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Internal Audit Report
October 2010

Table of Contents

• Executive Summary
• 1.0 Introduction
  • 1.1 Background
  • 1.2 Risk Assessment
  • 1.3 Audit Objective and Scope
  • 1.4 Approach and Methodology
  • 1.5 Audit Criteria
  • 1.6 Statement of Assurance
• 2.0 Audit Conclusion
• 3.0 Findings, Recommendations and Action Plans
  • 3.1 Awareness
  • 3.2 Risk Management
• Appendix A: Top Key Indicators of Employer-Employee Relationships
• Appendix B: Audit Criteria
• Appendix C: Summary of Contract Review
• Appendix D: List of Acronyms

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Executive Summary

Background

The Audit of Employer-Employee Relationships (EER) with contractors was approved as part of the Canada Border Services Agency's (CBSA) Three-year Risk-based Audit Plan for 2009–10 to 2011–12. The Treasury Board (TB) Contracting Policy states that contracting authorities must ensure that an EER will not result when contracting for the services of individuals, in accordance with criteria established by the Canada Revenue Agency (CRA) and pertinent court rulings.

CRA publishes a guide to assist departments and agencies in understanding and differentiating employees and self-employed people to aid contracting authorities in determining if a relationship exists. The documentation in this guide considers what the intent was when a worker and a payer entered into a working arrangement.

Objective and Scope

The objective of this audit was to provide assurance that controls were in place to minimize the risk of EER with contractors. The audit reviewed a sample of contracts, from three branches, with start dates between April 1, 2006 and August 31, 2009. The audit was conducted from January to April 2010.

Statement of Assurance

The audit engagement was conducted in accordance with the Internal Auditing Standards for the Government of Canada.

Risk Assessment

The main risks related to EER are the potential for financial liability should contractors be considered employees, and the possible damage to the Agency's reputation. The impact of these risks is considered to be low.

Audit Conclusion

The Agency currently has controls designed to minimize the risk of employer–employee relationships with contractors.

However, the audit found it was common for CBSA contracts to have multiple EER risk indicators. Accordingly, there is a need to enhance existing controls to further minimize EER risks by:

• improving project authorities' understanding of the consequences of employer–employee risks, and
• improving project authorities' management of identified potential employer–employee risks.

With respect to awareness of what constitutes an EER risk, the audit found that while there is guidance on this issue, project authorities do not consistently understand the potential consequences of these risks.

With respect to the management of identified potential EER risks, the Agency's contract authority currently requires project authorities to complete a checklist during their contract request that specifically addresses and identifies the main potential EER risks pertaining to each contract. However, advice on effective procedures to manage these risks is not generally provided.

Potential EER risks are further minimized to some degree by contractors' desire to be paid as consultants rather than as employees.

There are no documented cases of EER at the CBSA since its inception in 2003.

Recommendation

The audit makes one recommendation to:

• Improve current EER risk mitigation procedures by requiring the CBSA's contracting authority to advise project authorities during their respective contract requests on the possible consequences of, and effective procedures to manage, identified potential risks.

Management Response

Management accepts the recommendation and will implement measures to augment the project authority's capacity to identify, prevent and manage risk of EER.

1.0 Introduction

1.1 Background

The Canada Border Services Agency's (CBSA) Audit Committee approved an audit of the Employer-Employee Relationships (EER) with contractors as part of the Three-year Risk-based Audit Plan for 2009–10 to 2011–12. The audit was conducted from January to April 2010.

The Agency contracts with the objective of acquiring goods and services in a manner that enhances access, competition and fairness, and results in best value or, if appropriate, the optimal balance of overall benefits to the CBSA and Canadian taxpayers. Service contracts are required to complete specialized tasks/projects or to respond to a lack of resources. As part of its contracting activities, the CBSA is expected to comply with the Treasury Board (TB) Contracting Policy.

The TB Contracting Policy states as a requirement that contracting authorities must ensure that an employer-employee relationship will not result when contracting for the services of individuals, in accordance with criteria established by the Canada Revenue Agency (CRA) and pertinent court rulings. By using contracts for services, the CBSA faces the risk of inadvertently creating an EER between the government and the contractor, which could create a liability for the government. For example, in the event of serious illness of a contractor, the individual could initiate a request for compensation if the individual can demonstrate that an EER existed.

