During
the early stages of a start-up, we understand that funds can be tight, and your
ability to hire employees or pay contractors may be near impossible. To assist
you in growing the company, you may have a friend or relative who offers to
help you out by providing their business experience or helping to develop your
product out of the goodness of their heart. While you may want to jump at this
offer of free labour, it is important to understand the potential implications
of allowing someone to provide “free” services to your company.
Contractor vs. Employee Considerations
A
commonly held misbelief among start-ups is that by merely designating a person
as an “independent contractor,” the person cannot be an employee. The
start-up is therefore not required to pay at least minimum wage, collect income
tax, CPP or EI deductions or give the person notice of termination. While this
may be your intention, it is easy for the relationship between the parties to
change into an employer-employee relationship.
In
the event that it is determined a contractor relationship is actually an
employment relationship, there are a number of consequences for your start-up,
including becoming responsible for the historical remittance of income tax, CPP
or EI deductions, plus interest and a penalty. In addition, your start-up may
be required to pay the worker wages, overtime pay, vacation pay and pay in lieu
of notice of termination.
To
reduce the likelihood that the contractor is deemed to be an employee, which
can occur under a number of different scenarios, it is important to have a
contract in place that clearly defines what the relationship is between the
parties. While the contract alone cannot guarantee an independent contractor
relationship, it shows the subjective intention of the parties, which is one
factor that CRA or a court will consider when evaluating the overall
relationship.
Intellectual Property Considerations
As
a start-up company, your most valuable assets are likely to be your
intellectual property – your technology, know-how, developments, trade secrets,
proceeds or methods. If you fail to have an agreement in place that states that
any intellectual property developed by the worker is the property of your
start-up, there may be uncertainties regarding the ownership. This can lead to
a number of problems, which can arise when your start-up decides to pursue
patent protection, or during a purchase and sale transaction. Without
agreements in place confirming the ownership of the start-up’s intellectual
property, you may need to approach every worker who created or helped to create
the intellectual property, and have them each sign agreements confirming the
ownership of the intellectual property. This can result in significant delays
moving forward, especially where workers have moved, or lead to negotiations to
pay additional consideration in exchange for the worker’s cooperation to
confirm the ownership of the start-up’s intellectual property.
The take-away:
Getting
the right agreements in place at the beginning of any relationship with a
friend or any third party is vital to protecting your start-up company. Your
agreement should accurately define the relationship between the parties and
clearly state that any intellectual property devised as a result of the relationship
belongs to the start-up company.
If
you are uncertain about whether your current independent contractor agreement
sufficiently protects your company, or if you don’t have any contracts in
place, contact
MDK Business Law,
where we are happy to review your contracts and/or provide you with a new
template.