Employees, contractors, partners, the government: You have obligations to all of them
Health Law Update
January 31, 2017Contributed by MaryAnne Loney and James Lingwood | Associates, McLennan Ross LLP
Physicians are very well educated, but that education does not necessarily prepare them for the business and legal considerations of operating their own practice. While some will work as employees, many doctors will find themselves alone or as part of group operating their own office and running a business.
Doctors can, and most do, hire office managers, accountants and others to help them. But as owners, ultimate responsibility rests with them. The following is a list of some of the legal issues facing doctors as business owners and some suggestions that could help you avoid problems.
Determine if your workers are independent contractors or employees
Your legal obligations to your employees are very different than your obligations to contractors. There are specific employment and tax obligations imposed on employers that are typically not contemplated in a contractor/payer arrangement.
Under both tax law and employment law, whether someone is an employee or a contractor is based on the nature of the relationship, focusing on such factors as control, ownership of tools, integration into the workplace and the workers’ chance of profit and risk of loss. Tax and employment law typically supersedes what the contract actually says, so a judge or an arbitrator could decide that a person you thought was your contractor is actually your employee, and you are significantly liable because of this mistake (both in employment and tax obligations). The Canadian Revenue Agency (CRA) regularly reassesses and disgruntled former employees regularly sue or seek employment insurance on these grounds.
Worse, even if the agreement is found to create a contractor relationship, a court or tribunal may find that the contractor is dependent upon the employer. In such cases, employment standards legislation will apply to the relationship, creating significant burdens that were not anticipated or intended by either party.
Therefore, before entering into the relationship, it would be prudent to consult with a tax or employment lawyer to ensure the conditions indicate a contractor relationship and will avoid a finding of dependency, both in the written contract and in the actual circumstances of the relationship.
Know your obligations as an employer
Beyond the obvious requirements regarding minimum wages, vacations and statutory holidays, employment standards legislation creates a bevy of rights to employees including rights to leaves of absence, restrictions on pay corrections and limitations on the right to terminate.
Additionally, it is an implied term of an employment agreement that the employee receive notice (or pay in lieu/severance) where he or she is dismissed without cause. It is possible to contract out of this obligation, but employers must be careful to draft legally valid limitations on these rights that meet the minimum requirements of legislation. Court decisions are replete with examples of invalid attempts to limit severance, so clear and limiting language must be used to effect such a limit. The severance obligation can change significantly where there is a fixed-term contract. Additional care and attention is required to avoid large exposure.
You may wish to set up your employment relationships in a manner that restricts competition by employees if they leave their employment. Unfortunately, restrictions on competition are presumptively invalid, but there are ways to draft agreements to effectively protect your business for a limited period following dismissal. This can include restricting competition within a limited area for a limited period and restrictions on soliciting patients/clients.
Record your agreement with your business partners
While your relationship with the other doctors you work with may not have the same risks associated with failing to meet your obligations to an employee, a properly drafted agreement between you and the other doctors will help reduce the chance of disputes arising, assist in resolving any disputes that do arise and even limit your tax liability.
There are several possible ways to structure your relationship with the other doctors at your office, including a partnership, a cost-sharing arrangement and contractor agreements. All of these can be personalized so that the specific conditions suit you and your business partners.
However, more important than limiting your tax liability, putting into writing each party’s rights and obligations will make sure everyone knows what those rights and obligations are, which means they will more likely be respected. While saving some money in taxes is great, saving yourself the cost and hassle of having to find new business partners can be even more important.
Know your tax obligations
There is no creditor like the CRA. Fighting the CRA can be frustrating, time consuming and expensive. While you are legally presumed to know your tax obligations, many people do not. There are three main areas small business owners, including doctors, get themselves in trouble.
First, keep your business financials separate from your personal financials. Do not use your business account or credit cards directly to pay for personal items and assume your accountant will catch it and fix it later. Even if you haven’t actually done anything wrong, auditors are much more likely to reassess a shareholder a taxable benefit when they have trouble following the transactions.
Second, know what you can and can’t deduct. You can only deduct expenses which are for the purpose of earning income, and there are several rules that limit that. Expenses which may offer personal benefits, like cell phones, vehicles and home offices are particularly prone to being denied. An accountant can help you with this.
Finally, meet your trust obligations. Source deductions, which are tax withholdings from employee salaries and GST are considered trust funds that you collect on behalf of the CRA. If you fail to properly collect and remit trust funds, the CRA can take collective action immediately, even if the assessment is under appeal. If the CRA cannot collect it from your business, they can seek collection from directors or anyone who has received dividends from the corporation directly.
This is another reason it is important to know whether your worker is an employee or a contractor and if you should be collecting GST. While medical services are usually exempt from GST, if your office is selling other property or services, you may still have GST obligations. An accountant or tax lawyer can help you resolve this question.
In summary, while legal and accounting advisors are happy to help you with your business issues once they arise, contacting them beforehand may prevent legal problems from developing in the first place.