CRA published a guide entitled Employee or Self-Employed? to assist people in understanding and differentiating employees and self-employed people to aid contracting authorities in determining if EER exist. CRA considers what the intent was when the worker and the payer[ 1 ] entered into the working arrangement.

Appendix A displays a summarized list of the top key indicators to EER as per the CRA guide.

In addition, Public Works and Government Services Canada (PWGSC) published the Guide for Risk Management of the Employee-Employer Relationship as part of a PWGSC Framework for Risk Management of the Employer-Employee Relationship related to procuring and managing consultants and contractors. This guide provides tips and a checklist for managers.

According to the TB Contracting Policy, "[i]t is virtually impossible to lay down general rules on the meaning of employment […] that apply uniformly and without exception; each relationship is assessed individually."[ 2 ] Even with the lack of general rules, there are three main determining factors to be taken into consideration:

• the intent of the parties to the contract,
• the contract documents, and
• the actual work situation.

The CBSA contracting process involves three main players: the Project Authority[ 3 ], the Integrated Branch Business Services (IBBS) and the Procurement and Contracting Section, Contracting, Assets and Telecommunications Division (CATD) of the Comptrollership Branch. CATD is the contracting authority for contracts for services between $5,000 and $2 million issued by the CBSA. PWGSC is the contracting authority for contracts for services over $2 million. The level of approval of project authority (e.g. director, director general, etc.) depends on the value and the sensitivity of the contracts.

The Acquisitions Branch at PWGSC provides departments and agencies with assistance at all steps of the procurement process, which may include assisting with the identification of requirements.

The CBSA project authority initiates the process by defining the requirements. The IBBS prepares the requisition and sends the Project Authority's documents to CATD. CATD's role is to acquire goods and services on behalf of clients, in support of their operational requirements, while obtaining best value.

Agency wide from April 1, 2006 to March 31, 2009, there were $97 million in service contracts over $10,000. Ninety percent of these service contracts over $10,000 were in Headquarters. The three branches with the largest number of service contracts over $10,000 were:

• The Information, Science and Technology Branch (formerly the Innovation, Science and Technology Branch) – $56.3 million or 58.1%.
• The former Strategy and Coordination Branch – $11.2 million or 11.6%.
• The Human Resources Branch – $5.5 million or 5.7%.

There have been no internal audits or reviews previously completed on the subject of EER within the CBSA.

1.2 Risk Assessment

The risk assessment, based on the Management Accountability Framework and key operational practices areas combined with preliminary interviews and documentation review, identified the following risks:

• The main risks related to EER are the potential for financial liability should contractors be considered employees, and the possible damage to the Agency's reputation.

1.3 Audit Objective and Scope

The audit objective was to provide assurance that controls were in place to minimize the risk of EER with contractors.

The audit scope included a review and observations of the Agency's contracting practices and a sample (chosen randomly and judgementally) of 73 service contract files, including temporary services, awarded to the Information, Science and Technology Branch (formerly the Innovation, Science and Technology Branch), the former Strategy and Coordination Branch and Human Resources Branch with start dates between April 1, 2006 and August 31, 2009. These three branches were selected due to the amount of service contracts issued out of the total for the Agency.

1.4 Approach and Methodology

The examination phase of this audit was performed using the following approach:

• Reviewed policies, procedures, guidelines and reports.
• Conducted interviews with key stakeholders across the department, specifically with Contracting and Procurement Section, CATD in the Comptrollership Branch, Contract Coordination and Procurement Unit in Innovation, Science and Technology Branch as well as managers, project authorities and employees.
• Conducted interviews with contractors to identify work situations that may lead to EER.
• Performed a walk-through/observation of the work environment, the office premises and the processes to ensure that the controls are put in place and that there is no indication of EER.
• Reviewed a sample of contracts for services, whereby the CBSA was both the contracting and project authority, for the period from April 1, 2006 to August 31, 2009 using judgemental and random sampling techniques, to assess if contracts contain any indicators of EER. For the judgemental sample, the files were selected based on various criteria, such as the duration of the contract, the dollar value and/or the type of contract.

