Legalities of Hiring Remote Canadian Workers for U.S. Based Companies
Many American companies look north to hire remote Canadian workers for their operations. It could be sales people selling their products or services in Canada, technicians to service their Canadian installations, or simply Canadian talent to support their business inside the US or internationally. In such cases, a U.S. work visa is not required as the Canadian worker is not relocating to the U.S., but rather working remotely in Canada typically out of their home or in a shared executive suite. In these situations, many American companies ask “How do we go about hiring a worker in Canada when we don’t have legal presence there?” The good news is that you can and this article will explain how.
Hire the Canadian Worker as an Independent Contractor
One simple solution is to hire the Canadian as an independent contractor and maintain a business to business relationship. However, this solution is fraught with potential problems. As the Canadian worker is not your employee, you don’t have the same level of employer protection when it comes to intellectual property, non-disclosure, and non-solicitation. Independent Contractors are also legally allowed to set their own hours and schedules, take on additional clients that could be your competitors, and even hire substitute workers to perform work on their behalf! On the flip-side, most Canadian workers won’t do this to you as they want to be your loyal employee, but without a legal presence in Canada, you can’t genuinely reciprocate the type of employer-employee relationship that most workers seek in return for their loyalty and commitment. To make matters worst, there is also an income tax liability that your Canadian worker bears for being an independent contractor which may make them queasy or unwilling to work for you in such an arrangement. Canada Revenue Agency (CRA) is Canada’s equivalent of the IRS and they don’t like seeing Canadian workers misclassified as independent contractors when they behave as employees. Although CRA normally penalizes the employer for worker misclassification, they can’t do so when you are outside their country. Hence the CRA takes it out on your poor Canadian worker by deeming them as a “Personal Service Business” (PSB). All of a sudden, your Canadian worker is disallowed to write off any business expenses so all their revenues become taxable, and they are forced to back pay employer payroll taxes (often with penalties) that you, as their real employer, was suppose pay had you been located in Canada. Your once happy and loyal Canadian worker may suddenly become the thing of the past.
Hire the Canadian Worker through a Professional Employer Organization (PEO) based in Canada
Professional Employer Organizations (PEOs) are essentially intermediary employment agencies that act as your official co-employer partner in Canada. You effectively “mooch” off their legal status in Canada to hire your Canadian worker as a legal employee of their agency, and then have them place or lease back your worker to you as their foreign client. As the legal employer of your Canadian worker, your PEO partner would look after all the Canadian employer payroll tax remittances, employee source deductions, worker’s compensation insurance, social security contributions (called CPP in Canada), unemployment insurance contributions (called EI in Canada), and even issue your Canadian worker a W-2 (called a T4 in Canada) at the end of the year so they can file their income taxes as a true employee. For you as the US employer, such an arrangement also provides added security knowing that your company is off the hook for any Canadian tax and labour compliance issues and that your PEO partner can enforce your intellectual property, non-disclosure, and non-solicitation clauses in Canada under a far more effective employer-employee relationship model. Most PEOs in Canada are also registered employment agencies, as Canadian labour and tax laws have specific regulations allowing employment agencies to hire workers as their agency employees, but placed under the direction and control of their clients. Such specific employment agency laws not only protect placement worker rights, but also client rights in terms of limited employment liability and client protection from worker related fraud, misbehavior, and enforcement of intellectual property, non-disclosure, and non-solicitation agreements.
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