This article was updated to reflect changes imposed by Bill 47.
Canadian businesses increasingly use a mix of employees and independent contractors to satisfy their staffing and operational needs. As the dynamics between businesses and workers evolve, the line between those workers considered “employees” and those considered “independent contractors” often become blurred.
In Ottawa, we see many workers who believe that they are “independent contractors”, either because their employers describe them in those terms, or because workers themselves prefer this characterization for tax reasons. However, being improperly considered an independent contractor when you are in fact an employee can have serious implications - the two relationships are treated very differently at law. The following are some examples of obligations employers have to employees but not to independent contractors:
Employees have the right to a minimum wage, paid vacation, public holidays, overtime pay and leaves of absence (think pregnancy and parental leave) under the Ontario Employment Standards Act;
If an employer chooses to end the employment relationship, employees are entitled to reasonable notice of termination or pay in lieu thereof (i.e. a severance package);
Employees have many rights and protections under the Ontario Occupational Health & Safety Act;
Employees can be awarded significant damages under the Ontario Human Rights Code; and
Employees have the right to collect Employment Insurance (EI) benefits.
Independent contractors, on the other hand, do not have these rights unless they have been expressly negotiated within a service contract.
It is important to note that simply having an individual sign a contract stating that he or she is working as an ‘independent contractor’ and not an employee does not settle the matter. Our courts, administrative tribunals, as well as the Canada Revenue Agency, will look beyond the wording of such contracts and delve into the actual relationship between the parties in order to determine its true character.
Employee or Independent Contractor: Which are you?
Although there is no “one size fits all” test to determine whether you are truly an employee or independent contractor, our courts have set out a number of key factors in order to make this determination. The most important of these factors include:
the level of control over the work each party has;
the ownership of tools; and
the opportunity for profit and/or risk of loss.
Level of Control
How much control does the employer have over the worker? Who sets the hours of work? Can the worker refuse work? Is the worker supervised?
In a traditional employment relationship, the employer sets the hours of work, determines the work that is to be performed, and supervises the employees performing the work. By contrast, an independent contractor would set his or her own hours of work and scope of work with minimal supervision from the employer.
Ownership of Tools
Who owns the tools and equipment, and who is responsible for replacing them?
In a typical employment relationship, the employer owns the tools and equipment needed to complete the work and is responsible for replacing them. By contrast, in a business relationship the independent contractor would typically have his or her own tools and equipment to complete the work.
Opportunity for Profit and Risk of Loss
Can the worker negotiate his or her fee? Can the worker hire other employees or subcontract the work? Does the employee bear any expenses in completing the work?
When the employee is paid a set amount and bears no risk of loss or personal expense they are considered an employee. By contrast, in a contractor relationship, the worker has an opportunity to negotiate his or her fee, as well as incurs expenses directly related to the work being performed.
Recent Developments in the Law
In January, 2018, the recommendations adopted by the Ontario government in Bill 148 reversed the onus of misclassification of employees as independent contractors onto employers. This means that if an Ontario contractor claims to be an employee (and is therefore entitled to overtime, vacation pay or other relevant statutory entitlements), the employer now has the burden of proving that the worker in question is truly an independent contractor and not an employee.
Misclassification of contractors can lead to significant liability for employers as these individuals can lay claim to termination and severance pay, vacation pay, statutory holiday pay, overtime pay, etc. Of course, outside of claims under employment standards legislation, there can also be consequences for unremitted taxes, CPP, EI, health taxes or government health insurance, and workers' insurance premiums in some cases.
The changes under Bill 148 reflect a growing concern amongst law makers across Canada that workers and employers are operating outside of the traditional employer-employee framework. With these changes, we expect to see an increase in the number of misclassification cases brought against employers.
On October 23rd 2018, the Ontario government introduced Bill 47, also known as the Making Ontario Open for Business Act. Bill 47 will repeal many portions of Bill 148, including the section concerning misclassification. The new bill will once again put the onus back on an individual to prove that they are an “employee” instead of a contractor.
If you are facing a potential misclassification situation or have further questions about the characteristics that differentiate an employee from an independent contractor, don’t hesitate to contact us for practical advice and assistance.
Alex Lucifero leads Samfiru Tumarkin LLP’s Ottawa office as its managing associate, providing sound advice to both employers and employees on all aspects of labour and employment law, including wrongful dismissal, severance packages, terminations and workplace harassment. He is often called upon by local media to comment on topics concerning labour and employment law matters.
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