Dating culture gave us the term “situationship” for a relationship kept deliberately undefined—one that offers the closeness of commitment without its obligations. Organizations have their own version.
An organizational situationship is an arrangement in which one party draws commitment-level effort, loyalty, availability, or dependence from another while deferring commitment-level clarity, investment, or accountability. In short, one party is encouraged to act as though the relationship is durable, while the other keeps its options open. The defining feature of this kind of relationship is deniable reliance.
Employees, contractors, and partner organizations make real career, financial, and/or operational decisions in response to the signals they receive. When one party is comfortable sending those signals but unwilling to formalize, qualify, or review them, the resulting risk is carried informally and unevenly, with the party least able to absorb it usually facing the greatest risk.
Consider, for example, a senior manager who is repeatedly told that they are “partner material” without being given any stated criteria or a decision date; or an interim director who carries permanent responsibilities without fair compensation or an end point in sight. Another example is a smaller firm reserving specific staff, investing in specialized systems, or turning away other work when a big client repeatedly signals that their relationship is strategic and/or will be continuing.
For CPABC members in public practice and industry, organizational situationships such as these will rarely appear as liabilities in the technical accounting sense. They may, however, surface as liabilities in terms of governance and risk.
The argument is not that every informal arrangement should become binding, but that someone should be able to say who authorized the reliant relationship, on what basis it was created, and how it will be reviewed.
Why is this a professional question?
Under IAS 37, a constructive obligation can arise from an entity’s own conduct. An established pattern of past practice, published policies, or statements can create a valid expectation in others that an entity will accept certain responsibilities.1
While a vague promise of promotion would not ordinarily appear in the financial statements, the underlying principle still applies: Conduct and communication can create expectations even in the absence of a contract.
CPAs are trained to apply professional skepticism and examine substance over labels. This scrutiny is often directed outward—for example, to analyze how a client or counterparty has characterized a transaction—but it should also be directed inward to examine an organization’s own relationships.
For CPAs who advise boards, serve as CFOs, or lead public practice firms, the question is whether the organization’s own patterns of reassurance, encouragement, and “informal understanding” are creating reliance and exposure that no one has consciously chosen to govern.
Governed versus ungoverned ambiguity
Organizations cannot eliminate uncertainty, and honest leaders should not pretend otherwise. Markets shift, budgets freeze, mergers stall, and approval may genuinely sit beyond a manager’s authority. Not every interim role is a trap. Development sometimes requires people to try responsibilities before formally assuming them.
The distinction is in the details. Four features set organizational situationships apart from ordinary uncertainty:
- Repeated ambiguity: There is enough encouragement to keep the other party invested, but not enough information to allow them to make an informed decision.
- Unequal dependence: One party can delay, withdraw, or reinterpret the arrangement much more easily than the other.
- Deferred reciprocity: Additional effort, loyalty, patience, or investment is accepted now, but recognition, compensation, or protection is postponed indefinitely.
- Interpretive power: If the arrangement becomes inconvenient, the party with more leverage keeps the authority to decide what the relationship “really” was.
In summary, governed ambiguity has limits, decision rights, review points, and honest communication, while ungoverned ambiguity asks one party to continue investing in the relationship without knowing whether the other party recognizes, reciprocates, or even acknowledges the reliance from which it benefits.
When dealing with ambiguity, two questions often arise: “Did someone explicitly promise something?” and “Was someone disappointed?” These questions are tempting but misleading. The former is too legalistic, as reliance is often created through repeated conduct, encouragement, and implication rather than a written promise; the latter is too subjective, as disappointment alone does not establish a governance failure. The more useful question is: “Who is able to act on the uncertainty, and who isn’t?”
Where both parties understand the limits of an arrangement, retain meaningful choices, and know who will make the next decision and when, ambiguity may be legitimate. It becomes harder to defend, however, when one party is kept on the hook.
From a governance perspective, intent alone does not settle the issue. A sincere manager may believe a promotion is likely, the HR team may be waiting for authorization, and senior leadership may be genuinely undecided—each communicating a partial truth, while the employee, contractor, or partner organization bears the full consequences of waiting. The concern here is whether anyone owns the arrangement through which reliance is being created, and how that arrangement is being governed.
