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Today, the company that I work for announced that they will no longer employ contractors and are requesting all contractors to become Employees in the near future. I have been with the company for 20 months and have an ongoing contract working full-time. I am in Canada and the employer is based in the US. They are stating that it is not an option and I must do it. They plan to provide me a new employment offer letter by the end of the month. What will happen if I refuse the new employment agreement? Can they terminate me for this or will I be laid off?

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    – Kilisi
    Commented Nov 10, 2023 at 9:34
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    Title should be, “Customer has decided to not renew contract, but is offering me the option of becoming full time employee”.
    – jmoreno
    Commented Nov 18, 2023 at 15:13

6 Answers 6

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They are stating that it is not an option and I must do it. What will happen if I refuse the new employment agreement? Can they terminate me for this or will I be laid off?

If you refuse the new employment agreement, your contract will be terminated in a manner following whatever is laid out in your contract agreement. Usually, that means you have a week or so before you are gone.

If you don't wish to become an employee, start looking for your next contracting gig now.

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    I don't know how things work in Canada but the distinction they seem to be making between being terminated and laid off doesn't exist for contractors. That's only important for employees. Commented Nov 8, 2023 at 22:20
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    I am puzzled since employees in most developed countries get far more employment rights than contractors. However, you should also examine the contract you are currently working under and take legal advice from an employment law specialist. If this were the UK, the employer/client might have identified a problem that you are already technically an employee by default and they are 'shitting' themselves that they might retrospectively have to pay other benefits like holiday and sick pay that might not have been part of the self-employed contract.
    – Nikki
    Commented Nov 9, 2023 at 20:34
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    @Nikki The rights and benefits usually come at the expense of net salary and some flexibility e.g. there is a mutual notice period which in my case is 3 months, considerable amount of job offers would really like to start earlier. You could do mutual termination, but that's something you need to negotiate, so cannot promise until you disclose urge to leave. Here contractors earn considerably more as long as they work and can switch workplaces more freely... unless they can't - it's a trade off. Side note: the problems with forceful retrospective establishing of employment are also known.
    – luk32
    Commented Nov 10, 2023 at 2:09
  • @Nikki employers often claim IP of all work done by an employee even outside the office. Contractors agreements can sometimes allow working for other clients and retaining IP of side projects. Plus it's often shorter notice period both ways i.e. 1 week Commented Nov 10, 2023 at 10:01
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What will happen if I refuse the new employment agreement? Can they terminate me for this or will I be laid off?

The good part is that you cannot be laid off as you are not an employee. But they absolutely can terminate your contract, or just let it expire and not renew/sign up a new one - whatever is more applicable.

In some cases they can simply stop giving you work altogether, and not even bother to break the contract itself at all, that is often true if there are no minimums specified in your contractual agreement and you work on hourly basis.

So it seems that your choice is to either become an employee or move to another greener pastures. Good luck, and welcome to the other side of contracting where stability is only as strong as penalty clauses for terminating your contract early (and your ability to collect on those).

Edit by popular demand: What's worth noting is that they have offered you employment. This is not something they are under any obligation to offer you. It means they see value in keeping you and you could try to leverage that into getting employment terms that work for everyone.

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  • Why is the good part that they can't be laid off? Commented Nov 8, 2023 at 22:21
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    @DeanMacGregor The phrase looks like it was tongue in cheek in response to OP's worries about being laid off.
    – GammaGames
    Commented Nov 8, 2023 at 22:38
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Question you did NOT ask: What should I do right now?

  1. Run the numbers and figure out what offer would be acceptable to you and what isn't. Contractor compensation works often very differently from employee compensation. Typically the "hourly rate" of an employee is a lot lower, but that doesn't mean they make less money. Make sure you fully understand the difference so you can quickly assess the offer when it comes along.
  2. If there is an agency involved: cutting out the middle person can safe a lot of cash and converting to an employee can result in more money for both the employee and the employer.
  3. Look for alternative contract work and test waters. How easy/hard is it for you to find other work?
  4. Think about your long-term career goals: do you like being a contractor with a fare bit of freedom or do you prefer the more constrained but safer situation of being a regular employee?

Once you do 1 and 2 you can make a confident and informed decision when the offer letter comes in.

What will happen if I refuse the new employment agreement?

You'll be gone as soon as your contract expires or is terminated per the terms of your current agreement (READ THAT CAREFULLY).

Can they terminate me for this or will I be laid off?

Neither. You are not an employee and hence you can't be terminated or laid off. They will simply discontinue your contract, most likely in the fastest manner it allows.

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    "fastest manner" — or not — depending on how unique the OPs skillset is, the company might be in trouble without the OP
    – gerrit
    Commented Nov 8, 2023 at 7:36
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    Run the numbers: some decades ago while I was still a contractor I had this decision too. Germany had changed the law. I wasn't sure what I wanted - it was a good job, but, filthy lucre! So I ran the numbers and decided what I could live with, security and comfort against the money. And I said, give me this much and I'll stay. To my surprise they did and I stayed there till I retired.
    – RedSonja
    Commented Nov 8, 2023 at 8:48
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    Important also: "Total compensation" is NOT meaningful, at least, not the way HR calculates it. The company is going to try to replace cold hard cash with a bunch of benefits OP doesn't care about (along with some that are genuinely valuable). OP needs to do his own "value of benefits" calculation.
    – Ben Voigt
    Commented Nov 8, 2023 at 17:35
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Accountant/bookkeeper here. I've often had to tell companies that some or all of their contractors are supposed to be employees by IRS definition. Companies don't like this in general, as it tends to cost them more in taxes but the smart ones don't want to get in trouble with the IRS.

