Carey Singer, CPA, heads up the Sports and Entertainment industry team at Mintz & Partners LLP in Toronto.

The entertainment world is one of the originators of the ‘virtual organization’ – a team of independent individuals brought together for a short-term purpose such as shooting a film or commercial or producing a show. This can include performers, camera operators, stagehands, and any of the host of people it takes to produce a performance.

In many cases, companies like to keep their workers as independent contractors, to avoid having to deal with Employment Insurance, Canada Pension, income tax and other source deductions.

If you do this, however, you should be careful that you do not run into challenges from the Canada Revenue Agency, which we have found to be cracking down on companies it sees as trying to evade their responsibility to collect source deductions. CRA wants to be sure that tax revenues are maintained, in order to fund government programs.

The result of this concern by CRA can be a time-consuming, frustrating investigation of your company’s books – and possibly, an assessment for back payments and fines. Directors and officers can be held personally responsible for liabilities, particularly important if CRA suspects that it was more than an innocent mistake and that tax evasion was intended.

How do you make sure you steer clear of these problems, so you can concentrate on your work and not have to keep looking over your shoulder? You can start by applying the same four ‘tests’ that CRA uses.

These tests should be used only as guidelines, as the CRA takes the view that any one test is not conclusive. Also, changes in the world of work are pushing analysis away from too much reliance on these classic four tests.

1. The control test: This first test examines who controls the work and how, when and where it is done. If the hirer has the ability to control the place and hours of work, requires the service provider to do the work personally, prescribes the way the work is done, and prevents the worker from providing similar services to others or from turning down work, that service provider is likely an employee.

For example, if you commission an electrician to work on a set for a specific timeframe – say, every day for a month – and direct that electrician’s work, he or she would likely be considered an employee and may be more likely to be on your payroll.

Another consideration of growing importance is the existence of other clients or customers. If the service provider has more than one significant source of business, it points to a ‘contractor’ relationship.

2. Ownership of tools: A second indicator test CRA uses regards who owns the tools being used. If a makeup artist, for example, uses her or his own equipment and products in the work done for your company, this will help tilt the balance towards the ‘contractor’ end of the ‘contractor vs. employee’ spectrum.

This test is not as useful in the case of some workers such as graphic designers, who may use their own computers and software, yet be an employee. It can be controversial, as well, in a case where the worker provides some equipment but not all – such as a stunt person who provides her or his own safety equipment but not the costume.

Applying this test can be complicated. It can be that if the service provider rents from the service recipient the tools involved in doing the work, which might include renting office space and equipment, that this tilts the relationship towards ’employee.’

3. Chance of profit: In an employment relationship, the employer bears the risk of profit or loss, and employees do not normally carry any of that risk. However, many employees do have a commission aspect to their jobs, and some have profit sharing. These exceptions limit this test’s usefulness.

However, if the worker is able to turn down offers of work in order to seek more profitable tasks, it indicates a contractor relationship.

4. Risk of loss: While a fixed retainer might be considered to point to ’employee’ status, this is not definitive. If the service provider is responsible for defects in work and must repair them at her or his own expense, this points to ‘contractor’ status. Other factors tipping the scale towards contractor include the service provider having professional liability against which she or he must insure, and circumstances in which the service recipient is not required to compensate a service provider who is ill and unable to work.

Recent developments

The changing nature of business has meant that while still relevant, these four traditional tests are becoming less conclusive. Partly, this is because of the rise of telecommuting, in which workers operate from their own premises with their own equipment, setting their own hours, but are to all intents and purposes employees.

As a result, we are seeing growing importance being placed on the ‘contractual intent’ of the relationship. In other words, what did the two parties – service recipient and provider – really intend?

It now appears that the courts will consider any clearly drafted written agreement as conclusive, unless it is demonstrated that the agreement was a sham or in conflict with clear credible evidence to the contrary.

Structuring an effective contractor relationship

Here are some points to consider in a contract that sets out the relationship with an independent contractor, to reduce chances that it will be challenged by the CRA.

* List specific tasks to be completed, possibly indicating the time frame, but not regulating the service provider’s work hours.

* Indicate that the service recipient can review the quality of the work, but the service provider does not need to accept ‘supervision’ of that work.

* The contract should specify that the service provider must make good any defects in the work.

* Indicate that the service provider may engage others to provide the services and does not need to do them personally.

* Stipulate that the service provider may do work for other clients or customers, must provide all necessary tools, equipment and supplies, and must take responsibility for complying with all applicable provincial or federal legislation.

* The service provider must provide all necessary tools and equipment, and if renting (even from the service recipient), must pay fair market rate.

* Structure compensation so that it varies with the quantity, quality or results of the service – and avoid structuring it as a retainer or salary.

This article is provided for information only, and cannot be considered legal advice or a full treatment of the subject. For advice on your specific situation, see a qualified professional.

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