The use of AI is making this distinction even more important, as it is creating real uncertainty about staffing, professional development, job design, and the future division of work between people and technology.2 Reasoning such as “we need to see how it unfolds” can cause an organization to postpone decisions indefinitely while individuals are still expected to reskill, accept new responsibilities, and remain available.
While there is widespread unpredictability about how AI will ultimately change the business environment, an organization’s leaders can still prioritize transparency and open dialogue as fundamental to business values.
What boards and senior leaders should ask about the creation of reliance:
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Contractor and quasi-contractor arrangements
Two related but distinct questions arise in contractor relationships. The first is whether a worker is an employee or self-employed for payroll and employment purposes, and the second is whether an incorporated worker’s company is carrying on a personal services business for income-tax purposes. Both questions require that attention be paid to the substance of the relationship, but each relates to different obligations.
The clearest expression of this tension is the case of a worker who is independent in form while dependent in substance—engaged as a contractor, yet subject to employee-like direction, integration, and exclusivity. Here, ambiguity has a tax and classification dimension, and CPAs may be required to price the consequences.
The Canada Revenue Agency does not determine employment status from the wording of a contract alone. Instead, it compares the respective parties’ stated intention with the actual working relationship and considers factors such as control; tools and equipment; financial risk; investment and management responsibility; the ability to subcontract; and the opportunity for profit. In short, a contract that says the individual is an “independent contractor” means little if the working relationship reads like employment.3
The CRA’s Personal Services Business (PSB) pilot, which ran in two phases from 2022 to 2024, examined the “incorporated employee”—an individual who would be considered an employee of the payer, if not for the corporation interposed between them. The findings were significant. Of the 913 corporations that participated in Phase 2, 291 (32%) were determined to be operating as PSBs, which are taxed at higher rates and limited to a narrower set of specified deductions.4 Of those confirmed PSBs, 245 (84%) had wrongly claimed the small business deduction and had not included the additional 5% PSB tax in their filings.
The apparent financial savings from misclassifying an individual as a contractor rather than an employee can be substantial. For an employee whose earnings exceed all applicable 2026 program ceilings, an employer’s annual CPP, CPP2, and EI contributions total $6,218.75.5 This is before considering benefits, vacation entitlement, payroll administration, or compensation implications for others performing comparable work. On a spreadsheet, the savings from keeping a working arrangement outside the definition of employment is real. But so is the exposure.
The legislative direction matters even where it does not bind most readers directly. Since June 2024, the Canada Labour Code has presumed that a person who is paid remuneration is an employee unless the employer proves otherwise—a reversal of the past onus—and it treats misclassification as a contravention. Because this presumption applies only to federally regulated employers, the majority of British Columbia’s workplaces, which are governed provincially, are not subject to the reverse-onus rules; however, worker classification remains consequential for provincially governed workplaces under other applicable employment and tax rules.
Consider the federally regulated road transportation sector, for example. In March 2025, the CRA and the Labour Program established an information-sharing arrangement that allows the CRA to receive relevant misclassification information from the Labour Program; its launch was described as a first step toward a broader enforcement framework.6,7 This indicates that regulators are increasingly prepared to look past contractual form to the substance of a working relationship.
Managing costs and designing roles carefully are legitimate practices, and not every contractor arrangement is suspect. However, the ethical line is crossed when ambiguity is used to create an organizational situationship. More than a classification risk, this can become a form of moral arbitrage, with organizations capturing the benefits of commitment while shifting the commitment’s costs onto the worker and, in some cases, onto the public programs those contributions were meant to support.
From a governance perspective, directors and/or engagement partners need to ask whether the arrangement has been tested against employment and tax criteria or only against convenience, and whether any perceived savings depend on keeping the relationship undefined.
The costs
Organizational situationships rarely appear as a single budget line, which is one reason why leaders may underestimate them. The savings are immediate and visible—no salary adjustment, no severance accrual, and no precedent set—while the costs remain unassigned and diffuse, sitting in the background of operations rather than in any one account.
