|By David O’Brien,
Vice President, East Region & Government Services at Eagle
The issue of “tenure limits” or contract length has been coming up again lately, as clients start to debate whether or not it is a necessary way to mitigate risk against co-employment concerns. This means that many large organizations across Canada are implementing a maximum length of time they’ll keep a contractor. Regardless of the status of an IT project, once this time period is reached, the independent contractor can no longer work on that project. The theory being that by limiting the amount of time an IT professional is on contract, the lower the co-employment risk for the organization.
As an independent contractor, you too want to be familiar with all risks that may see you deemed a Personal Services Business (PSB) by the CRA, and how high of a threat they actually pose to you. On this subject, while there are a number of ways clients can minimize such risk, implementing tenure limits is not one of them; in fact, it is not based in law or even precedent in Canada.
The issue of tenure limits is an interesting one as it has been around for a number of years. I believe it can almost be traced back to one of the big US Consultancies who, years ago, started advocating that their clients use two-year time tenure limits to mitigate risk. The key here was that this was likely specific to US, where tax code is extremely specific.
The reality here in Canada is quite different for a number of reasons. At the industry association level, the NACCB’s experience in working with clients, contractors and the CRA on the Personal Services Business (PSB) issue (the one that put the microscope on independent contractors) was that tenure or contract length on its own was largely irrelevant in the assessment process. There are a multitude of other factors to consider in the actual assessment of co-employment that clients and contractors alike should be aware of. A strong contract that outlines the intent of the parties and is descriptive of the work is but one. In addition, this document from the CRA describes some other factors to consider.
As you can see, there are many factors involved, some of which include: control of the work, ownership of tools, financial risk of profit or loss, degree of integration of work and of course the written contract. It is abundantly clear that there is no rule that suggests 2 years is a magic time period.
There is not even much precedent to base this theory. There have been instances of issues and risk for contracts less than 2 years, and yet many IT contractors have been on site for much longer than 2 years. A recent decision saw a contract that initially was for 6 months extended several times to 5 years not deemed a PSB, based on the overall consideration of these other factors.
Perhaps more importantly in determination of status is the issue of control, which is shown in documents such as the contracts. Also of interest to CRA (and other agencies) is (a) how the individual is treated, as in are they treated like an employee, and (b) how they act, as in do they act like an employee.
The other key consideration based on recent industry experience is the issue is very much less likely to affect clients than the contractors. It is more likely a contractor will be deemed to be on a Personal Services contract as opposed to being deemed an employee and to date, we have not seen any negative result for clients.
Finally, it is important to note that many large organizations have walked away from tenure limits realizing much of the aforementioned but additionally realizing how detrimental the churn is to the success and outcomes of projects as key resources are moved out at critical times arbitrarily. Clients may now begin to walk away from tenure limits as a hard rule as having realized it is not a singular factor in risk together with the adverse effects it has had on projects (taking off key consultants at critical times) . The reality is that many IT projects by their very nature are longer than 1, 1.5 or 2 years and need to have the skills required through the duration for successful outcomes.