The companies sometimes get pushback from their contractors -- but it's either the contractors who don't understand the benefits or the ones who weren't properly reporting income. There are very few downsides to changing to a W2 employee, especially if you already meet the criteria about things like control.

To the OP, I'd ask -- WHY don't you want to be an employee? Employees get a lot of legal and financial benefits that contractors don't. It's usually financially to your benefit, unless they're severely cutting your hourly wage.

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    Comparing contract to employment pay, there's always a severe cut in hourly wage. The company will argue that "total compensation" is the same or better, but that's a bunch of baloney -- the employment benefits are some average of what most employees want, while contractors have to pay for benefits out of the contract rate, but only for the benefits immediately applicable to them.
    – Ben Voigt
    Commented Nov 8, 2023 at 18:45
  • I think that depends on whether we're talking "Employee of a contracting company" or "Independent Contractor". The former will almost universally benefit both primary parties by converting into a direct employee.
    – davolfman
    Commented Nov 8, 2023 at 21:28
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    I think this answer is especially relevant to contractors who do it through agencies. Less relevant to (truly) independent contractors who have their own companies, get paid via 1099, provide their own equipment except that which is specially required by the employer, work with much less supervision, have a statement of work to define what they're doing, etc. Do you agree?
    – davidbak
    Commented Nov 8, 2023 at 21:49
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    Since you are a contractor in Canada working for a US company, I expect that you simply report your contract billing as income in Canada. If you become an employee, your tax situation will likely become more complicated; now you have the IRS and the Canadian revenue folks to deal with, and tax treaties to worry about. Factor that into your calculations. When I first immigrated to the US, I took a cross border (US/Canada) contracting job and worked with my "employer" to figure out a "fair wage". I didn't realize I'd need to pay FICA both sides, and missed that in the calculations.
    – Flydog57
    Commented Nov 8, 2023 at 23:26
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    @Flydog57 if OP is not actually physically working in the US, its very likely the company will actually be employing them through a canadian subsidiary/"shell" (ULC), or something like TriNet, where they're paying a company with a presence in Canada to be the actual "employer", and OP doesn't need to deal with the IRS. I don't think its actually legally possible to have a "real" employee if you don't have a legal entity in the country.
    – mbrig
    Commented Nov 9, 2023 at 18:14
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Why would you want to refuse before seeing the offer?

In your position, I would be more concerned with what taxes and visa requirements need to be met, so a Canadian citizen can work for a US corporation.

This concern, btw, can be your ticket to remain a contractor, or not even getting the offer of employment.

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    +1. International employer-employee relationships can be a major pain, for both sides involved. I would suggest OP makes very sure both they and the prospective employer know what they are doing to avoid unpleasant surprises down the line, e.g., when HR/legal/finance finds out that "we have international employees??? We never knew about this! We need to become compliant with all applicable laws and regulations ASAP!" For instance, does the company already employ international employees? Can OP talk to them? Commented Nov 8, 2023 at 7:18
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    It's pretty easy for a Canadian citizen to work in the US assuming the OP is a citizen of Canada.
    – JimmyJames
    Commented Nov 8, 2023 at 17:44
  • @JimmyJames: OP doesn't seem to be planning to move to the US, so "work in the US" doesn't apply.
    – Ben Voigt
    Commented Nov 8, 2023 at 18:41
  • @BenVoigt I've actually managed Canadian employees that commuted daily from Canada to the US. I have other colleagues that live in Canada and used to commute daily but now work remotely. Unless the company is going set up a Canadian subsidiary, I don't know the exact details don't think it matters much from a visa perspective. I should probably have said it's easy for a Canadian to be an employee of a US company.
    – JimmyJames
    Commented Nov 8, 2023 at 19:59
  • @JimmyJames: Did you read the page you linked to? It cannot possibly be applicable to Canadians not physically present in the US, because all the paperwork is about entry and exit from the US, admission to the US, etc. Whether the person needs to enter the US is self-evidently very impactful on the visa perspective.
    – Ben Voigt
    Commented Nov 8, 2023 at 20:05
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What probably happened here is that someone with legal knowledge at your client noticed that having "contractors" who work full-time only for them means "misclassification of an employee as an independent contractor", which is actually illegal. That means they have no other choice but to terminate your existing contract.

Why is it illegal?

  • You miss out on several rights you should have through labor laws
  • You miss out on social security contributions
  • The government misses out on payroll taxes

The only one who doesn't miss out on anything is the client employer.

So yes, if you don't accept the offer to turn your illegal work relation into a legal one, they won't have a choice but to stop using your services. Depending on the details of your contract, they might or might not have to pay you a kill fee to terminate the contract early. But that's something you should have negotiated with them when you made the contract. Another difference between employees and contractors is that contracts with contractors are a lot less standardized, so there can be pretty much anything in them. If you are not sure, you might have to consult a lawyer. Did I mention that lawyers for business-to-business disputes like in your case are much more expensive than lawyers for labor disputes? Yet another reason why you generally want to be an employee and not a contractor.

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  • The government doesn't miss out on payroll taxes, and the worker is still forced to make retirement and social safety net contributions. They are treated differently of course, instead of flowing employer -> govt, they flow employer -> contractor -> govt, so the contract rate needs to include them (something that workers may not know and companies may take advantage of), but the worker can't decide "the contract doesn't pay me enough to make these contributions". The government will hold them responsible, under the auspices of "self-employment tax"
    – Ben Voigt
    Commented Nov 10, 2023 at 21:13
  • There may also be a strict time limit on contract work depending on locale. The OP does not mention if the nearly two years he is at this job is just for one contract, but it may have become impossible to convince tax authorities that he is indeed a contract worker.
    – Neil Meyer
    Commented Nov 11, 2023 at 12:07

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