"Under the table" pay arrangements. Notoriously common among smaller employers. And almost always illegal.
(There are a few exceptions carved out, including for employment of a casual nature other than for the purpose of the employer's trade or business. Pretty narrow, when it comes right down to it, and many employers try to rationalize themselves into it...and then end up with the Courts telling them otherwise.)
I cannot emphasize this enough: The freedom to contract is not absolute. In general, you cannot contract out of statutory requirements. So even if the employee agrees to be paid under the table, that doesn't provide you with any real protection whatsoever.
An employer is obligated to make deductions from an employer's pay and remit them to the CRA. The employer must also make its own contributions to CPP and EI. Costs money, yes, but not as much as it will cost you when, at the end of the day, the CRA comes after you for failing to do so.
And when the CRA comes after you, that'll be a big bill all at once, rather than spreading it out over time as you're supposed to.
Moreover, when other legal issues occur in "under-the-table" employment arrangements, employers lose a lot of credibility. An employer that does things by the books, does things legally, maintains appropriate records, etc., can walk into any legal proceeding with clean hands. Small business owners take heed: You shouldn't want to present yourself as an individual doing what you need to do to scrape by, thinking that your operations are beneath the notice of things like the law; rather, you should present yourself as a professional, a businessperson, somebody who owns a real company and operates it properly within the requirements of Canadian law. When there's a credibility issue, and an employer's dirty laundry is popping up in every fact in the litigation, the employer likely will not be believed.
And when it comes to penalty, too, when a reputable employer makes a mistake in good faith and misses an obligation, an adjudicator will not be nearly so hard on that employer than he or she would be on an employer who has shown reckless disregard for legal obligations in every aspect of the business' operations.
It's generally a lot more cost-effective to meet your legal obligations in the first place, rather than having to hire someone like me afterward to help you clean up your mess.
As a good starting point to understanding your specific payroll obligations, go to the CRA website.
This Blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.