IBEX

Paying Employees "Under the Table"

Business owners, their advisers and their employees need to understand the consequences of paying "under the table."

The term "under the table" refers to any disguised payment of wages to employees by cash, cheque or other compensation with the intent of avoiding payroll taxes.

As attractive as this practise may appear at the outset, paying employees under the table can have costly, and sometimes unfortunate, outcomes. The following real-life example illustrates the the price you can pay for keeping employees "off the books":

In 2005, a large U.S. competitor opened a flagship Canadian operation right down the street from his operation and within a year his operation was in trouble; the franchisor decided to take back control of his franchise. Rather than being a major relief for the entrepreneur, it turned out to be a major problem.

Within a couple of weeks the franchisor wanted all employees at the original location transferred to the corporate payroll. This transfer included completing T4s for all employees and creating Record of Employment forms for those employees being laid off. Naturally, creating the forms for his “under-the-table” employees wasn’t possible and there were enormous consequences for the actions of the entrepreneur.

The entrepreneur was required to pay the Canada Revenue Agency all the past EI, tax and CPP contributions that should have been deducted from the employees, along with the employer portions he was responsible for. The event also triggered an audit of his entire operation by CRA, which did confirm his other locations were above board, but took a huge amount of his energy at a very bad time. To make matters even worse, the entrepreneur has not been allowed to purchase any more franchises from the franchisor.