We frequently receive questions regarding employer/employee relations. Many of the questions relate to the regulations governing not-for-profit employers. In this issue we will provide an overview of many of the statutory obligations of employers in the not-for-profit sector.
Employee versus independent contractor
There are two main types of relationship between not-for-profit organizations and the individuals performing work for them:
- an employer/employee relationship
- an organization/independent contractor relationship.
As an example of the difference consider a not-for-profit organization hiring two people. One person is hired to provide counseling to a group of clients specified by the organization for five days a week, eight hours a day. The person is given an office onsite and is expected to work in accordance with organization policies. This person has all of the attributes of an employee. The same organization engages a computer consultant to keep the organization’s computer network up and running. If the individual, or another person designated by that individual, is expected to perform work only on a sporadic basis as and when problems arise then this person may be considered an independent contractor. Needless to say, there are many instances where the defining criteria are not nearly so clear cut.
The determination of whether a not-for-profit organization has an employer/employee relationship with an individual or has hired them as an independent contractor is a question of law. Whenever you are unsure you should consult a labour lawyer. Some of the principal criteria used by the courts in making the determination follow.
Traits of an employer/employee relationship
- the individual is effectively precluded from working for other organizations while employed
- hours of work are regulated by the organization
- the individual must perform the services (i.e. they cannot delegate the work to another individual).
- the individual is entitled to benefits by virtue of working for the organization (Canada Pension Plan, Employment Insurance, vacation and sick pay, other non-statutory benefits)
- the individual has work space and equipment provided for them (e.g. computers)
- the individual is guaranteed a fixed amount of revenue (e.g. a fixed sum paid every two weeks)
- the individual does not retain ownership of client engagements on which he/she works.
Traits of an organization/contractor relationship
- acceptance of the contract does not preclude the individual from simultaneously working for other organizations
- hours of work are not specified by the organization
- the individual may delegate tasks to other individuals (e.g. employees of the contracted individual)
- the individual receives no benefits from the not-for-profit organization in addition to contracted payments
- the individual must provide his/her own workspace and/or equipment
- the contracted individual is not guaranteed payment in the event that services are not provided and/or performance is not achieved
- the individual retains ownership of client engagements.
Correctly determining whether an individual is an employee or an independent contractor is important as the organization’s obligations vary significantly depending on the classification. Specifically, if an organization is an employer then it must comply with statutory regulations including the requirement to deduct from remuneration and remit to Revenue Canada Employment Insurance and Canada Pension Plan premiums and income tax. In addition, the organization must meet the statutory requirements for vacation and sick pay and may incur additional liabilities if the employment contract is terminated.
The costs associated with employment can amount to 20% of gross employment income. If an individual is hired for $20,000/year then the additional costs of employment to the employer could amount to $4,000/year. It is often an advantage to an individual to be classified as an employee as opposed to an independent contractor as the organization pays the cost of benefits.
There can be costs associated with having work performed by independent contractors. Typically, the organization contracting the work has less say in and control over the way services are performed. In addition, the independent contractor will often have to charge the organization GST of 7% in addition to the contracted price. The not-for-profit organization may or may not be eligible for a refund of up to half of GST charged [Volume II, Issue 4, p.19]. Note that in the Maritimes contractors may have to bill the not-for-profit organization Harmonized Sales Tax (HST) of 15%.
Determining whether an individual is an employee or a contractor is often more difficult where the individual performs services for an organization on a sporadic basis. Sporadic work should not be confused with a part-time position where an individual works less than a full week but works on a regular basis. If you have questions as to whether you should be treating an individual as an employee or a contractor we urge you to seek legal advice. A labour lawyer will be able to help you reach the best possible arrangement for both the organization and the person to be hired.
Following is an overview of the principal statutory obligations that follow from a not-for-profit organization entering into an employment contract with an individual.
Canada Pension Plan (“CPP”)
Who must contribute
Both the employer and the employee must contribute to the CPP provided the employee:
- is older than 18 and younger than 70
- has collected pensionable earnings during the year
- does not receive a CPP or QPP retirement or disability pension during the year
What CPP premiums are based on
Premiums must be paid on all pensionable earnings. In general terms, pensionable earnings includes all salaries, wages and taxable benefits earned in the year by an employee. This would include lump-sum bonus payments, pay equity adjustments and wage and salary grant payments received.
Certain types of employment and payments are not subject to CPP contributions. A detailed list of these is contained in the Employer’s Guide to Payroll Deductions published by Revenue Canada. A significant exemption from pensionable earnings is any lump-sum payment made by an organization to an employee as a retiring allowance or severance payment. CPP should not be deducted on these amounts.
How much must be deducted
The maximum amount of CPP deductions can be obtained from the Ontario Payroll Deduction Tables published by Revenue Canada Taxation. The general rate of deduction and maximum contribution limits vary so please consult the CRA web site. Employers must match employee contributions (i.e. for every dollar of employee deduction employers must also pay a dollar).
Benefits of the plan to employees
Employees are eligible for CPP benefits once they reach the age of 65. Benefit recipients may continue to be employed. In addition, employees may continue to work and elect to contribute to the CPP until they reach age 70. They will increase their CPP credits by deferring receipt of benefits up to the age of 70.
