First Reference company logo

First Reference Talks

News and Discussions on Payroll, HR & Employment Law

decorative image

Misclassification of workers: contractors or consultants?

I have often written and spoken about misclassification of workers, specifically that many organizations agree to call workers “contractors” or “consultants” even though they are, in reality, employees. The bottom line is that our courts and government agencies, including the Canada Revenue Agency, will not be swayed by the terms used in a document or the manner in which parties describe their relationship. They will look at the reality of the situation and assess whether the individual is truly in business for themselves, or is really a part of the organization. As my friend and colleague in the employment law bar, Natalie MacDonald, likes to say, “If it walks like a duck and talks like a duck, it most likely is a duck.”

When a court must consider the issue of whether an individual is an independent contractor or an employee, they will look at factors including the following:

  1. The degree of control that the employee has over her or his activities
  2. Whether the worker or the employer provides the required equipment and tools
  3. Whether the worker hires his or her own helpers
  4. The worker’s degree of financial risk (chance of profit and risk of loss)
  5. The worker’s responsibility for investment and management

There are many other tests that the courts will use. One of them is the integration test, in which the court essentially attempts to determine whether the individual is truly an integrated or integral part of the organization, or whether they are an independent business person providing services, much as a lawyer or a law firm would.

There are many misconceptions on this topic. Among the more common is the notion that if the worker invoices the organization, particularly through their own corporation, then that will be sufficient to create an independent, or non-employment, relationship. That is not true. This issue was addressed by the Ontario Court of Appeal recently in the case of McKee v. Reid’s Heritage Homes Ltd. In that case, Ms. McKee:

  • Contracted with Reid’s Heritage Homes in order to advertise and sell new homes
  • Entered into the contract through her own corporation
  • Was paid a fixed commission for every home sold
  • Hired her own staff of sub-agents

After 18 years, the relationship came to an end and Reid’s purported to terminate the agreement on 30 days’ notice, as provided in the original contract. At that point, Ms. McKee became disenchanted with the role of an independent contractor, and sued for wrongful dismissal. The trial judge and the Ontario Court of Appeal both applied the tests set out above and found that she was indeed an employee entitled to notice of termination of 18 months.

I do not want to spend a lot of time reviewing the analysis in that case. However, I do mention it to point out the risk that a court will not defer to the parties’ characterization of the relationship and that both parties may be exposed to liability as a result. In some cases, the individual has paid taxes as a corporation and may be liable for back taxes and penalties. The organization may have liability for failing to remit EI, CPP and other source deductions that apply to employees.

It is important for organizations to be aware of the differences that exist when they are dealing with true contractors, as opposed to employees, and to ensure that they are not providing benefits that they don’t have to. True contractors are not governed by employment standards legislation. They are not entitled to statutory holidays, vacation time, vacation pay and other benefits offered to employees. Furthermore, they are not regulated by hours of work legislation, not entitled to overtime pay and not entitled to the same amount of notice of dismissal that an employee would be. Many workers are shocked to discover that by agreeing to be treated as an independent contractor, they have given up significant rights. Organizations should be careful in this regard, but if they are dealing with an individual that is truly an independent contractor, they do not have to offer them all of the same benefits and protections that they would an employee.

That being said, from an organizational point of view, if there is any question as to whether an individual is an employee or not, there is very little benefit to treating them as a contractor. Many organizations have told me that they do so in order to avoid the obligation to provide employment related benefits and significant notice of dismissal. These issues are easily dealt with through an employment contract. An employee can be hired on the basis that they will not receive specific benefits. Furthermore, a contract of employment can provide for minimal notice of dismissal, so long as it is not less than that required by statute. Treating an individual as a contractor, when they are in fact an employee, results in significant potential liability and is generally not worth the risk, particularly when the concerns that drive such a decision can almost always be addressed in a different and less risky manner.

Stuart Rudner
Miller Thomson LLP

Follow me

Stuart Rudner, Rudner Law

Employment Lawyers and Mediators at Rudner Law
Stuart Rudner is a leading HR Lawyer, mediator and a founding partner of Rudner Law, a firm specializing in Canadian Employment Law. At Rudner Law, their approach is simple. They want to understand your circumstances, your concerns, and your goals. They will then ensure that you understand the legal regime along with your rights and obligations. Once that is done, they work with you to design a cost-effective strategy that meets your needs. They want to be your trusted advisor.Read more
Follow me
Kindle

, , , , , , , , ,

Comments are currently closed.

2 thoughts on “Misclassification of workers: contractors or consultants?
  • Joanne Royce says:

    Hi Stuart: Great blog post. I also enjoyed Natalie’s analogy and the “duck” and I provide a slightly different perspective about the same “duck” in my blog post at: http://www.royceassociates.com/?p=6448
    I’ve included a link to your post in the comments section of my blog to provide the legal perspective. Thanks.

  • In my experience as a paralegal and now as an advisor to organizations, I have witnessed many employers attempting to dress of a “duck” as a goose or eagle or something other than what it truly is. The case cited here points to the reality that even attempts at subterfuge like billing via the worker’s corporation are not sufficient to meet the legal test of employee vs. contractor. At the end of the day the employer needs to honestly ask itself, “Is the person already ‘set up in the business’ of providing the services offered?”