1.5 Audit Criteria

The audit criteria were based on the preliminary findings from the planning phase. Detailed audit criteria were developed in accordance with guidelines from TB, CRA and PWGSC on EER as well as the Management Accountability Framework elements.

The audit criteria were organized under three lines of enquiry:

• Policies and Procedures;
• Accountability, Roles and Responsibilities; and
• Mitigation of Risk of EER.

Detailed audit criteria are listed in Appendix B.

1.6 Statement of Assurance

The audit was conducted in accordance with the Internal Auditing Standards for the Government of Canada.

2.0 Audit Conclusion

The Agency currently has controls designed to minimize the risk of employer–employee relationships with contractors.

However, the audit found it was common for CBSA contracts to have multiple EER indicators. Accordingly, there is a need to enhance existing controls to further minimize EER risks by:

• improving project authorities' understanding of the consequences of employer–employee risks, and
• improving project authorities' management of identified potential employer–employee risks.

With respect to awareness of what constitutes an EER risk, the audit found that while there is guidance on this issue, project authorities do not consistently understand the potential consequences of these risks.

With respect to the management of identified potential EER risks, the Agency's contract authority currently requires project authorities to complete a checklist during their contract request that specifically addresses and identifies the main potential EER risks pertaining to each contract. However, advice on effective procedures to manage these risks is not generally provided.

3.0 Findings, Recommendations and Action Plans

3.1 Awareness

Project authorities are the key control in preventing EER with contractors. They should be knowledgeable of the contracting policies and processes, aware of the potential of EER and manage the risks. As well, policies and procedures for EER with contractors are a key control because they should explain to stakeholders how to recognize and manage the indicators of such relationships. The policies and procedures should be written in a reasonable level of detail, available and understood by the different stakeholders involved in the management of service contracts. These policies and procedures should be clear on accountabilities, roles and responsibilities, as well as providing sufficient guidance on how to identify and minimize the risks of EER with contractors.

The audit reviewed various existing policies on contracting, as well as guidelines on EER with contractors. In addition, the auditors conducted interviews with various stakeholders, including project authorities, contractors and CATD staff, to obtain their understanding of existing policies and guidelines. Training material was also reviewed for analysis of content.

The TB Contracting Policy states:

"4.1.9 With respect to contracting for services, contracting authorities must:

b. ensure that an employer-employee relationship will not result when contracting for the services of individuals in accordance with criteria established by the Canada Customs and Revenue Agency and pertinent court rulings."

In addition, Subsection 16.3.4(c) of the TB Contracting Policy provides further guidance as follows:

"…seek legal advice from the Department of Justice, where it is not feasible for officials to determine whether a contract is a contract for services or a contract of employment (i.e., employment status is not easily identifiable). However, the role of the Department of Justice in these cases is only advisory. It is ultimately the responsibility of Contracting Authorities to ensure that contracts do not create employer-employee relationships."

In the Agency's contracting policies and procedures, there is no specific mention of EER. However, two external documents that provide complete information on EER are:

1. The CRA guide entitled Employee or Self-Employed? is available to assist people in understanding and differentiating employees and self-employed people, and to aid contracting and project authorities in determining if EER exist. This guide outlines indicators of EER that managers should be aware of.
2. PWGSC created a Guide for Risk Management of the Employee-Employer Relationship. This guide provides tips and a checklist for project authorities. The indicators are grouped into the following categories:
   • level of control the payer has over the worker;
   • ownership of tools and equipment;
   • degree of financial risk taken by the worker (including profit and/or loss);
   • degree of responsibility for investment and management held by the worker (including subcontracting and hiring assistants); and
   • integration of the contractor work in the work environment.

These documents are very good in explaining the risks and consequences of EER. However, distribution in the Agency has been limited to the directors of the Information, Science and Technology Branch.

Internally, the CATD has issued guidance through an INSight bulletin, but the scope of this guidance was limited as it dealt with only one EER indicator.

Awareness sessions were given in 2005 to project authorities on ways to avoid EER by the former Contract Coordination and Procurement Unit within the former Innovation, Science and Technology Branch. No other similar sessions have been provided since that time.