Finally, employees may apply for reduced CPP benefits once they reach 60 provided they can verify that they have substantially ceased to be engaged in paid employment prior to the pension commencing.
Employees who have contributed to the CPP are eligible for disability benefits “only if they are determined in a prescribed manner to have a severe and prolonged mental or physical disability”. In addition, the employees must meet specified criteria defined by the CPP legislation. Employees must apply in writing to the Client Service Centre – Health and Welfare Canada – to qualify for disability payments.
Finally, separated or divorced individuals may qualify to share their former spouse’s pension earnings. Individuals who believe they might be eligible for pension sharing should contact the Client Service Centre – Health and Welfare Canada, nearest them.
Employment Insurance (“EI”)
Who must contribute
Employers must deduct EI from all individuals classified as employees. There is no upper or lower age limit for deducting EI premiums. Employment outside Canada can also, under certain circumstances, be insurable (see Employer’s Guide to Payroll Deductions).
What EI premiums are based on
EI premiums must be deducted on every dollar of “insurable earnings”. Insurable earnings include basic salaries and wages, taxable benefits and other bonus payments received. In almost all cases insurable earnings received will equal total taxable earnings of the employee up to the maximum limits.
Note that, as is the case for CPP premiums, no EI should be deducted from lump-sum payments made to employees for retiring allowances or severance payments.
How much must be deducted
The general rate of deduction and maximum contribution limits vary so please consult the CRA web site. Employers must more than match employee contributions (i.e. for every dollar of employee deduction employers must pay $1.40).
There is no minimum insurable earnings level. As a result, the employment of many part-time and casual/temporary employees is now covered by the EI system. Employers are responsible for deducting EI premiums from the salaries/wages of these employees. This situation makes the determination of whether casual staff are employees or contractors especially important. If a not-for-profit organization’s decision not to withhold EI on even small amounts of income is questioned by Revenue Canada then the organization could end up paying significant penalties and interest.
Benefits of the plan to employees
The new rules and regulations surrounding eligibility for EI are complex. Employees with questions should be referred to their local Employment Insurance Centre.
Individuals are eligible for Regular EI benefits if they have become unemployed and are seeking but cannot find work. To be eligible an individual must have:
- paid EI premiums, typically through payroll deductions
- had an interruption of earnings from employment for at least seven consecutive days
- collected insurable earnings for a specified number of hours during the qualifying period.
It gets more complicated. New entrants to the labour force must have a minimum of 910 hours (essentially half of a full-time work year) in order to qualify for EI benefits. In addition, no regular benefits are paid to those who quit a job without just cause or are fired for misconduct. Just cause for quitting a job for EI purposes includes a variety or situations including:
- sexual or other harassment
- discrimination as defined in the Canadian Human Rights Act working conditions that constitute a danger to health or safety
- obligation to care for a dependent child or other immediate family member
- significant modification of terms and conditions respecting wages or salary
- significant changes in work duties
- excessive overtime work or refusal of an employer to pay for significant overtime
- antagonistic relations between an employee and a superior where it can be demonstrated that the employee is not primarily responsible
- reasonable assurance of other employment in the immediate future.
There are three types of Special EI benefits:
- maternity benefits which are available to the natural mother of a child for up to 15 weeks (note that the 17 week period usually claimed includes 2 weeks of unpaid absence);
- parental benefits which are available to both natural and adoptive parents caring for a new-born or newly adopted child up to a maximum of ten weeks. These can be received by one parent or split between two and are payable for absences from work at any time during the twelve month period after the child arrives home;
- sickness benefits which are available for up to fifteen weeks of sickness on providing a medical certificate from a doctor.
Employer Health Tax (“EHT”)
All employers with an annual gross Ontario payroll in excess of $400,000 and with permanent establishments in Ontario must pay EHT. Certain agencies “relatd” to the government of Ontario are not eligible for the exemption.
What EHT premiums are based on
EHT premiums are calculated by multiplying total Ontario gross calendar year payroll (box 14 on the T4 Summary) by the tax rate applicable to that amount. For gross employment over $400,000/year the EHT tax rate is 1.95%. As with CPP and EI, gross annual payroll does not include lump-sum payments made by an employer to an employee as retiring allowances or as severance or termination payments.
Note that related organizations are required to pool employment earnings for EHT purposes. As an example, an organization running a children’s mental health centre under one employer number and a childcare centre under a separate employer number must combine the two gross payrolls for purposes of calculating the EHT premium.
An annual EHT return must be filed by March 15th of each year pertaining to the previous year’s payroll.
Benefits to the employee
The eligibility of Ontario residents for coverage under the Ontario Hospital Insurance Plan (“OHIP”) is independent of the requirement of employers to make EHT payments. Employees with OHIP questions should be directed to their local OHIP office.
All employers are responsible for deducting income tax from remuneration paid to employees. All organizations should request that employees complete a form TD1, Personal Tax Credits Return, to determine the amount of tax to be withheld at the source. Employees can request for more than the minimum legally required tax to be deducted by specifying this on the TD1 form.
