Jake asked:

If you are paying a sub-contractor at $40/hr, what should you offer them as a rate to be paid as an employee in order to cost the employer the same (expecting there will be corp portion EI and CPP and Fed and Prov taxes that will be a new expense to employer)?

Julie King answered:

Figuring out the tax portion is fairly easy, but you also need to think about things like overhead costs, which change from business to business.  Here are seven things to consider.

1. Taxes

You can use CRA's free online calculator to help you estimate your employer tax costs.

Another useful figure is the "Mandatory Employment Related Costs" used by the federal government for hiring programs. These numbers fluctuate slightly; a program I saw this year accepted that Employment Insurance, Canada Pension Plan and Vacation Pay would cost the employer 10.49% per employee (based on 2 weeks holidays). 

2. Statutory holiday

You will also want to consider that you are now going to cover statutory holidays. The holidays granted vary from province to provinces, but 7-9 stat holiday days per year is normal.

3. Increased risk

Taking a sub-contractor on full time may also increase your risk, as you will have them on payroll even if you have shortages of work from time to time. Reducing risk and assuming all of the sales and marketing costs are factors to include in your calculations.

4. Overhead costs

The business bears the full costs of administration, tax collection/remittance and provides the employee with equipment/furniture/supplies needed to perform his or her job.

The actual overhead costs can vary significantly from business to business. One business might need to buy expensive equipment for the person to work with, while another might have minimal costs. You may also expect your employee to provide his or her own tools / vehicle / working equipment. All of this needs to be weighed into the wage you will offer.

Of course, if you are already having the person work for you full time at $40 an hour, you may already be assuming some or all of the overhead costs outside of traditional holiday/vacation pay/ government deductions. In this case, you might not consider those costs when deciding what to pay.

5. Formula for X times earnings

Another figure to consider is how much income you expect the person to generate for your business. For example, many consulting businesses expect their technical employees to generate income of 3 to 4 times their salary. For example, using a 4X earnings formula, if you think based on past performance that it is reasonable for the person to generate $240,000 in income for your business, then a salary of $60,000 would make sense. If you decided to use a 3X earnings formula, then $80,000 would make sense using the same annual income.

6. The CRA risk factor

Another consideration is that is can be risky to a business to have someone work as a sub-contractor when the person should really be an employee according to CRA's definitions (a good legal contract can mitigate this risk). If CRA is asked to make a ruling, it is possible they would determine that the person should have been an employee, resulting in your company having to pay the employer tax portion on earnings to date and possibly interest as well.

7. A time for careful communication

The final consideration is how essential this person is to your business and what the person will need to feel that he/she is being given a fair offer.

Managing the perception of your prospective employee when you make an offer - clearly explaining why you are offering less than you are currently paying out - is equally important to the process of abstracting how much you think it makes sense to pay the person! Leave room for negotiation and if the person is important to your business, be careful not to deliver the offer in a "take-it or leave it" manner.

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