Employees are essential to growing a business, but the many factors to consider can be overwhelming if you have not done it before. Here you can find a list of essential considerations with some helpful links to get you started.
Difference between contract and employee
Do I hire an independent contractor or an employee? There are several factors that the CRA uses to determine whether an individual is an employee or independent contractor. Among other aspects, they will consider the employer’s level of control over the worker’s duties and whether they are free to perform work for multiple clients and hire subcontractors. If you are unsure of your particular situation, you can check out CRA’s website for further details.
Suppose your independent contractor was deemed to be an employee. In that case, the CRA could ultimately assess backed payroll taxes for the entire duration of the employment and require you to pay both the employer and employee portions of these taxes. If you have had an independent contractor relationship with an individual you think should be an employee, you might be better protected to put them on payroll. If they are indeed independent contractors and meet CRA’s requirements, you should set them up with an independent contractor agreement to ensure the relationship remains clear.
Getting Started: What is needed?
So, you have found the right candidate and are ready to get them set up and working. What do you need to get started?
Signed Employment or Independent Contractor Agreements
An employee would need to have a signed employment agreement before they start with the company for the agreement to be valid. An employment contract should have an explicit termination clause limiting termination payout to the Employment Standards Act, 2000 minimums. In the absence of a termination clause, this employee will be open to common law entitlement upon termination, and this is where we hear of some hefty payouts to employees. To protect your company, speak to an HR representative or lawyer who can help you better understand and provide a template for you to use.
An independent contractor can sign an agreement at any time but ideally before they start with the company, so that clear expectations are set as things can get muddy later on. As an independent contractor, the termination would be clearly stated and agreed upon by both parties and is typically several weeks or months notice provided to either party that the work will cease. There would be no other claims for termination of contract. This would clearly state who invoices whom and how the arrangement will work. IE: Contractor is responsible for their own taxes and not entitled to vacation or Statutory holiday pay. It is also integral that you treat an independent contractor as just that and not an employee.
You may have some internal documents that you would like to review with your new employee, but from a compliance standpoint, your employee should complete the federal TD1 and provincial TD1ON for the current year. This will provide most of the details you need on file for the employee, including their SIN number, birthdate and address, and tax deduction information. You will need this for processing their payroll. This form should be updated annually if there are any changes in the employees’ circumstances.
If you plan to use a direct deposit service, don’t forget to collect their banking information. Ensure that you receive a valid SIN number from your new employee to avoid any complications down the line. Some payroll providers offer to collect this information from the employee on your behalf.
Open a Payroll account with CRA
You will have to open a payroll account to remit your Source Deductions (payroll taxes). If you already have a government account for HST or corporate tax, this is a relatively simple process that you can complete online or over the phone.
You will be put on a remittance frequency (usually quarterly or monthly), for which you will be expected to include a PD7A with your payment either by mail or online. Many payroll programs offer automatic remittances on your behalf.
WSIB will be required for most employers. If you are unsure of your requirements, you can contact them to inquire about your specific situation. Once you set up a WSIB account, you will be required to file regular remittances and make payments. Some payroll programs can make payments on your behalf, but WSIB does not currently allow these programs to file the remittance for you.
Employment Standards Act
Employees are entitled to certain benefits and protections under the Employment Standards Act. This is enforced by the Ontario Ministry of Labour. These factors can vary for different industries and circumstances, but here are some basic considerations with some helpful links for more details :
- Required workplace signage and materials – most can be ordered free of charge
- Limitations around the number of hours an employee can work – 8 hours/day and 48hours/week
- Rest Periods – 30-minute unpaid break per 5-hour shift
- Minimum wage rules – currently $14.25 going up to $14.35 in October 2021
- Minimum vacation requirements – 2 weeks and 4% pay, goes up to 3 weeks and 6% after 5 years
- Overtime Requirements – 1.5 times regular rate for hours worked over 44 hours/week
- Stat Holiday Pay – the minimum calculation is based on hours worked in the prior 4 weeks divided by 20 days
- Leaves of Absence – various types and job protections to consider
- Record-Keeping – keep written records of everything for at least 7 years using secure means for obtaining and storage in compliance with PIPEDA
- Termination Regulations – working notice, termination pay instead of working notice, and severance can all apply. In other cases, common law entitlement may be applied. Know and understand how this can affect you.
Suppose you decide to pay your employee on a salary basis (annual amount divided by number of pay periods in the year). In that case, vacation and stat holiday pay will typically be rolled into that rate, but you will still be required to track vacation hours separately.
Health and Safety/Policies
There may be other regulations specific to your industry with which you will have to comply. Look into the health and safety regulations through the Ontario Health and Safety Act to review your obligations to your employees from a health and safety standpoint. You may need to have access to a first aid kit and provide appropriate training. These policies will evolve with your business and will have to be assessed on an ongoing basis.
Other forms: T4/ROE
Periodically, you will be required to file other forms for your employees. Every year, you will have to ensure that T4s are issued to your employees no later than February 28. Whenever there is an interruption of earnings to your employee (usually a termination, but can also apply to other situations), you will have to issue an ROE through Service Canada within 5 days of the final pay. Most payroll software programs offer to file both these forms for you.
There are many considerations when hiring your first employee, and it can be pretty overwhelming. Fortunately, there are many good small business payroll programs out there that can help with a lot of these processes and keep you compliant with the CRA, such as Knit, Wagepoint and QBO. These programs are almost always worth their weight in gold! Not all programs are created equal, so talk to your accountant or bookkeeper to advise you on which program would suit your business.
Additionally, you can seek out support for the Human Resources side of things either through your payroll provider or an independent contractor, such as RLB.
Done correctly, an employee can be an excellent asset and is an essential step to growing your business and meeting your goals. But it is crucial to make sure that you are doing it correctly and protecting your business from liability.