What taxes must be deducted from
Incomes tax must be withheld on salary, wages and other taxable remuneration including bonuses and vacation pay. Unlike CPP and EI premiums, income tax must be deducted on severance payments and retiring allowances. The minimum amount to be deducted on lump-sum severance and retiring payments is:
|Payment amounts||% deduction|
|$0 – $5,000||10%|
|$5,001 – $15,000||20%|
|$15,001 and up||30%|
Who earns it
All employees in Ontario earn a minimum of two weeks of vacation with pay after each twelve months of employment. This works out to 4% of salary (2/52 weeks). Entitlement to vacation time and vacation pay benefits applies to all full-time, part-time and temporary employees. Employees who have worked less than one year are not entitled to vacation time. They are, however, entitled to vacation pay of 4% of remuneration earned in their first year.
The Ontario Employment Standards Act requires that an employee must be provided with two weeks of vacation time upon completion of twelve months of employment. Any agreement to provide pay in lieu of this minimum vacation time entitlement requires the approval of the Director, Employment Standards of the Ontario Ministry of Labour. If an employee is entitled to receive more than two weeks vacation a year, the employee may accept pay in lieu of vacation for that portion of the vacation entitlement in excess of the basic two week minimum. This policy of insisting on at least two weeks of time off emphasizes the basic principle of providing employees with an opportunity to rest, relax and rejuvenate.
Employers typically state vacation entitlement in terms of number of weeks permitted per year. Where significant unpaid absences from work are anticipated, employers should quote the vacation entitlement as a percentage of salary earned. For example, if an employee would normally have entitlement to three weeks of vacation, the employer should consider quoting the vacation entitlement in the employment contract as 6% of remuneration earned. Using this method an unpaid leave of absence would accrue no paid vacation time.
How much vacation time is required
Typical paid vacation allowances are:
|Service||Vacation time||% of pay|
|1 – 4 years||2 weeks||4%|
|5 – 10 years||3 weeks||6%|
|10 – 15 years||4 weeks||8%|
|25 years +||5 weeks||10%|
Note that an employer can stipulate when employees may take vacations. Weeks given need not be consecutive. Note, however, that two weeks of vacation must be given within ten months after the end of the twelve month period for which the vacation was earned. Terminated employees are entitled to receive vacation pay earned but not taken. An employee entitled to three weeks vacation pay a year is entitled to one-and-a-half weeks’ pay in lieu of vacation if they are terminated in the middle of the year.
Legislated public holidays
The rules for employee entitlement to legislated holidays in Ontario are surprisingly complex. Currently there are nine legislated paid holidays in Ontario. They are:
- New Year’s Day
- Family day
- Labour Day
- Good Friday
- Thanksgiving Day
- Victoria Day
- Christmas Day
- Canada Day
- Boxing Day
Customarily Ontario employers provide at least ten paid holidays each year. The two additional days are often Simcoe Day in Ontario (the first Monday in August) and a floater holiday (e.g. Easter Monday). Employees may request a holiday to observe religious holidays that are not recognized by legislation. To support such a request organizations should consider:
- granting an unpaid leave of absence for the employee for the day
- allowing the employee to observe the holiday as a day of vacation
- allowing the employee to take a paid floating holiday for the day requested.
Loss of holiday pay entitlement
Under certain circumstances an employee may lose their entitlement to receive holiday pay. In these situations legislated public holidays taken need not be paid for by the employer. These situations are where the employee:
- has been employed for less than three months
- fails to report for work on a scheduled work day either before or after a holiday without giving notice
- has agreed to work on a public holiday and fails to report for work
- has not earned wages on at least twelve days during the four weeks immediately preceding a holiday.
This last point is important in situations where employers hire staff on an irregular basis. Full or part-time staff who earn wages on at least twelve days during the four weeks immediately preceding the holiday are entitled to pay for the relevant legislated public holiday. If you have significant part-time staff that are not receiving pay for legislated holidays you should check the regulations under the Employment Standards Act.
Statutory leaves of absence
Statutory provisions for pregnancy and parental leaves of absence are detailed in the Employment Standards Act. In summary, an employee is entitled to 17 weeks of unpaid leave of absence for pregnancy only if they have been employed for at least thirteen weeks preceding the estimated date of delivery. During the leave of absence the employer must continue to provide and make contributions to non-statutory benefits such as pension plans, health and dental plans unless the employee declines coverage in writing.
It is critical to note that on returning to work the employee must be reinstated to the same position he/she left and at the same rate of pay. The Ontario courts have been extremely unforgiving in cases where employers have terminated employees while they were on maternity or paternity leave. If you are considering such a course of action it is imperative that you consult a labour lawyer first.
Note also that vacation continues to accrue during pregnancy leave. If, as was suggested before, you quote vacation pay entitlement in terms of a percentage of salaries earned then, while the employee may earn an extra week or two of vacation time during the pregnancy leave, the employer need not pay the employee for the time away. If, on the other hand, employees are guaranteed a specified number of paid weeks per year then the employer may not only be required to give the employee vacation time earned during the unpaid maternity leave but they may also be required to pay the employee for the time off.