Businesses often look for ways to increase flexibility and reduce the costs associated with their work force. Characterizing a worker as a “contractor” may initially seem appealing, as it seems to afford greater flexibility and reduce costs. However, several legal problems can result if the contract is not properly written or does not reflect the true nature of the relationship.
Most workers are legally considered to be “employees.” Some are considered to truly be “independent contractors.” Others are referred to as “dependent contractors”, which is an intermediate category between the other two.
Canada Revenue Agency (CRA), courts and various administrative tribunals each have the ability to determine whether a worker is an employee or an independent contractor. While the stated intent of the parties will be considered, it is not determinative. The substance of the relationship is considered, as well as the contract. The substance of the relationship can carry more weight than the contract, particularly if it is not well written or does not reflect the relationship. Should one of these bodies determine that an individual is legally an “employee”, despite a contract that may have characterized him or her as a “contractor”, various penalties, liabilities and other unintended consequences can follow.
The law provides several protections to employees. These protections are not available to true independent contractors. For example, employees are protected by the Employment Standards Act (ESA), the Human Rights Code (HRC), the Canada Labour Code (CLC) and the Canadian Human Rights Act, whereas independent contractors are not. Further, independent contractors are not typically entitled to reasonable notice at common law if they are dismissed, although the law in this is area is complex. Individuals who fall into the intermediate category of dependent contractor are generally entitled to reasonable notice of dismissal.
Determining whether an individual is an employee or an independent contractor can be complex. Of course, different statutes have different underlying policy objectives and different definitions. This means that “employee” and “independent contractor” may be interpreted differently under different statutes. These interpretations are often similar and sometimes follow the same or similar tests. However, they are not always exactly the same. For example, the ESA and the HRC may define “employee” more broadly than do the common law tests. The approach taken by CRA tends to be similar to that of the courts. More information on CRA’s approach can be found in RC4110 – Employee or Self-Employed. Different approaches taken under different statutes can result in an individual being considered as a dependent or independent “contractor” for one purpose, such as under the common law, but being be categorized as an “employee” for another purposes, such as under the HRC.
Generally, the Employment Standards Branch considers the onus to be on the organization to show that a worker is an independent contractor.
An independent contractor with an indefinite contract may be entitled to reasonable notice of termination.
If an organization classifies workers as independent contractors, but they are later found to legally be employees, the “employer” will find itself subject to a number of additional liabilities. These can include liabilities under employment standards legislation, workers’ compensation legislation and occupational health and safety legislation. The employer may also find that it is responsible under the Income Tax Act (Canada), Employment Insurance Act, and Canada Pension Plan Act for failure to deduct and remit income tax and premiums. It may also find that reasonable notice of termination (or pay in lieu of such notice) is required to end the relationship.
Federally, an investigation by a Labour Program inspector may be required to establish if an employer-employee relationship exists, in order to determine whether the CLC applies.
It is preferable to seek legal advice from an employment lawyer before entering into an arrangement under which a worker is characterized as a “contractor.”
If you are an employer who did not obtain legal advice before characterizing workers “independent contractors”, it would be wise to promptly seek legal advice from an employment lawyer. It is generally easier to address any issues before individuals or others start asking questions, not after. If you yourself have been characterized an “independent contractor” but feel you should perhaps be considered to be an employee, you should consider seeking legal advice from an employment lawyer.
If a relationship of independence is truly desired by the parties, it is imperative that the contract be properly written, that it be complied with, and that it accurately reflect the substance of the relationship between the parties. If it does not, it is likely to carry little evidentiary weight, and be of little if any assistance in any challenge to the worker’s classification.
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