What’s the Difference between an Employee and Independent Contractor?
As an employment lawyer, I have been asked to assist many individuals who (I believe) were improperly classified by their employer as an “independent contractor”. As is the case more often than not, most of these individuals are actually “employees” in the true sense of the word – they work primarily for (and earn their living from) one company.
In recent years, this has become a hot-button issue in employment law, with the Ministry of Labour and courts coming down hard on employers who wrongly treat employees as independent contractors. This usually occurs in situations involving serious workplace disputes, including wrongful dismissal claims or constructive dismissal claims. For workers, one of the main reasons to work as an independent contractor are achieving preferential tax treatment, while for companies, it is flexibility in managing its workforce and an opportunity to reduce liability when it comes to termination of the relationship (i.e., potentially not having to pay severance package).
General speaking, the key differences between an independent contractor and an employee include:
- Employment and labor laws apply only to employees, not independent contractors
- For employees, the value of work/services they provide is earned either as an hourly rate or salary; for independent contractors, a contract may be for a total amount for an entire project/task (and it could be earned as an hourly, daily, or weekly amount that ends on a specific date or a total amount to be paid when the job is completed)
- Employees are usually paid on a fixed playdate (e.g., bi-weekly or monthly), while independent contractors are usually paid after issuing an invoice to the company for services provided
- For wages paid, the company is legally required to withhold payroll taxes (income tax, CPP and EI deductions) from wages paid, but not for independent contractor
What is the Legal Test to Determine Employee or Independent Contractor Status?
The issue of properly classifying a worker as employees or independent contractors (or in some cases, “dependent contractors”) is crucial, because it defines the parties’ legal rights and liabilities. However, this determination is not easy to make.
To add to the confusion, the courts have carved out a new category of workers called “dependent contractors”. Dependent contractor relationships are basically an intermediate category between an employment relationships and independent contractor relationship. The courts have defined this as a “non-employment work relationship that exhibits a certain minimum economic dependency, which may be demonstrated by complete or near-complete exclusivity.” The most important consequence is that, unlike an independent contractor, dependent contractors are entitled to reasonable notice of termination (or pay in lieu thereof) under the common law, unless they agree to a lesser notice entitlement in a contract.
Under Ontario employment law, whether a person is an employee or an independent contractor essentially requires weighing factors that help identify the degree of control that a company has in the relationship with the person. A recent court case called 1159273 Ontario Inc. v. The Westport Telephone Company Limited helps illustrate this point, while also providing some useful guidance for both employees and employers on the applicable legal test.
In this case, the plaintiff, 11592783 Ontario Inc. (“115”), was a corporation that was owned and controlled by Tom Lynn. As part of his contract, he provided services to the defendant, Westport Telephone Company Limited (“Westport”). Their relationship lasted from 1977 to 2019. However, from 1977 to 1996, Tom worked directly as an employee of Westport. Then, in 1996, Tom incorporated 11592783, hired himself as the company’s only employee, and continued providing similar services to Westport, in exchange for receiving a monthly fee. For many years, 115 held was also a minority shareholder in Westport.
In July 2019, Westport informed the 115 that its services would no longer be required, effective August 31, 2019. At the same time, Westport also advised 115 that it was prepared to pay a further three (3) months of fees as a result of the termination. However, 115 did not accept Westport’s offer and commenced an action claiming, among other things, that it was a dependent contractor, and therefore entitled to reasonable notice of termination.
After reviewing the circumstances, the court determined that 11592783 was an “independent contractor,” and was therefore not entitled to damages for Westport’s failure to provide reasonable notice of termination. In particular, the judge applied the legal test to determine a worker’s status, finding that they did not apply to 115:
- Exclusivity/Near Exclusivity – 115 argued that it had the requisite exclusivity with Westport to demonstrate its status as a dependent contractor. To justify its position, it produced its contract revenue charts and Tom’s income tax returns. In finding that 115 failed to show the requisite exclusivity, the court noted that:
- from 1996 to 2010, roughly 52.83% and 71.48% of 115’s contract revenue was from Westport;
- from 2011 to 2013, more than 88% of 115 contract revenue was from Westport; and
- from 2014 to 2019, 70% of 115’s revenue was from Westport. The Court determined that: (i) billing percentages between 52% to 71% do not amount to exclusivity; and (ii) billing percentages of more than 80% do amount to near exclusivity.
- Control – 11592783 argued that it was “controlled” by Westport. However, the Court disagreed because it was actually Westport (through its owner/employee, Tom), that had actual control over Westport as a result of 115’s minority ownership interest in Westport.
- Tools – the Court determined that Westport provided Tom with the equipment and tools necessary to do his job, including an office and staff. However, those tools were provided to Tom, in his individual capacity as an employee, and not to 115 as a corporation.
- Degree of Business Risk or Imputation of Profits – 115 argued that it did not have any business risk or expectation of profit when it provided its services to Westport. However, the Court found that, overall, Tom (who was not a personal litigant in the lawsuit) made a profit or loss through his shareholding in Westport based on the overall success of Westport.
- Integration – the Court found that the parties were not integrated because 115 was never shown on the organizational charts of Westport.
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If you are an employer deciding whether to hire a new worker as an independent contractor or dealing with an employee termination dispute, or if you are an employee or independent contractor with questions about your status, or who would like understand your legal rights and ability to claim for wrongful dismissal or negotiate your employer’s severance package, contact our employment law firm to speak with a top wrongful dismissal lawyer for help. Contact our experienced employment lawyer by phone 647-822-5492 or fill out the contact form to the side. We would be happy to assist in your employment law matter as quickly as possible.
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