Have you decided you need to hire? Before you start handing off your to-do list there are a few things to consider. One of the more important considerations is what type of relationship you and your new hire will have. What are the key differences between hiring a contractor vs an employee?

This week on Financial Conversations I sat down with Kira La Forgia HR consultant for millennial entrepreneurs. Kira gave us the full lowdown on hiring, delegating, and designing an employee/employer relationship that is the right fit for you.

1. Determine the Job Requirements:

Kira suggests first considering the role that you need to be filled in your organization. She suggests writing a list of all the things you don’t want to do in your business. Anything that is still left on your task list at the end of the week is probably a good start to that list. Once complete, you can start to group these tasks into a job description and then determine the key differences between hiring a contractor vs an employee.

2. Would this role suit an employee or a contractor?

A smaller list of highly specialized skills might indicate that an expert in that specific field would be a better fit for the role. On the other hand, a broad list of repeatable but highly trainable tasks may be better suited for an employee. It is always best to start by letting the tasks dictate if the role is better suited towards an employee or a contractor.

3. What are the major differences between hiring a contractor vs an employee?

A. Does the employer set the rate or the employee?

A contractor is more likely to have a set hourly rate or a fixed price for various services or packages, an employee on the other hand would be provided with a job offer or rate.

B. How the employee is paid (EI, CPP, Income Tax & GST):

When hiring an employee, a business is required to withhold some payments and remit them to the CRA as payments for employee EI, CPP, federal and commercial tax. The employer also must contribute the employer portion of EI & CPP these are in addition to the employee’s gross salary.

A contractor, on the other hand, is only entitled to their set hourly or fixed wage, there is no need to make remittance deductions or report these payments to the CRA.

Contractors will usually be required to register for GST and as such will charge GST on their invoices. Employee payments do not require GST.

C. Employee Work Hours VS Contractors schedule:

When hiring an employee, the employer generally has control over the hours they set and work. This is usually determined in the employment contract. A contractor on the other hand can determine their own hours.

D. Vacation time & stat holiday pay:

Employees in Canada are entitled to time off including vacation pay and stat holiday pay. Contractors can dictate when they work, however are not entitled to pay for these days.

E. Response time contractor vs employee:

When hiring an employee, the employer has a lot more control of the work hours which can mean a faster response time. Contractors will usually specify what their average response time is, or you can discuss this before starting to work together.

F. Are contractors better suited to short term projects?

While some contractors do tend to work for the same companies long-term, generally they will be better suited to one-off or smaller style projects.

G. How do I offboard and employee vs a contractor?

Employees must be offboarded in accordance with the relevant laws and restrictions. In Canada, this can mean some type of notice and redundancy pay. Contractors on the other hand are not entitled to either unless their contract specifies it.

H. Offering benefits to employees:

While there is no requirement to provide benefits to an employee or a contractor, competitive pressure from employers competing for employees in a tight labour market can make it difficult to hire an employee without some sort of benefits. Contractors on the other hand aren’t typically included in a company’s benefit plan.

I. Is a contractor more expensive?

Contractors are usually specialists in their field and can determine their own rate. They are also not subject to other benefits such as vacation pay, redundancy pay and stat holiday. These factors allow contractors to demand a higher rate for their services vs employees who are more subject to market rates for their specific education and experience.

There are many factors to consider when deciding to hire in your business, determining if a contractor or an employee is a better fit is really just the first step. You will also want to consider your business financials including cash flow, revenue, and profit projections.

Whatever you decide, hiring is a pivotal step in your business its important to do things the right way from the beginning and truly see the benefits from a long lasting employer and employee relationship.

Have more financial questions? Tune in every other week to ‘Financial Conversations’ the podcast at www.financialconversations.com, Spotify, or Apple Podcasts.