employee misclassification

Employee Misclassification of Workers as Independent Contractors Instead of Employees

Many businesses in Ontario understand that hiring employees comes with various obligations, both from an employment law and tax perspective. However, many companies, regardless of whether they are in the startup phase or are well-established, sometimes to avoid these responsibilities by labeling workers as independent contractors. While this may seem like an easy fix, it can expose employers to significant legal, financial, and tax risks. In this article, we delve into why it is crucial to emphasize substance over form when it comes to employment contracts, as well as the potential issues arising from employee misclassification, and the steps you can take to protect your business.

Understanding Worker Classification: Why Labels Aren’t Enough

When determining whether a worker is properly classified as an independent contractor or employee, authorities (including a court, Ministry of Labour, or tax agencies) will focus on the actual relationship between the parties (i.e., the “facts on the ground”), rather than simply the title on the contract. Even if the worker’s contract is titled “Independent Contractor Agreement,” there can still be a misclassification if the worker is treated like an employee.

Consider these key questions:

Are you paying your worker a salary and overtime pay, or offering health benefits like bonus, stock options, vacation pay, or sick leave?
Do you dictate how, when, where the work gets done as well as the tools and equipment used to perform the work?
Is the worker subject to the same workplace policies as other employees?

If so, it could create the risk of a finding of employee misclassification in a workplace dispute resulting in a favourable outcome to the employee, such as an entitlement to financial compensation in a severance package.

The Rise of the “Dependent Contractor” and Quasi-Employment Protections

Over time, the law involving “employee vs. independent contractor” has resulted in an intermediate category called a “dependent contractor.” Put simply, these are workers that do not neatly fall into either an “employee” or “independent contractor” category, but somewhere in between (typically working exclusively or primarily for one company). As such, in order to ensure fair treatment, the courts will award them the same employment law protections as normal employees, such as a severance package in a termination of employment.

Key Tax Risks of Misclassifying Workers

In the event a company is found to have misclassified a worker as an independent contractors when they were, in fact, an employees, there could be significant tax-related implications that may arise. For employers, worker misclassification for tax purposes is a serious concern, as it is responsible for the amount that should have been withheld and remitted. Specifically, if an employer misclassifies an employee as an independent contractor, it may be liable for failing to make and remitting required source deductions (such as income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums) from payments made to the worker. The Canada Revenue Agency (CRA) can impose stiff interest, charges and penalties up to 20% of the amount that should have been withheld. Additionally, directors of the company may be held personally liable for any tax shortfalls.

How to Minimize the Risks of Employee Misclassification in Ontario

The issue of a worker being an employee or independent contractor is a grey area and the determination is very fact-specific. However, there are several best practices you can implement to avoid misclassification and minimize legal and financial risks. The most important factor is “control”: how much control does the employer holds over the worker, including how the worker completes their work, or how much power the company has to direct the worker’s activities, the tools and equipment they use for their work, as well as their work schedule. Likewise, courts in resolving termination-related workplace disputes involving “independent contractors” will consider how integral the worker’s services are to the primary purpose of the business itself, and what benefits are generally provided to the worker (e.g., salary, bonus, health benefits, vacation pay, etc.). Additionally, the longer the worker works for the company, the more closely the worker’s duties may be connected to the company’s operations, and therefore the more likely a court will find the relationship to be one of employer/employee, not independent contractor.

1. Treat Independent Contractors as True Contractors

To mitigate the risk misclassification, make sure your contractors are treated as independent workers, not as employees. Some key guidelines include:

Contractors should set their own hours and work independently, without supervision from your company.
Compensation for contractors should reflect their independent status and should not include benefits such as vacation time, health insurance, or stock options.
Contractors should be responsible for their own tax filings and insurance. They should invoice the company for work completed, rather than being paid on a salary.
Contractors should not be subject to company performance reviews or disciplined in the same way as employees.
Contractors should be engaged for specific tasks or projects and should not work full-time or exclusively for your company.

By considering these issues, employers can improve their ability to clearly distinguish between employees and contractors and avoid misclassification pitfalls.

2. Use Proper Contracts and Agreements

Ensure your independent contractor agreements clearly define the terms of the relationship. These contracts should specify that the worker is an independent contractor, outline their responsibilities, and include provisions about payment, deadlines, and deliverables. However, the fact that the parties label the worker as an “Independent Contractor” is simply a factor, and it is not the determinative factor in the analysis..

3. Regularly Review Worker Classifications

As your company grows, it is important to regularly review the status of your workers to ensure their classification still aligns with their role. Over time, relationships may evolve, and a contractor might start to take on duties that would qualify them as an employee. Regular check-ins and reviews can help mitigate misclassification risks before they become legal issues.

Conclusion: Protect Your Business by Getting Worker Classifications Right

Misclassifying workers as contractors can have serious financial, legal, and operational consequences for employers in Ontario. From tax penaltiesto employment standards violations, the risks of getting it wrong are significant. By treating contractors as the name implies (actually independent workers) and regularly reviewing your worker classifications, business can help reduce the chance of misclassification and protect your business from unwanted consequences.

If you are a business that is unsure about your worker classifications, consider consulting with an experienced Toronto employment lawyer to ensure you are meeting all compliance requirements.

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.

Why Choose Bune Law When You Need an Ontario Employment Lawyer?

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.
Proven track record of successfully resolving workplace disputes through negotiation, mediation, and employment litigation.
Compassionate and personalized approach to each case, ensuring tailored solutions that meet your specific needs.

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.