In regards to training, project authorities received the mandatory training for financial delegation, which included a session on contracting but did not cover EER. Contract training for project authorities was provided within the CBSA; this training was provided upon request and included limited discussion on EER. Twenty-one out of 25 project authorities interviewed responded that they had not received any training on EER.

While EER awareness and training sessions have some limitations, CATD does have a control that appears to be effective in providing awareness of risk indicators to project authorities. CATD requires that on every request for contracting, a Contract Request Summary (CRS) be completed by the project authority. A section of the CRS contains a checklist that deals specifically with EER issues, and addresses the most important EER indicators for consideration by the project authority. This CRS checklist is CATD's most important current control in promoting awareness of EER indicators.

This CRS checklist can also be leveraged to improve project authorities' understanding of the potential consequences of identified risks. Interviews found that while the level of awareness of indicators was reasonable amongst project authorities (although it did vary somewhat), their understanding of the consequences of identified potential risks was inconsistent. CATD can improve their understanding by explaining potential consequences of risks that they have identified in the CRS checklist. This is referenced in the Recommendation (Section 3.2).

The audit also showed that project authorities recognize that they are the key control in preventing EER with contractors. Twenty-two out of 23 project authorities indicated they would be responsible if an EER resulted from their contract. CATD also indicated that the project authority would be accountable as per the PWGSC contracting guideline.

It is to be noted that there are no documented cases of EER at the CBSA since its inception in 2003.

In conclusion, project authorities know that they are responsible for managing their contracts, including EER. There are policies and guidelines on EER with contractors. The contracting authority does provide awareness and identification of potential EER risks to project authorities for each contract request; however, their understanding of the potential consequences of these risks needs to be enhanced.

3.2 Risk Management

Control processes are designed to ensure that risks are mitigated within the risk tolerances established by the risk management process. The main risks related to EER are the potential for financial liability should contractors be considered employees, and the possible damage to the Agency's reputation. The impact of these risks is considered to be low.

To assess the risk mitigation control process, project authorities, contractors and CATD managers were interviewed and the audit team performed walk-throughs to observe the physical aspects of the EER. Also, a sample of 73 files was examined to test control processes for service contracts. Contract documents and payment records in these files were reviewed and the files were also assessed in relation to the EER indicators listed in Appendix A.

In addition to providing context for the file reviews discussed below, the interviews also identified two additional factors that minimize risks to some degree: firstly, that contractors want to be paid as consultants rather than as employees, and secondly, that the experience of project authorities could be seen as providing increased assurance.

The review of contract documents and payment records indicated that contractors were engaged through a documented contract with a supplier, and payment was made out of the operating budget (rather than salary) to the supplier (rather than directly to the contractor). These factors contribute to mitigating the risk of EER.

A summary of the results of the assessment in relation to EER indicators is provided in Appendix C. All files reviewed showed some indicators of potential EER. Key highlights were:

• 32 percent of the files had more than 10 EER indicators; 60 percent had between six and 10 indicators;
• 77 percent had contract continuity over one year (contract continuity is considered a particularly important indicator);
• 66 percent provided working tools, supplies and other equipment;
• 89 percent showed that deliverables had no clear dates of completion; and
• 82 percent of the files indicated the payment was not dependent upon successful completion of a specific milestone.

It is recognized that many of these indicators are to be expected in contracting. However, the audit results indicate that it is common for CBSA contracts to have multiple EER risk indicators. Accordingly, there is a need to enhance controls to further minimize EER risks. By building on an existing control, the CRS checklist, CATD is in a good position to further mitigate against these risks by providing advice to project authorities on effective procedures to manage identified indicators.

Recommendation
The Vice-President of the Comptrollership Branch should improve current EER risk mitigation procedures by requiring CBSA's contracting authority to advise project authorities during their respective contract requests on the possible consequences of, and effective procedures to manage, identified potential risks.

