under liability insurance policies

Obligations when hiring an employee

When you hire an employee, you are assuming a great deal of responsibility. One area of responsibility that some businesses neglect in their early stages is taxation. When you have an employee, you are responsible for remitting payroll deductions to the Canada Revenue Agency (CRA).

This means that you will have to deduct CPP (Canada Pension Plan) contributions, EI (Employment Insurance) premiums, and income tax from your employee’s pay and remit these amounts to the CRA. At the end of the fiscal year, you must also ensure that you issue each of your employees a T4 tax slip so that they may file their income taxes. It is important to meet your taxation obligations or there is the possibility that you will be found retroactively liable for unpaid deductions by the CRA.

Businesses must also provide certain statutorily mandated entitlement for their employees. The Employment Standards Act (ESA) sets out rules on everything from vacation pay, leaves of absences, probationary periods, and termination.

Some crucial pieces to take away from the ESA are:

  • “Probation periods” can last a maximum of three months, after which point severance and notice obligations are triggered on termination
  • Each employee is entitled to two weeks’ vacation pay
  • An employer must give an employee a half hour eating period every five hours
  • There is an obligation to pay your employees the minimum wage
  • If you terminate your employee, you must give them a minimum amount of notice or payment in lieu of notice – this amount depends on the length of time your employee has worked for you. You do not have to pay a contractor any termination or severance pay.

Remember that, as in most business situations, you are obligated to follow applicable human rights and workplace safety regulations.

Take-away: timing is everything

Most businesses will eventually need the help of full or part-time employees. However, it is often best to avoid entering into a full-fledged employment relationship until certain of the need and with complete understanding of the obligations.

Until then, hire an independent contractors on a temporary basis. This solution allows small businesses to be more nimble, make less long-term resource commitments, shield themselves from legal liability, and avoid the compliance and taxation issues that are associated with hiring an employee.

Every business is different, and having an understanding of the dynamics involved in hiring an employee will allow your business to make the right choice. If you are uncertain of what is involved in hiring an employee or what your obligations towards your employees are, you should seek the advice of a lawyer.

Image credit to: Flazingo Photos via Flickr.

Author

Jonathan MacKenzie

Jonathan MacKenzie is an Associate with Aluvion Law, a law firm providing innovative solutions for entrepreneurs and small businesses. Jonathan has an entrepreneurial background, having started a company to help pay his way through law school. After graduating from the University of Leicester in the UK, Jonathan joined Aluvion Law so that he could leverage both his entrepreneurial streak and his legal acumen.