What often erodes first is the discretionary layer of working life that no contract compels. People continue to meet deadlines and attend meetings but don’t go above and beyond, because they don’t believe the organization truly values their efforts. In organizational research, this is understood as a psychological contract breach, which signifies a perceived gap between what the organization has implied or induced and what it ultimately honours. Meta-analytic evidence associates such breaches with lower trust and satisfaction levels, weaker performance, and less commitment to the organization—perhaps even a stronger intention to leave.8,9
Over time, dispersed effects become traceable costs. A resignation that appears sudden to leadership may have followed a long private countdown. The organization is then left with a vacancy, which leads to recruitment and onboarding expenses, reduced productivity, and the loss of knowledge and relationships that may not be easily replaced. A 2026 survey of Canadian hiring decision-makers placed the average cost of employee turnover at $30,680.10 The governance question for leaders is whether avoidable ambiguity in one part of the organization is creating costs that appear later, and often in someone else’s budget.
Recognizing and managing obligations
An organizational situationship is the governance equivalent of an unrecorded obligation: Reliance has been encouraged, value has been drawn, and risk has been shifted, without clear authority or accountability. Boards and senior leaders will rarely see these reliance structures in policy language; instead, they will see them in interim roles with no end date, promotion pathways with no criteria, contractor arrangements that resemble employment in substance, and partnerships that look strategic but remain formally undefined.
Bringing these arrangements into view is not about turning every informal understanding into a contract. It is about deciding, deliberately, which relationships the organization is prepared to govern, and accepting that the others still carry risk even if they haven’t been formalized in writing.
For CPABC members advising on governance, risk, and ethics, the professional task is to notice where substance has quietly outgrown form and to help organizations recognize and manage the obligations they’ve already incurred. As we enter a revolutionary new age of business influenced by AI, this scrutiny will be increasingly important.
Rafia Faiz, PhD, SHRM-SCP, is an associate professor at the University of Doha for Science and Technology and a professionally certified HR specialist. Her work examines leadership, employment relations, workplace inclusion, and organizational risks.
Jaspal Singh, CPA, M.Sc., is employed as a tax accountant in Abbotsford and as a contract instructor at Simon Fraser University. He is the chair of the CPABC Fraser Valley Chapter and serves as the head of the finance committee and a board member of the non-profit society SARA for Women.
This article was originally published in the November/December 2026 issue of CPABC in Focus.
Footnotes
1 IFRS Foundation, “IAS 37 Provisions, Contingent Liabilities and Contingent Assets,” ifrs.org. Accessed July 20, 2026.
2 World Economic Forum, The Future of Jobs Report 2025, January 2025, weforum.org.
3 Canada Revenue Agency, “Employment Status: Employee or Self-Employed,” modified January 6, 2026, canada.ca/en/revenue-agency/services/tax. Accessed July 20, 2026.
4 Canada Revenue Agency, “Personal Services Business Pilot,” updated April 14, 2026; and “Worker Who Performs Services on Behalf of Their Own Corporation (Personal Services Business),” updated April 14, 2026. Both at canada.ca/en/revenue-agency, accessed July 20, 2026.
5 Canada Revenue Agency, “CPP Contribution Rates, Maximums and Exemptions”; “Second Additional CPP Contribution Rates (CPP2) and Maximums”; and “EI Premium Rates and Maximums,” 2026, canada.ca/en/revenue-agency. The maximum employer contributions for CPP, CPP2, and EI are $4,230.45, $416.00, and $1,572.30, respectively.
6 Employment and Social Development Canada, “Determining the Employer-Employee Relationship – IPG-069,” revised June 27, 2025, and “Misclassification – IPG-105,” revised April 23, 2026. Both at canada.ca/en/employment-social-development, accessed July 20, 2026.
7 Canada Revenue Agency, “Strengthening Compliance in the Trucking Industry: CRA and Labour Program Sign Information-Sharing Arrangement,” March 7, 2025, canada.ca/en/revenue-agency/news/2025.
8 Denise M. Rousseau, “Psychological and Implied Contracts in Organizations,” Employee Responsibilities and Rights Journal 2, 1989 (121–139). (link.springer.com/article/10.1007/BF01384942)
9 Hao Zhao, Sandy Wayne, Brian Glibkowski, and Jesus Bravo, “The Impact of Psychological Contract Breach on Work-Related Outcomes: A Meta-Analysis,” Personnel Psychology, vol. 60, no. 3, 2007 (647–680).
10 Express Employment Professionals, “Employee Turnover Is Getting More Expensive for Canadian Companies,” January 28, 2026, reporting findings from an Express Employment Professionals–Harris Poll survey of 504 Canadian hiring decision-makers. (expresspros.ca/newsroom)