Management Action Plan	Completion Date
The following measures will be implemented:
1. To increase the level of guidance provided to the project authority, the policies and procedures will include the guidance provided in the PWGSC Guide for Risk Management of the Employee-Employer Relationship related to Procuring and Managing Consultants and Contractors and the CRA guide entitled Employee or Self-Employed?	November 2010
2. The Contract Request Summary (CRS) Checklist to identify EER risk will be modified to include a certification by the project authority that he/she has read and understood the responsibilities to prevent EER.	November 2010
3. The CATD will advise the project authorities on measures they can take to prevent EER should such risk have been identified in the CRS Checklist.	September 2010
4. The CATD will communicate these changes to Agency staff prior to implementation.	September to November 2010

Appendix A: Top Key Indicators of Employer-Employee Relationships

The following is a non-exhaustive list of key indicators of EER as per the CRA guide Employee or Self-Employed?

• The degree of continuity (duration of relationships–contracts or series of contracts);
• Payments not dependent upon successful completion of the work and by the way of a predetermined priced or specific milestones;
• The working space, tools and equipment are provided to contractors;
• Progress reports are required from contractors;
• Hiring subcontractors and/or replacement with CBSA involvement;
• No limited assignment period;
• The work performed by contractors is similar to the work performed by CBSA employees;
• Contractors are identified in CBSA Outlook properties; and
• Contractors' e-mail addresses are included in distribution lists.

Appendix B: Audit Criteria

The audit criteria used for the Engagement Phase were:

Line of Enquiry	Audit Criteria
Policies and Procedures	Guidance on EER is adequate to the level of risk and properly communicated.
Accountability, Roles and Responsibilities	Authority, roles and responsibilities regarding EER are clear. Managers/employees have the knowledge and ability to support the discharge of their responsibilities related to EER at all steps of the contract life cycle.
Mitigation of Risk of Employer-Employee Relationship	Project authorities regularly monitor compliance with policies and procedures. Results of monitoring are documented and reported to the required management level. Controls are in place to ensure that EER are prevented as per criteria of CRA guidelines. Contracts (and clauses within) are written in a way that does not lead to EER. Management ensures that the statement of work avoids the use of employment-type terms, and where possible describes the work in terms of expected results and deliverables with clearly defined dates of completion. There is a documented rationale to justify the long-term contracting assignments and/or continuing relationship.

Appendix C: Summary of Contract Review

Indicator of Employer-Employee Relationship	Total files reviewed	Yes	No	Unable to assess	Not Applicable	% of files with indication of risk of EER
The contractor has worked for the payer with a degree of continuity (years).*	73	56	17	0	0	76.7%
The payment is not dependent upon successful completion of the work and by way of a predetermined priced or at specific milestones.	73	60	5	8	0	82.2%
The contractor performs the tasks in CBSA offices or premises.	73	69	3	1	0	94.5%
The contractor is required to provide progress reports.	73	48	23	2	0	65.8%
The payer provides working tools, supplies and equipment necessary for the completion of the work.	73	66	6	0	1	91.7%
The contractor is not permitted (without any intervention of the payer) to subcontract work.	73	26	46	1	0	35.6%
The contractor is not permitted (without any intervention of the payer) to hire a replacement to complete the work, if for any reason, he/she is in a position where he/she cannot complete it.	73	44	27	1	1	61.1%
The assignment period is not limited (e.g. temporary help services).	73	35	15	23	0	47.9%
The contractor performs similar work to the work performed by CBSA employees.	73	19	53	1	0	26.0%
CBSA Outlook properties (e-mail address) do not identify the contractor as such.	73	18	18	2	35	47.4%
The contractor's name is added to e-mail group distribution lists.	73	30	5	2	36	81.1%
Deliverables of the statement of work do not have clearly defined dates of completion.	73	64	1	7	1	88.9%

* Contracts that lasted more than a year were considered to have a degree of continuity.

Appendix D: List of Acronyms

CATD

Contracting, Assets and Telecommunications Division

CBSA

Canada Border Services Agency

CRA

Canada Revenue Agency

CRS

Contract Request Summary

EER

Employer-Employee Relationships

IBBS

Integrated Branch Business Services

PWGSC

Public Works and Government Services Canada

TB

Treasury Board

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Notes

1. Term used in CRA Employee or Self-Employed?, RC4110. [Return to text]
2. Treasury Board Secretariat Contracting Policy, section 16.3.1. [Return to text]
3. Project authority is the person in the organization who wants to award a contract and who is responsible for the initialization of the procurement process, creation of the required documents and the management of the contract once it is in place. [Return to text]