Know the Difference from an Independent Contractor vs. Employee Contract

Independent Contractors in Ontario: Understanding the Legal Implications

What is an Independent Contractor?

In Ontario employment law, an independent contractor is a worker who provides services to a company but is not considered an employee. Unlike employees, independent contractors are not subject to the same employment standards protections under the Ontario Employment Standards Act, 2000 or common law.

Are Independent Contractors Employees?

Because Ontario employment law applies only to employer-employee relationships, independent contractors are not covered. However, sometimes workers pursue employment-related claims that seek protections and entitlements that otherwise only employees receive, especially a wrongful dismissal claim or negotiating a severance package.

In resolving these disputes, the courts evaluate the circumstances of each working relationship to determine whether an employment relationship exists with respect to a given worker and company.

In doing so, the courts focus their test on the degree of control exercised by the employer as an essential factor in determining whether an employer-employee relationship exists. While no single factor is controlling or decisive in determining whether an employment relationship exists, the facts and circumstances that courts and federal enforcement officials examine in deciding whether an individual is an employee or an independent contractor are:

the degree to which the employer controls or directs the manner in which work is
performed,
whether the worker’s opportunity for profit or loss depends on his or her managerial
skills,
whether the worker’s duties are performed for the employer on an ongoing or permanent
basis,
whether the service performed by the worker is an integral part of the employer’s
business,
the extent of the worker’s investment in equipment or materials needed to perform the
job, and
the degree to which the worker is engaged primarily for the benefit of the employer.

In resolving a worker classification dispute, the CRA (just like a court or the Ontario Ministry of Labour) may considers a worker to be an employee if the company has the right to control not only what work will be done, but also how the worker will do it. If a company treats a worker as an independent contractor, but the CRA decides you have sufficient control over the worker, the company can be hit you with a costly bill for the employment taxes you should have been withholding and paying.

Key Distinctions Between Employees and Independent Contractors

The primary distinction between employees and independent contractors lies in the degree of control exercised by the employer. Independent contractors have greater control over their work, while employees are subject to the employer’s direction and supervision. Other factors considered include:

Ownership of tools and equipment: Independent contractors typically own the tools and equipment necessary to perform their work.
Profit and loss: Independent contractors bear the risk of profit and loss, while employees are paid a fixed salary or wage. In other words, whether an employee may be rewarded, disciplined, demoted, or fired depending on job performance, but only an independent contractor can realize a profit or incur a financial loss from his or her work. Put simply, an employee will always get paid; an independent contractor, however, has a financial stake in his enterprise.
Integration into the employer’s business: Independent contractors are generally not integrated into the employer’s business structure.

The Importance of Proper Classification

Correctly classifying workers as employees or independent contractors is crucial for several reasons:

Employment standards: Employees are entitled to minimum wage, overtime pay, vacation pay, and other employment standards protections. Independent contractors are not.
Tax implications: The classification affects income tax, payroll taxes, and other tax obligations.
Workplace safety: Employees are covered by workplace safety legislation, while independent contractors may not be.
Liability: Employers may be liable for the actions of their employees, but not necessarily for the actions of independent contractors.

Misclassification Risks

Misclassifying workers as independent contractors can lead to significant legal and financial consequences for employers, including:

Employment standards violations: Employers may face fines and penalties for misclassifying employees.
Tax liabilities: Employers may be liable for unpaid payroll taxes and other tax obligations.
Vicarious liability: Employers may be held liable for the actions of misclassified workers if they are deemed to be employees.

