A question we often receive from dentists is whether or not an employee can change their designation to that of a contractor or vice versa. As an employer, you need to be familiar with the risks of doing so. And, before making any changes, you’ll want to clearly understand your current and desired working relationship with that person. The following is an overview of the analysis we urge any dentist employer to make before switching any worker’s designation.
From Employee to Contractor
Theoretically, you can do this. As with any contractual relationship, you and your hygienist can negotiate new terms of work that are mutually agreeable as long as no one is contracting to do anything illegal or unconscionable. That said, whether you should oblige such a request is a different question. To decide whether you are comfortable with this request, you should assess the different risks to you and your practice.
From a Termination Perspective
Let’s first look into the future at what could happen if you decide to terminate your hygienist. In the event of a wrongful dismissal dispute, there is always a risk that your hygienist could attempt to go after more money in damages. They could claim to actually have been an employee all along, regardless of the designation you both agreed upon. In this case, Ontario courts would apply the same employee-vs-contractor test we have discussed before. As with any contested proceeding, you may successfully defend yourself if the facts are on your side (i.e., if the facts indicate that the person is closer to the ‘independent contractor’ end of the workers’ continuum). But are you willing to take that chance? Unfortunately, relying solely on the originally stated intention of the parties is NOT enough. As the Supreme Court of Canada has stated, it is the total relationship of the parties, and not only their intentions, that matters.
From A Tax And CPP/EI Perspective
Next, let’s look at the tax-related risks of changing your hygienist employee to a contractor. As a contractor, your hygienist would not require the same statutory deductions for income tax and CPP/EI contributions on their pay. While this would seemingly be a financial advantage to you, there is, again, a risk to you as an employer if the facts of the working relationship do not match the new designation.
The meaning of an employee as opposed to a contractor for tax purposes flows from an almost-identical legal test as in the employment standards context. A pair of recent Tax Court of Canada decisions (here and here) have provided guidance on how persuasive the parties’ intention is and whether intention plays an enhanced role in this area of the law. Similarly to what we saw above, the answer is that subjective intention is never enough to outweigh the facts on the ground.
In the event of a Canada Revenue Agency (“CRA”) business audit, if the CRA determined that your hygienist was still working as an employee despite the contractor’s intention, they would reassess any unremitted income tax and CPP/EI amounts. At that point, you, as the employer, would be liable to pay any unremitted amounts plus potential penalties and interest!
While it is not unheard of for employees to ask to renegotiate the terms and worker designation of their position, it should be a carefully considered move. Before complying with your hygienist’s request, you must ensure that the new working relationship’s intended terms will match the requested designation. And, to ensure that there are no incongruencies between those two things that could come back to haunt you, an honest assessment of your risks from the perspective of tax remittances and potential termination costs is necessary.
From Contractor to Employee
The above scenario is not the only designation change request you may face as an employer. You may also have an independent contractor looking to become an employee. To review this scenario, let’s assume you have an associate dentist currently set up as a contractor, and they have asked you to switch them over to an employee. In our experience, this is a less common occurrence. However, in theory, it is still a contractual matter which you can negotiate with your associate as you see fit.
There are two practical questions to ask yourself in this scenario. The first is whether it makes life much more difficult for you to set up your dentist associate this way. The second question is to confirm whether your associate is aware of the different exemptions from the Employment Standards Act, 2000 (the “ESA”), which are unique to dental practitioners.
As we discussed in the earlier scenario, contractors do not require the same statutory deductions as employees. Therefore, if your associate were to become an employee, these payroll additions would add to your managerial responsibilities and expenses. Not to mention, there may be some administrative problem-solving for how and when you pay your associate. As dental associates are often paid monthly, based on a percentage of their collections within a given month, moving them onto payroll may entail shifting them onto a bi-weekly or weekly pay structure, likely to align with any other employees you have.
Sometimes, part of why a contractor wants to become an employee is to take advantage of the assumed benefits and protections of the ESA. However, there are certain ESA entitlements that dentists and other professionals are exempt from, even as employees. These exemptions include the following:
- Dentists are not entitled to minimum break periodsPart VII of the ESA.
- Dentists are not entitled to public holiday payPart X of the ESA.
- Dentists are not entitled to overtime payPart VIII of the ESA.
- Dentists are not entitled to paid vacation timePart XI of the ESA.
Once you clarify the above exemptions, the allure of being an employee may be diminished for your associate, leaving them wanting to remain an independent contractor after all.
Designating an associate dentist as an employee may not carry the risks we saw in Scenario 1. However, the risk of the actual working relationship differing from the designation remains, with the possibility of future logistical nightmares that brings. If the terms of your associate’s work fall closer to the contractor end of the continuum in all respects other than the designation, then it may be preferential for both of you for them to remain a contractor.
Hopefully, this helps you better understand the legal means and risks associated with changing an employee’s designation. Of course, from our experience dealing with the implications of such a decision, we have learned that not all situations are necessarily black and white. But still, this analysis sheds some light on the various elements to consider before making any changes.
As with all employment decisions, we recommend speaking with your professional advisors before committing to anything. At DMC, our team is dedicated to helping dentists understand and minimize the risks associated with being an employer. Send DMC an email or give us a call at 416-443-9280 to discuss the specifics of your current situation.