Misclassification of workers is a significant issue, and it exposes both sides to potential liability. “Deciding” whether to treat a worker as an independent contractor or an employee is not as simple as asking them how they want to be paid; courts and the Canada Revenue Agency will look beyond how the parties characterize the relationship and assess its true nature.
This blog post addresses the following main questions:
- What is the legal test to distinguish between them?
- What factors should be considered when deciding how to categorize a worker?
Workers typically fall into one of three categories, with independent contractors at one end of the spectrum, employees at the other end of the spectrum, and dependent contractors somewhere in between. An independent contractor is self-employed and provides services to their clients. Conversely, an employee provides services to their employer as part of the employer’s business. Dependent contractors fall in the middle: workers who cannot be considered employees but who are economically dependent on a single client company. Dependent contractors have certain rights similar to those of employees, such as an entitlement to reasonable notice upon termination under the common law.
The core factor distinguishing independent contractors from employees is whether a worker is in business on their own account. That said, no single test is definitive and in each case a court or tribunal will examine the total relationship of the parties to determine the true status of a worker. These tests are applied under the common law.
Contrary to popular belief, none of these factors will guarantee that a worker will be found to be an Independent contractor:
- the worker is incorporated;
- the worker submits invoices; or
- the worker works for other businesses.
Distinguishing between independent contractors and employees
The tests for independent contractor status examine characteristics of the working relationship that indicate whose business the worker is a part of (their own or an employer’s). To summarize the various tests, the Supreme Court of Canada has approved the following non-exhaustive set of factors, which must be balanced in the assessment:
- Whether the person who has been engaged to perform the services is performing them as a person in business on his own account.
- The level of control the employer has over the worker’s activities.
- Whether the worker provides their own equipment.
- Whether the worker hires their own helpers.
- The degree of financial risk taken by the worker.
- The degree of responsibility for investment and management held by the worker.
- The worker’s opportunity for profit and the performance of their tasks.1
As a starting point in determining whether a worker should be treated as an independent contractor or an employee, the following questions should be considered:
- Will the worker provide services through their own business, without developing a dependence on the company as their long-term, principal source of income?
- Does the company simply need the end product of the worker’s efforts, with little need to direct how it is accomplished?
- Will the company be able to minimize the control and supervision it exerts over the way the worker does the job?
- Can the individual work for other clients?
- Will the worker maintain an identity that is separate from the company (e.g. will not be integrated into the company by being placed on the organizational chart, given a title, etc.)?
- Will the individual work at their own pace and direction?
- Can the individual subcontract the work or have their own employees?
- Will the worker set their own hours / determine when they work or don’t work?
There are several important factors examined by courts and adjudicators, including but not limited to the duration and scope of work, the organization’s right to exercise control, the ownership of tools, the training provided to the worker, whether the worker is integrated into the company’s business, whether the worker has the chance of profit and risk of loss, and whether the worker is required to provide services on an exclusive basis to the company.
When creating and administering an independent contractor relationship, the company should also ensure that the worker provides services through their own business, without developing a dependence on the company as their long-term, principal source of income.
In addition, the manner in which a company engages a worker may indicate the parties’ intentions regarding worker status. The actions of the parties should reflect that the company is engaging the worker’s services for a discrete, limited purpose, rather than integrating the worker into its ongoing business. Both the company and the worker should maintain written records of all communications with each other. That way, if there is a dispute about representations made to the worker about their status, each side would be able to produce a record of such discussions in support of their position.
Further, the company must avoid treating the worker as an employee throughout the working relationship. Even if the relationship begins with every indication of independent contractor status, a court or adjudicator may determine that the relationship was, in practice, one of employment or dependent contractor. The company should train its management and human resources staff to understand the difference between independent contractors, dependent contractors and employees, and monitor the company’s relationships with independent contractors to ensure they do not evolve into employees over time.
The simple reality is that if the company expects to treat the worker as it would treat any other employee, but simply wants to pay them differently, then they are an employee.
While there are several advantages to classifying a worker as an independent contractor for both the company as well as the individual, the required work must be appropriate for an independent contractor. If an independent contractor relationship is created, the parties should maintain that relationship in a way that ensures the status does not inadvertently switch to that of a dependent contractor or an employee.
By Nadia Zaman
 See 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 CarswellOnt 3357 (S.C.C.) at paragraph 47.
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