Factors Considered in Determining Independent Contractor Status

In Ontario, courts use a multi-factor test to determine whether a worker is an employee or an independent contractor by evaluating the degree of control, including:

Level of instruction. If the company directs when, where, and how work is done, this control indicates a possible employment relationship.
Amount of training. Requesting workers to undergo company-provided training suggests an employment relationship since the company is directing the methods by which work is accomplished. In other words, if your company provides or arranges for training of any kind for the worker, this is a sign you expect work to be performed in a certain way; therefore, the worker is your employee. Training can be as informal as requiring the worker to attend meetings or work along with someone who’s more experienced.
Degree of business integration. Workers whose services are integrated into business operations or significantly affect business success are likely to be considered employees
Extent of personal services. Companies that insist on a particular person performing the work assert a degree of control that suggests an employment relationship. In contrast, independent contractors typically are free to assign work to anyone.
Control of assistants. If a company hires, supervises, and pays a worker’s assistants, this control indicates a possible employment relationship. If the worker retains control over hiring, supervising, and paying helpers, this arrangement suggests an independent contractor relationship.
Continuity of relationship. A continuous relationship between a company and a worker indicates a possible employment relationship. However, an independent contractor arrangement can involve an ongoing relationship for multiple, sequential
projects.
Flexibility of schedule. People whose hours or days of work are dictated by a company are apt to qualify as its employees.
Demands for full-time work. Full-time work gives a company control over most of a person’s time, which supports a finding of an employment relationship.
Need for on-site services. Requiring someone to work on company premises— particularly if the work can be performed elsewhere—indicates a possible employment relationship.
Sequence of work. If a company requires work to be performed in specific order or sequence, this control suggests an employment relationship.
Requirements for reports. If a worker regularly must provide written or oral reports on the status of a project, this arrangement indicates a possible employment relationship.
Method of payment. Hourly, weekly, or monthly pay schedules are characteristic of employment relationships, unless the payments simply are a convenient way of distributing a lump-sum fee. Payment on commission or project completion is more
characteristic of independent contractor relationships.
Payment of business or travel expenses. Independent contractors typically bear the cost of travel or business expenses, and most contractors set their fees high enough to cover these costs. Direct reimbursement of travel and other business costs by a company suggests an employment relationship.
Provision of tools and materials. Workers who perform most of their work using company-provided equipment, tools, and materials are more likely to be considered employees. Work largely done using independently obtained supplies or tools supports an independent contractor finding.
Investment in facilities. Independent contractors typically invest in and maintain their own work facilities. In contrast, most employees rely on their employer to provide work facilities.
Realization of profit or loss. Workers who receive predetermined earnings and have little chance to realize significant profit or loss through their work generally are employees.
Work for multiple companies. People who simultaneously provide services for several unrelated companies are likely to qualify as independent contractors.
Availability to public. If a worker regularly makes services available to the general public, this supports an independent contractor determination.
Control over discharge. A company’s unilateral right to discharge a worker suggests an employment relationship. In contrast, a company’s ability to terminate independent contractor relationships generally depends on contract terms.
Right of termination. Most employees unilaterally can terminate their work for a company without liability. Independent contractors cannot terminate services without liability, except as allowed under their contracts.

Tips for Employers

To minimize the risk of misclassification, employers should:

Review employment contracts: Ensure that work-related contracts clearly outline the relationship between the employer and the worker.
Document the relationship: Maintain records of the worker’s work arrangements, payments, and control exercised by the employer.
Seek legal advice: Consult with an experienced Ontario employment lawyer to ensure proper classification.

Conclusion

Correctly classifying workers as employees or independent contractors is essential for compliance with employment laws and avoiding legal and financial risks. Employers should carefully consider the factors involved in determining worker status and seek legal advice if necessary, and an important first step is to speak with an employment lawyer about how having an employment contract or independent contract agreement can be a factor in resolving a dispute.

Book a Consultation with an Employment Lawyer in Toronto

At Bune Law, we understand and are familiar the complexities of workplace law and are committed to helping both employers and employees navigate these challenges. Whether you are an employer or employee dealing with employment contracts, workplace disputes like a wrongful dismissal or constructive dismissal, or simply need guidance on your rights and obligations for a severance package review and negotiation, our experienced employment lawyer is here to assist you.

Book a confidential consultation with our Toronto employment law firm to protect your legal rights to understand your options and protect your rights.

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Experience in all areas of workplace law, including wrongful dismissal claims, constructive dismissal claims, severance package reviews, severance package negotiations, discrimination and human rights disputes, and employment contract reviews.
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If you need a Toronto employment lawyer who is committed to delivering strong results and proactive solutions, please contact Bune Law online or by phone today at 647-822-5492.