Individuals who perform services for a startup are either consultants or employees. What are the key differences and what agreements do you need to engage them? Founders of a start-up need to know the basics.
Consultants or employees: what’s the difference?
On a practical level, there’s little distinction between a consultant and an employee —both contribute to a startup in much the same manner on a day-to-day basis. The key reason founders should bear in mind the difference is that companies have an obligation to collect and remit employee source deductions such as CPP, EI and income taxes from employee wages. Since these can significantly add up, and they represent personal liabilities on the part of the directors, founders should avoid mischaracterizing the participants in their ventures.
In addition, the employment relationship is highly regulated in Ontario. Ontario’s Employment Standards Act provides a lengthy code for what employers can and cannot do in the context of an employment relationship, including rules relating to the termination of employees. These provisions do not apply to consultants or independent contractors.
Can founders choose either form of relationship?
Certainly, corporations are free to contract with individuals either as consultants or employees. However, keep in mind that the less independent an individual is from his or her engagement, the more likely such an individual will be characterized as an employee. If the corporation provides an office and other tools of employment (such as computer equipment), or if the individual provides services on an exclusive basis to the company, then founders should be wary of characterizing them as consultants.
Hiring consultants and employees: what agreements do we need?
Regardless of the form of engagement, individuals (including founders) need to execute agreements that define their position, responsibilities, remuneration (including any equity interests, such as options), and benefits during their term of engagement.
Individuals own the intellectual property rights for what they develop, whether it be software code, graphics, logos, marketing materials, or simply ideas. Fortunately for start-ups whose value derives from intellectual property, creators can legally assign their legal and moral (attribution) rights to a startup corporation at any time. Ideally, founders will obtain written agreements that assign intellectual property rights from co-founders, employees or consultants when the hiring takes place. If these agreements are signed by the individuals after they first began work on the project, the startup should make some additional payment to the person who is assigning his or her rights (as little as a few dollars will do). This will help ensure the agreement’s validity and enforceability.
This article was produced by James Smith and Shane MacLean and is made available through the generosity of Labarge Weinstein Professional Corporation.
- Limited partnership agreement: Sample template
- General partnership agreement: Sample template
- Term sheet template (angel or venture capital investors): Ontario startups
- Independent contractor agreement: Sample template
- Angel or seed investing: Angel term sheets for startups