The distinction between employees and contractors is an issue that will not go away. As I have written about in the past, there seems to be a trend toward giving workers the option of being treated as an employee or a contractor, though the reality is that this impacts nothing other than how they are paid. I have even heard of situations where employers have insisted that workers they have hired will be treated as contractors. In other cases, employees asked to be treated as such, as they have been told that it will be beneficial for them when it comes to paying taxes.
Unfortunately, our courts and government agencies, particularly the Canada Revenue Agency, will look beyond the wording of a contract or the way in which the parties define their relationship, and assess the reality of the situation. If it is found that an employment relationship exists, both parties have potential liability with respect to unpaid taxes, employment insurance premiums, Canada Pension Plan contributions, and other matters. This is something that many workers and organizations unknowingly expose themselves to.
Furthermore, many individuals fail to realize that while being a “contractor” might have tax advantages, it also comes at a significant price, as they will no longer have the protections of an employee.
As counsel, we have a duty to advise our individual clients that by working as a “contractor”, they are not protected by employment standards legislation, or by the common-law, in the same way that employees will be. Among other things, they will not be entitled to
- statutory holidays
- vacation time or pay
- overtime pay
- limits on the number of hours that they are required to work
- pregnancy and parental leave
- notice of termination bracket (which can be extensive if the common law requirement of reasonable notice applies)
- breaks during the workday
Often, it is when the employee realizes what they have given up that a dispute arises between the parties. In many cases, I have been consulted by individuals that were “let go” with notice of 15 or 30 days after working for the organization for 10 or more years. When they question why their friends have received packages of 5, 10 or 15 months and they only get 15 or 30 days, they consult with a lawyer like myself, and realize that as a contractor, their rights are completely different. They then understand the implications of their decisions, years earlier, to be paid as a contractor. At that point, they are faced with the prospect of attempting to bring a wrongful dismissal claim and convince a court that they were really employees, despite the contractual arrangement in place that they benefited from by paying less taxes. Of course, if they attempt to do so, they will be threatened by the organization with all sorts of liabilities to government agencies, as outlined above.
When advising individuals, counsel must ensure that they understand these issues and also recognize that even if they want to be treated as a contractor, the wording of the contract will only get them so far, and courts and tribunals will assess the reality of the situation. In other words, if they are an employee in all but name, with an office, company computer, assistant, position on the organizational chart, company business card, title, corporate email, company phone, company benefits, company parking spot, etc., they are working full-time for the organization with no possibility of providing services to anyone else, and are utterly dependent on the company for their livelihood, they are, in all likelihood, an employee.
Similarly, when advising organizations, we as counsel must ensure that they understand the risks of treating an individual as a contractor, even in situations where it is at the request of that individual. The organization will have more potential liability than the individual.
As a corollary to this point, it is important that all parties understand that even where everyone is in agreement that the individual will be treated as a contractor, the courts and the Canada Revenue Agency are not bound by that agreement. Tax courts continue to consider situations where all parties confirmed, in their evidence, that their understanding, intention and desire was to create an independent contractor relationship. However, in many of those situations, the court will determine that based upon the relevant factors, the relationship was truly one of employer-employee. As a result, it is not enough to have a “watertight” contract; the factual reality must support the manner in which the relationship has been defined contractually.