Guidelines

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Guidelines

  1. 1. 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).
  2. 2. 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. 1. Who sets the worker’s hours of work? 2. Where will the work be performed? 3. When will the worker actually perform the work? 4. What will the worker be doing? 5. How long will the work assignment take to complete? 6. Is the work being performed related to teaching and/or research? 7. Does the worker have a business registration number (or HST registration number)? 8. What is the legal form of the worker (ie. individual, sole proprietorship, partnership, or corporation)? 9. Is the worker also currently an employee of the university? 10. 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.)? 11. Can the worker subcontract the work or hire assistants (ie. to either complete the work or help complete the work)? 12. Is there a written agreement or contract with the worker? 13. What is the basis on which the worker will be paid (ie. flat fee, hourly, etc.)? 14. Who determines the method and amount of pay? 15. Does the worker incur expenses in performing the services that are not directly reimbursed by the university? 16. Is the worker entitled to any of the university’s benefit plans? 17. Who bears the risk of profit or loss? 18. Is the worker financially liable if he/she does not fulfill the obligations of the contract? 19. Can the worker work for other payers while working for the university? 20. Does the university have priority over the worker’s time?
  3. 3. 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: • 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.
  4. 4. 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, self- employed 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
  5. 5. 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.
  6. 6. • 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.
  7. 7. • 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, non- instructional 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
  8. 8. 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.
  9. 9. Appendix A Tax Treatment of Various Services Provided to Memorial University Service Provided Type of Payment Tax Treatment A. Credit Courses (Degree and Non-Degree) In order to control the quality of teaching and related services, it is the practice of the university to contract with individuals, a contract of service, rather than other universities, organizations, firms, or proprietorships. Contracts must be signed prior to the commencement of teaching a course and those contracts will specify the party being contracted with as well as the method of tax reporting, T4 or T4A. If the individual is an employee of a university or other organization, then refer to items 1 or 2 below as applicable. If not, then refer to items 3 or 4 below as applicable. 1 Employees of Universities a. Employee of Memorial University Payroll T4 b. Employee of another university i. where contract is with the individual Payroll T4 ii where contract is with the other Accounts Payable university (other university will issue T4) Invoice from Other University 2 Employees of Another Organization a. Where the contract is with the employee Payroll T4 b. Where contract is with the other Accounts Payable organization (other organization will issue T4) Invoice from Other Organization 3 Partners of Firms a. Course subject is directly related to the business of the firm. Contract is between Accounts Payable the firm and the university. Invoice from the Firm b. Course subject is not related to the business of the firm. Contract is between the individual and the university. Payroll T4 4 Proprietors Where there is one professional or highly trained individual involved in the business (ie. the proprietory) the status of the individual should be the determining factor. For example, the individual may be a partner in a firm, an employee of a business or a staff member of the university and so on and reference should be made to the applicable category elsewhere in this guide. a. More than one professional or highly trained individual (ie. a professional or highly trained individual involved in addition to the proprietor), course subject is related to that business and Accounts Payable appropriate contract is used Invoice from the Firm
  10. 10. Service Provided Type of Payment Tax Treatment b. Only one professional or highly trained individual involved (the proprietor) and specific facts indicate a business is being carried on (more rigorous examination of facts than above may be Accounts Payable required) Invoice from the Firm c. Specific facts fail to support assumption that an independent business is being carried on Payroll T4 B. Non-Credit Courses and Special Seminars 1 Employee of Memorial University Payroll T4 2 Employees of Another Organization a. Where the contract is with the employee Payroll T4 b. Where contract is with the other Accounts Payable organization (other organization will issue T4) Invoice from Other Organization 3 Partners of Firms a. Course subject is directly related to the business of the firm. Contract is between Accounts Payable the firm and the university. Invoice from the Firm b. Course subject is not related to the business of the firm. Contract is between the individual and the university. Payroll T4 4 Proprietors Where there is one professional or highly trained individual involved in the business (ie. the proprietory) the status of the individual should be the determining factor. For example, the individual may be a partner in a firm, an employee of a business or a staff member of the university and so on and reference should be made to the applicable category elsewhere in this guide. a. More than one professional or highly trained individual (ie. a professional or highly trained individual involved in addition to the proprietor), course subject is related to that business and Accounts Payable appropriate contract is used Invoice from the Firm b. Only one professional or highly trained individual involved (the proprietor) and specific facts indicate a business is being carried on (more rigorous examination of facts than above may be Accounts Payable required) Invoice from the Firm c. Specific facts fail to support assumption that an independent business is being carried on Payroll T4 C. Guest Lecturers Each case will depend upon the particular circumstances, and some factors that might distinguish a guest lecturer from a part-time lecturer include the following: * No on-going responsibility to the participants or students attending * No marking or grading responsibility * Lectures are infrequent, usually non-credit and in most cases not part of a regular course * Fee charged to those attending * No appointment with the university * No office facilities or support staff provided * University has little control over the content of the lecture other than with respect to topic * Lecturer paid a single fee for giving the lecture and payment made at that time
  11. 11. Service Provided Type of Payment Tax Treatment 1 a. Canadian resident Accounts Payable T4A b. Non-resident (15% withholding tax on gross income (10% -- fee of $5,000 or less to U.S. individual) A tax waiver might be obtained in certain instances exempting withholding Accounts Payable T4A-NRD D. Guest Artists The Theatre Department of SWGC currently engages theatre professionals as guest artists/master teachers on contracts that run from two to thirteen weeks. Typically the theatre artist may teach all or part of one of the specially designated master classes at the third or fourth year level, and also will have a production responsibility as a director, actor, designer, dance or voice coach, etc., in a student production. Contracts are negotiated wih the guest artists/master teachers outside the collective agreement with MUNFA and the university. The stipend depends upon the stature of the individual concerned, the magnitude of the responsibilities agreed to, and the duration of the engagement. Accounts Payable T4A E. Other Miscellaneous Services (ie. Course Development/Revision) 1 Employees of Memorial University a. Where service is in the normal course of duties under existing employment contract Payroll T4 b. Where service is clearly beyond the terms of the existing Payroll Similar criteria as that identified employment contract under E.2 (a) to (c) below apply 2 Other than Employees a. Where fee is predicated upon quantity produced (ie. number Individual -- Accounts Payable T4A of papers marked, assignments graded, pages typed, etc.) Business -- Accounts Payable Invoice from Business b. If work is done away from the university, the person is expected Individual -- Accounts Payable T4A to pay own expenses, was free to use the services of others Business -- Accounts Payable and was simply required to produce a completed product Invoice from Business c. Only individual's time is purchased and tasks are assigned Payroll T4 F. Research Grants 1 Up to 5% of salary while on sabbatical Payroll T4A 2 Grant in lieu of sabbatical earnings Payroll T4A 3 Grant in lieu of salary Payroll T4A
  12. 12. 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. 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] 4. 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).
  13. 13. 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;
  14. 14. (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; b) 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 University of Newfoundland Per: (Authorized signatory) Witness
  15. 15. Title: __________________________________

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