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Employee vs independent contractor: The dangers of misclassification

When it comes to whether someone working for you is an employee vs independent contractor, courts will assess the reality of the situation rather than deferring to the parties’ characterization of the relationship.

Employee vs independent contractorThe Canadian workplace is constantly evolving, and so is the nature of the relationships that employers have with individuals who provide services to their business. More and more companies are seeing the benefit of retaining skilled individuals as independent contractors, rather than in the traditional employer-employee relationship. And companies like Uber and Skip the Dishes are built on an “independent” model that many have argued is more analogous to employment. As the nature of the workplace evolves, we are often left to determine how our laws, which were created in very different circumstances, should apply.

There are many advantages to truly independent relationships. Independent contractors do not have the same rights and protections as employees do under employment standards legislation or the common law, freeing employers from concerns about issues such as overtime, vacation, hours of work, and, in most cases, severance. Companies are also not responsible for making deductions from a contractor’s earnings for income tax, CPP and EI contributions. At the same time, the contractor is able to work with significantly more independence than an employee and has the freedom to decide how (and often when) work will be performed. They are also entitled to deduct business earnings and expenses, and can earn income from several different organizations at one time.

In order to take advantage of these benefits and freedoms, some employers (and individuals) will erroneously classify the individual (or themselves) as an independent contractor when they are, in fact, an employee. Misclassifying an employee as an independent contractor can have serious implications for both parties. For employers, the failure to make the proper deductions and withholdings from an employee’s wages can result in significant penalties, as well as interest and legal fees. Employees who have improperly claimed expense deductions as an independent contractor may also be liable.

Furthermore, the Employment Standards Act, 2000 (the “Act”), which was recently amended to address this growing issue, expressly prohibits employers from misclassifying employees as independent contractors. Breach of this prohibition can result in penalties for contravention of the Act, as well as orders for payment of outstanding wages (including Termination Pay and Severance Pay). While liability under the Act can be significant, it is important to remember that the Act only establishes an employee’s minimum entitlements at law. As a result, a contractor who is able to establish that they are in fact an employee could be entitled to substantially more damages at common law.

Many employers, and individuals, believe they are safe from such liability as a result of the existence of a written agreement between the parties that clearly establishes that the individual is an independent contractor and not an employee. However, the courts and the Canada Revenue Agency are not bound by such an agreement. Courts have repeatedly ruled that the written agreement is only one factor to consider, even where the parties confirm that their intention was to create an independent contractor relationship. In other words, courts will assess the reality of the situation rather than deferring to the parties’ characterization of the relationship.

Assessing the relationship

The CRA, the courts and adjudicators such as employment standards officers will consider various factors when attempting to determine whether an individual is an employee or an independent contractor, including:

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

Other factors that may be taken into account include:

  • whether the worker can take on other jobs or must provide exclusive services;
  • whether the worker is providing services through a corporation; and
  • whether there are any other written agreements in place.

The bottom line often comes down to whether the individual is truly an integrated or integral part of the organization, or whether the individual is carrying on business on his or her own account. In that regard, any indicia that the worker is a part of the organization will weaken the argument that they should be seen as independent. Such indicia can include:

  • Business cards
  • Corporate email address
  • Office
  • Provision of benefits
  • Allocation of support staff
  • Title (particularly if supervisory or managerial)
  • Participation in company events, and
  • Mention on the website as a member of “our team”

Key takeaways

It is essential that employers understand and consider the risks of misclassifying employees as contractors, even when the individual themselves is the one requesting or proposing the contractor relationship. Similarly, individuals must understand that while there may be tax advantages to being a contractor, they may also lose out on significant protections that they would otherwise have as an employee under employment standards legislation, and the common law. Many of the perceived benefits of treating someone as a contractor can be achieved through other means.

Here are some tips for employers to avoid liability as a result of the misclassification of an employee:

  • Analyze the character of the relationship before retaining. An employer should assess the individual’s intended duties and responsibilities, the nature of the relationship, especially the degree of control the employer intends to exercise over the individual, and the relevant factors outlined above, in order to evaluate whether the individual will truly be acting as a contractor.
  • Avoid exercising control. The degree of control and independence that a contractor has over the work that is to be performed is a crucial factor that courts and government agencies will consider when assessing whether an individual is a contractor or an employee. If an employer is able to direct the individual, including setting their schedule, instructing the individual on performing the work, or prohibiting them from working elsewhere, the relationship will look more like one of employer-employee rather than business-contractor.
  • Ensure contractual agreements are not only well drafted, but accurately reflect the parties’ intentions as well as the reality of the situation. If an individual is truly an employee rather than a contractor, having a well drafted independent contractor agreement will not be of assistance to either party. If an employer instead acknowledges that the person is properly characterized as an employee, they can more effectively limit their potential liability with a well written, enforceable employment agreement that sets out the terms and conditions of the relationship.
  • Seek legal advice, especially before hiring and firing workers. The potential liability is too significant for employers to simply ignore. If you are not sure how to characterize an individual you wish to retain, or you are concerned that a contractor you are currently working with may actually be an employee, speak with your lawyer prior to taking action.

Remember that the question to be answered is not “should we treat them as a contractor or an employee?” The question is what the reality of the relationship is. No contract will change that.

By Brittany A. Taylor

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Rudner Law, Employment / HR Law & Mediation

Employment Lawyers and Mediators at Rudner Law
Rudner Law is a firm specializing in Canadian Employment Law. They provide clients with strategic advice regarding all aspects of the employment relationship, negotiate and advocate on their behalf and represent them before courts, mediators and tribunals. Blog posts are written by Stuart Rudner, the principal and founder of Rudner Law, Brittany Taylor, a Senior Associate at Rudner Law, Nadia Zaman, an Associate at Rudner Law and Anique Dublin, a Law Clerk at Rudner Law. Read more
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