Employee/Self Employed - Alan Martin Associates - Chartered accountants, business consultants,tax returns, financial planning, tax advice, special reports

Employee or Self-Employed?

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If you are a payer or a worker it is important to establish the correct relationship from the beginning to avoid consequences at a later date. In order to determine if there is an employer-employee relationship or a business relationship the following three factors should be considered:

Control

Ownership of tools

Chance of profit or risk of loss

Control: In an employer-employee relationship, the employer controls, either directly or indirectly, the way and the method used to do the work. The employer assigns the specific tasks. If the employer does not directly control the worker's activities, but has the right to do so, the notion of control still exists. If the payer has the right to hire or fire, determine the wage or salary to be paid and decide on the time, place and manner in which the work is to be done then generally the payer exercises control.

Ownership of tools: In an employer-employee relationship the employer generally supplies the equipment and tools required by the employee as well as covers the repairs, insurance, transport, rental and operating costs, such as fuel, of the tools and equipment. In a business relationship, workers generally supply their own equipment and tools and cover costs related to their use. If workers purchase or rent equipment or large tools that require a major investment and costly maintenance, it usually indicates that they are self-employed individuals.

Chance of profit or risk of loss: The worker's financial involvement must be examined, for example, determine if the worker has the chance of making a profit; risks incurring losses due to bad debts, damage to equipment or materials, or unforeseen delivery delays; and covers operating costs. Generally in an employer-employee relationship, the employer alone assumes the risk of loss. The employer generally covers operating costs such as office expenses, employee wages and benefits, insurance and delivery costs. The employee does not assume any financial risk, and is entitled to his full salary regardless of the financial state of the business.

The following table will help you determine whether the payer exercises control over the worker; who risks losses relating to the ownership of equipment and tools; and if the worker has a chance of making a profit of risks incurring losses:

	Payer	Worker	N/A
Who is responsible for planning the work to be done?
Who decides how and how much the worker is to be paid?
Who decides on the time frames?
Who decides how the work is to be done?
Who decides on the hours of of work?
Who decides on the work location?
Who assigns the individual tasks?
Who supervises the tasks?
Who sets the standards to be me?
-Quality?
-Volume?
-Time Frame?
Who decides whether work must be redone?
-Who covers the related costs?
Who is responsible for training?
-Who covers the related costs?
Who decides on the territory to be covered?
Who decides on periodic activity reporting?
Who decides if the work is to be done by the worker himself?
Who hires helpers?
Who supplies the heavy equipment or covers its rental costs?
Who supplies the specialized equipment or covers its rental costs?
Who covers equipment maintenance costs?
Who supplies the large tools or covers their rental costs?
Who supplies the specialized tools or covers their rental costs?
Who supplies the small tools?
Who covers tool maintenance costs?
Who supplies the materials?
Who has invested in the equipment and tools?
Who covers the costs of damage to equipment or materials?
Who covers the costs of liability insurance?
Who covers office expenses?
Who covers rental costs?
Who covers delivery and shipping costs?
Who covers costs related to bad debts?
Who assumes responsibility for ensuring that guarantees relating to materials are honored?
Who assumes responsibility for the performance of the work?
Who guarantees the quality of the work?
Who covers the costs incurred by the worker in carrying out the work?
Who covers the costs of the worker's benefits (paid vacation, sick leave, life insurance premiums, etc.)?

If you answered "payer" to most of these questions than an employer-employee relationship probably exists. If you answered "worker" to most of these questions than a business relationship probably exists.

If you have any further questions or concerns about employee and subcontractor issues, please do not hesitate to contact us.