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Understanding contractor payroll models and employer burden costs in Canada

Independent Contractor Payroll refers to the tasks an organization must execute to ensure Independent Contractors are paid correctly and on time in accordance with their contract or Statement of Work (SOW).  
Engaging Independent  Contractors is practiced as a strategic outsourcing tactic around the world. Yet, contractor payroll is a complex, time consuming process, and staying on top of the frequent changes to legislation can be problematic. Any oversights will result in non-compliance, which could lead to serious fines and negative employer branding. 

Fortunately, however, there are methods to help mitigate these risks, and organizations don’t have to face the threats that come with a contingent workforce and complicated payroll models alone.   

What’s the difference between paying employees and paying contractors? 

Contingent workers can go by many different names – temporary workers, gig workers, contingent labor, Independent Contractors, freelancers, temporary talent, contractors or pre-identified contractors; yet they all refer to the same type of non-traditional worker: the contingent worker. 

However, depending on the method in which the worker is engaged to perform the work – whether directly sourced through the company itself or by way of a third party, there exists separate obligations to workers when it comes to payroll.  

How do I pay a contractor: What’s the best contractor payroll model for your business? 

If your organization is considering operating a contingent workforce or is currently re-evaluating your current program, below is a list of critical considerations about contractor payroll models that will help form an insightful decision on which is the right option for your business: 

Who is doing your payroll now?  

Any assessment should start with identifying who is managing your contractor payroll today. Is your organization running an internal program, outsourcing payroll to a single vendor or an adhoc program where multiple firms could be handing your program?  Once your provider is known, it’s important to evaluate the processes, documenting key points – like onboarding, worker classification and incident management. Are they well covered? 

What is the contractor experience like?  

Review the contractor’s experience with your current payroll model. Is this experience good? Are workers being paid on time and satisfied? Are you experiencing high turnover? Is it easy to submit time sheets and expenses or has the organization received complaints? Is the contractor experience compatible with your hiring brand? In today’s competitive gig economy, providing a great candidate experience is essential.  

Is your program architecture open or closed?   

Can a vendor support all legal statuses, engagement types and job types (open architecture) or not (closed architecture)? 

Who handles issue management?  

It doesn’t happen often, but workplace problems or incidents do happen, and there are frequently special considerations and compliance requirements when a contingent worker is involved. It’s important to determine who is responsible for issue management for your contingent workforce, especially for issues that have HR/contract and potential litigation consequences. Is there a process in place for recognizing and addressing these issues? What is the chain of command for escalations or decision making? If you’re using a third-party payroll provider, are they fully engaged, as to protect the integrity of the intended contractual relationships?  

Is there a process in place to manage misclassification and non-compliance?  

Classification is a critical step in contingent worker programs that relates to ensuring contingent workers are onboarded appropriately in the context of their worker status, overtime eligibility, workplace safety requirements and other important engagement management factors. Classification is a complex, time consuming process, and staying on top of the frequent changes to legislation can be problematic. 
Any oversights will result in non-compliance, which could lead to serious consequences. To stay compliant and competitive, growing organizations will typically shift from a ‘direct contractor payroll model’ to a third-party payroll model, built around the selection of a dedicated supplier with established and verifiable procedures.  

Understanding employer burden costs 

Incorporated or Partnerships 
A corporation and/or a partnership represent two options for contractors to register a business. With a registered corporation or partnership, contractors are responsible for remitting their own taxes, EI and CPP and are not eligible to receive any benefits, including statutory holiday or vacation pay. 

The bill rate for an independent contractor that is either a corporation or a partnership is equal to the hourly pay rate of the contractor plus the margin or administration fee of the agency. 

Bill Rate = Pay Rate + Margin/Administration Fee 

Registered Sole Proprietors 
A sole proprietorship is defined as an unincorporated business owned and operated by one individual. A contractor having a sole proprietorship will have to be registered for a HST/GST number. 

Sole proprietors are not required to receive any benefits such as statutory holiday and vacation pay. Sole proprietors being paid through a placement agency will be responsible for remitting their own taxes but will have the employee EI and CPP deducted from their pay. 

The bill rate for a sole proprietor is equal to the hourly pay rate of the contractor plus the employer government burden and the margin of the agency.  

Bill Rate = Pay Rate + Employer Burden + Margin/Administration Fee 

Bill Rate = Pay Rate + (Pay Rate x XY%) + Margin/Administration Fee 


Temporary Employees 
Temporary Contractors have not registered any business with the government. When these individuals are employed by a placement agency, the agency is required to deduct and remit all the same deductions as would face a typical permanent employee. The Temporary Contractor will also receive statutory holiday pay and vacation pay. 

The bill rate for a temporary contractor is equal to the gross pay rate of the contractor plus the employer government burden and margin of the agency.   

Bill Rate = Pay Rate + Employer Burden + Margin/Administration Fee 

Bill Rate = Pay Rate + (Pay Rate x XY%) + Margin/Administration Fee 


The role of a trusted contractor payroll vendor 

One of these methods is outsourcing employer responsibilities like contractor payroll to a trusted vendor who will manage workers’ wages, bonuses, and deductions, as well as provide support during the length of a worker’s assignment(s). 
The client partner will also identify and implement internal measures to protect organization from serious risks associated with a contingent workforce like severe fines, penalties and negative employer branding.  
However, it’s common for many organizations to think it’s better to let their own HR and accounting departments handle contractor payroll. After all, they do so for traditional employees, right? Payroll stats disagree, stating companies that outsource payroll save 18 per cent on costs over organizations that tackle it themselves. 

Performing a Contractor Payroll Maturity Assessment 

Performing a maturity assessment of your Contractor Payroll Program is the key to determining whether your organization has the Onboarding, Rate Management, Worker Management and Value Add attributes needed to ensure risk mitigation and really drive cost savings.

We invite you to take a complimentary Contractor Payroll Maturity Assessment below. You will receive feedback on the maturity level of your program and recommendations for improvement.


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