Hiring as a startup: Employee or independent contractor?

Startups need to have a thorough understanding of their workforce structure, short-term and long-term strategic business plans, and their obligations as an employer before deciding the best way to grow their team: by hiring a new employee or engaging the services of an independent contractor

If you are getting ready to hire, review your startup’s budget and priorities to determine the right hiring decision for your team. Remember that what is right for you now may change as your startup grows and evolves. Study all of your options. 

Hiring employees

Employees generally have an exclusive, and sometimes long-term, relationship with the employer. If it’s long-term stability that your organization requires, choosing to hire a full-time or part-time employee typically gives you the consistency, dependability and availability that you desire. 

  • Employees can be categorized as either:
    • Indefinite (full-time or part-time)—established start date with no set end date (employment continues until either party chooses to end the relationship)
    • Fixed-term (full-time or part-time)—established start and end dates
  • Employees have very specific entitlements under employment standards legislation that must be met by the employer (e.g., minimum wage, overtime, vacation, statutory holidays and leaves of absence).
  • Employers have statutory obligations with respect to salary deductions and remittances (e.g. CPP and EI payments). 
  • Employers are responsible for any notice and severance requirements as prescribed by employment standards legislation, at a minimum.
  • Based on the competitiveness of your total rewards package, employees have access to employer-paid benefits such as extended health benefits and professional development allowances.

Hiring independent contractors or consultants

An independent contractor (or consultant) is typically someone who can provide you with short-term, niche expertise to support your business decisions. They can be anything from a sounding board to your project leader. Whatever your requirements, there is expertise available, locally or globally.

  • Independent contractors have no employment status. They are not entitled to participate in traditional employee benefits or other benefits prescribed under employment standards legislation.
  • Independent contractors often assume the risk of having the project or assignment cancelled midstream. They usually retain control over when, how and where work is completed.
  • Independent contractors are allowed to contract with other companies at the same time.
  • Independent contractors generally use their own equipment (unless otherwise stipulated in the contract), which reduces your overhead costs.
  • Independent contractors submit invoices to the company to receive payment for the work. 
  • The company is not responsible for withholding, collecting and paying the independent contractor’s taxes nor any other payments required by the Canada Revenue Agency (CRA).
  • The company is not obligated for any notice or severance obligations pursuant to employment standards legislation. The company may terminate the agreement with the independent contractor at any time (subject to the terms in the contract).

Note: The CRA will ignore an individual’s designation as an independent contractor if there are indications, in terms of tax purposes,  that the individual is actually an employee.

What agreements do we need?

Regardless of the form of engagement, startups need to execute agreements that define the position, responsibilities, remuneration (including any equity interests, such as options), and benefits during a term of engagement.

Keep in mind that individuals own the intellectual property rights for what they develop, whether it be software code, graphics, logos, marketing materials, or simply ideas. Fortunately for startups whose value derives from intellectual property, creators can legally assign their legal and moral (attribution) rights to a startup at any time.

Ideally, startups will obtain written agreements that assign intellectual property rights from the co-founders, employees or independent contractors when the hiring takes place. If these agreements are signed by the individuals after they first began work on the project, the startup should make some additional payment to the person who is assigning his or her rights (as little as a few dollars will do). This will help ensure the agreement’s validity and enforceability.

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