Employee misclassification is a common issue in employment law that can result in significant financial consequences to the employer. Specifically, an employer may expose themselves to liability under the applicable employment standards, including in relation to unpaid wages, overtime pay, vacation pay, termination pay and Canadian Pension Plan and Employment Insurance contributions if a court finds that an employee’s role has been inappropriately classified.
Given the liability and serious consequences that flow from misclassifying a worker, determining the true nature of an employment relationship is fundamental to ensuring that employers are in compliance with all of their obligations, and that rights are afforded to workers as required, to avoid claims relating to wrongful dismissal or otherwise.
What is the difference between an employee and an independent contractor?
One of the most important, and potentially costly differences, between employees and independent contractors relates to their rights and entitlements under applicable employment standards.
In Ontario, for example, most employees in Ontario are protected under the Employment Standards Act, 2000 (“ESA”), which entitles them to paid overtime, paid vacation and reasonable notice of the termination of their employment, amongst other rights.
Independent contractors, by comparison, are not afforded any such protections under the ESA, and are generally self-employed.
How to determine if a worker is an employee or an Independent contractor
While the term “employee” is defined under the ESA, there is no express definition for independent contractors.
Therefore, it is not uncommon for an employee to be misclassified as an independent contractor. While this is sometimes an innocent mistake, there are numerous cases in which an employer consciously classifies a worker as an independent contractor specifically to avoid certain costs and responsibilities as outlined by the ESA, despite the illegality of such misclassification.
Whether a worker is an employee or an independent contractor is ultimately a question of law, despite any employment agreements that may be in place. Specifically, the courts, the Ministry of Labour, the Ontario Labour Relations Board, and even the Canada Revenue Agency, will scrutinize the employment relationship to determine its true character.
In reviewing whether a worker is an employee or independent contractor, the courts will look at the totality of the employment relationship. Specifically, if the relationship embodies an employer-employee relationship, meaning that the employer controls the employee’s working conditions and the worker is economically dependent on the employer, the worker will likely be deemed an employee.
Accordingly, the courts have identified a number of considerations to distinguish between employees and independent contractors, which includes the following factors:
- The extent to which the employer controls the worker’s working conditions, including in relation to time, place and nature of the worker’s work;
- The extent to which the worker is economically dependent on the employer;
- Whether the worker works exclusively for the employer;
- Whether the worker owns the tools used in the course of their work for the employer;
- Whether the worker has taken on risk in relation to the employer’s business, such that the worker has a direct stake in the success or failure of the business; and
- Whether the worker is integrated into the employer’s business (or operates an independent business in the service of the employer).
Best practices moving forward
We encourage employers to be proactive in reviewing and analyzing both current and future employment relationships to ensure the appropriate classification of workers. Employers may wish to engage the services of experienced employment law counsel to review whether the independent contractors they have engaged, or are considering engaging, are truly employees at law.
New employment agreements should be provided to workers where a misclassification has been identified in order to establish the new terms of employment based on the employer-employee relationship, including in relation to termination of employment.
Proactively managing the classification of workers will assist employers with limiting their liability under any applicable employment standards, as contravention and/or wrongful classification can give rise to significant compensation to the worker.
Original title of blog post: Employee vs. independent contractor: understanding the difference