As an employment lawyer, a common issue I often discuss with clients – both workers and companies – is the legal distinction between an “employee” and an “independent contractor.” While this has always been a thorny issue in employment law, it has drawn been in the spotlight more often with the advent of the so-called “gig economy” and “gig workers,” including the recent case in the Supreme Court of Canada called Uber Technologies Inc. v. Heller
In its simplest form, the “gig economy” refers to the growing market for certain non-traditional work arrange where companies contract with independent contractors for short-term engagements, without the typical expenses owed to ordinary employees, including regular salary, bonus, pension plan benefits, health benefits, and so on.
No matter what side of the fence you are on, it is important to understand the definition and importance of whether a specific worker is an employee or independent contractor. This is referred to as “worker classification.”
Independent Contractor vs. Employee
In employment law, all workplace relationships can generally be categorized as an employer/employee relationship or company/independent contractor. So, when a court is asked to resolve a wrongful dismissal dispute, it has to answer the question: does this working relationship resemble a traditional employer/employee relationship, or an independent contractor relationship? This is a difficult determination, and always depends on a court’s assessment of the specific facts of each case.
One of main reasons why this distinction is legally significant is that if a worker is deemed an employee, they are generally entitled to receive reasonable notice of termination (severance package) when their employment ends, but not if they are deemed an independent contractor
There are many why workers (and companies) use independent contractors instead of employees as part of a workforce. For instance, independent contractors often bring specialized expertise and tools, without the mutual expectation of a long-term employment relationship. Basically, they can shuttle in and out of an company, establish their own schedules, take on multiple projects or work for many different companies, or even hire their own employees (or sub-contractors) to complete services.
However, the Ministry of Labour and courts have increasingly challenged companies who “misclassify” workers as independent contractors. In fact, for employers, misclassifying workers by mistakenly concluding a worker is an independent contractor as opposed to an employee can be costly and result significant liability, including having to pay unremitted taxes, penalties, etc.
Test to Determine Independent Contractor or Employee
There is no one single factor in employment law to determine whether a worker is an employee or independent contractor. Rather, the courts look at the relationship between the parties as a whole to determine whether the worker is, in reality, conducting business for themselves.
The Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., [2001] 2 S.C.R. 983 stated “although there is no universal test to determine whether a person is an employee or an independent contractor … the central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account.” The Court held that the factors to be considered include:
1) the level of control the employer has over the worker’s activities;
2) whether the worker provides his or her own equipment;
3) whether the worker hires his or her own helpers;
4) the degree of financial risk taken by the worker;
5) the degree of responsibility for investment and management held by the worker; and
6) the worker’s opportunity for profit in the performance of his or her tasks.
As noted by one court: “in many ways, the question posed at the end of the fifth principle – whose business is it? – lies at the heart of the matter. Was the individual carrying on business for him or herself or was the individual carrying on the business of the organization from which he or she was receiving compensation?”
Generally speaking, when a person devotes all (or substantially all) of his or her time providing labour/services to one specific company, the courts are more likely to find that the individual is an employee, primarily due to the worker’s financial dependence (or economic reliance).
Consequences for Employer of Misclassification
An employer who misclassifies a worker as an independent contractor can face significant liability. Amongst other things, such workers (i.e., employees) may be able to sue for wrongful dismissal resulting from the termination of employment, as well as vacation pay, statutory holiday pay, overtime pay, termination and severance pay, among other entitlements that traditional “employees” receive under employment standards legislation. In addition to wrongful dismissal claims under common law for reasonable notice of termination, employers may also face Ministry of Labour complaints, fines and investigations, as well as demands for unremitted taxes, CPP, EI, health taxes or government health insurance, and workers’ insurance (WSIB) premiums in some cases.
A Third Category: Dependent Contractor
While the distinction between an employee and an independent contractor is well-known, the courts have established (and increasingly found) an intermediate category of “dependent contractor.” Basically, a dependent contractor is a contractor that more closely resembles (and is legally treated as) an employee than an independent contractor, usually because they are financial dependent on one specific company for whom they provided services.
In other words, while in a formal sense dependent contractors remain “contractors,” the courts have held they are owed reasonable notice of termination (a financial severance package) since, like employees, they are subject to relatively high levels of subordination and/or financial dependency. However, like independent contractors, dependent contractors do not benefit from the minimum protections under the Ontario Employment Standards Act, 2000.
Incorporated Contractors
An individual contractor may decide – usually for tax benefits – to provide his services through a corporation (sometimes called a “personal services corporation’). In this scenario, the corporation offers the services of the individual (owner) as its primary or sole service. In turn, the corporation then enters into a contract with the “employer” (another company) and receives payment for the individual’s services.
In these cases, the courts have been clear that simply incorporating does not mean a worker is automatically deemed a contractor. In fact, in many cases, the courts have found that a worker providing services to a business through their own corporation was an employee. This is because the simple fact that a worker is paid through his or her corporation is not determinative of whether they are an independent contractor or employee. Rather, the determination must be made on all of the evidence applying the general principles for distinguishing between an employee and an independent contractor.
Contact Employment Lawyer Today
If you are an employer who would like to know more about your options in hiring an independent contractor instead of an employee, or if you are a worker would like to understand your legal rights and ability to claim for wrongful dismissal or negotiate your severance package, our experienced employment lawyer at Bune Law can help. Contact us 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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