Umbrella companies are a common way for UK businesses to stay compliant with employment standards laws while hiring independent contractors. These companies ensure that contractors have compliant contracts, employment relationships, and payroll processing. While the strategy is common in Canada too, it has a different name: contractor payroll or contractor compliance. Contractor payroll arrangements help Canadian companies to stay compliant while engaging independent contractors, and the same is true of global companies hiring in Canada.
In this blog, we’ll go over why UK companies hiring Canadian contractors may want to work through a Canadian umbrella company, rather than hiring contractors directly.
What Is an Umbrella Company
Like Employers of Record, umbrella companies act as intermediaries between employers and workers. They keep both parties compliant while providing accurate and regular payroll. Umbrella companies in the UK provide IR35 compliant payroll for contractors while deducting all relevant taxes and pensions.
Why Use an Umbrella Company
The UK’s Intermediaries Legislation, or IR35, aims to prevent worker misclassification and contractor tax evasion, by setting out guidelines for what constitutes contract working arrangements. Worker misclassification occurs when employees are set up as contractors, either through carelessness, misunderstanding, or deliberately evading taxes. Worker classification is determined not by the employment contract, but by the nature of the work and how it is undertaken. The test for misclassification is different in each country.
Umbrella companies assist employers with appropriate classification and ensure that contacts and payroll are compliant. Violating IR35 can result in you and your worker being forced to pay back taxes and even fines.
How Do Umbrella Companies Work in Canada
As I said above, umbrella companies in Canada go by a different name and serve a slightly different purpose. Employers of record and contractor compliance and payroll companies act as intermediaries between employers and workers. Like UK umbrella companies, their role is to ensure compliance and reliable payroll when hiring workers. Employer of Record companies hire workers as employees and then lease them back to you to direct. They handle in-country compliance, taxes, and payroll. Contractor compliance and payroll companies perform a similar role, specializing in contract worker compliance. Some Employers of Record, like Canadian Payroll Services can handle both employees and contractors.
Why Use Employer of Record in Canada
Canadian umbrella companies, also known as Canadian EORs or Canadian PEOs keep employers compliant, no matter what type of worker they hire. Like in the UK, employers are always at risk of misclassifying their workers and running afoul of government fines, but when UK employers hire Canadian remote workers, the risk is higher. While there are some similarities between UK and Canadian payroll and employment law, the differences outweigh the similarities. Canadian payroll laws and employment rules have federal and provincial components that aren’t easy to understand without specialized help.
Risks of Not Using an Employer of Record in Canada
One option that UK companies hiring in Canada explore is setting up a local subsidiary and hiring employees and contractors directly. While a subsidiary may be the right choice for companies looking to expand their operations into Canada, for those wishing only to hire Canadian workers, there are easier, less risky options.
Worker misclassification investigations, where employees are improperly set up as contractors, are handled by multiple agencies, including the Canadian Revenue Agency and provincial worker’s compensation boards. Just like in the UK, if you are found to have misclassified workers, you and your workers may be liable for paying back taxes and steep fines.
Complexity of Payroll
In addition to misclassification risks, Canadian payroll is complex. Canadian payroll includes federal and provincial payroll tax, Canada Pension Plan, Employment Insurance, Worker’s Compensation, Health Tax, as well as taxes on certain employer-provided benefits.
Constantly Evolving Legal Compliance
Employers must also keep on top of provincial employment standards legislation, which governs hours worked, minimum wage, vacation, severance, and workplace rights.
Staying compliant isn’t easy – that’s why so many UK companies hiring in Canada opt to work with an employer of record!
Work with Canadian Payroll Services
While working with a Canadian umbrella company, or contractor payroll service, is a good option for some, working with an employer of record that provides both employee and contractor payroll is a more flexible and robust option. Employers of record that handle all types of workers, like Canadian Payroll Services, can deliver true worker compliance. Instead of trying to fit every hire into one model, we can help you hire employees and contractors, and provide compliant local contracts, onboarding, and payroll for both.
Want to learn more about how Canadian Payroll Services can help? Contact us today!