Are my workers employees or independent contractors? Am I employed or self-employed?
These questions may seem straightforward and dull, but critically reflecting on the nature of a business relationship is essential for workers and businesses alike. Many important consequences flow from how a worker is classified by law, including what a business is required to pay to workers, whether and what remittances must be made to the CRA, and what rights and protections a worker receives under various federal and provincial laws.
This post provides an overview of how employees and independent contractors are defined in the law, what the main differences are between these two types of workers, and the dangers of misclassifying workers.
What is an “Employee” or “Independent Contractor”?
Employment law governs the employee-employer relationship in a non-unionized workplace. As independent contractors are self-employed, they generally do not fall under the ambit of employment law.
However, provincial employment legislation does not clearly distinguish between employees and independent contractors. For example, section 1 of Ontario’s Employment Standards Act defines an “employee” as:
- a person, including an officer of a corporation, who performs work for an employer for wages;
- a person who supplies services to an employer for wages;
- a person who receives training from a person who is an employer, if the skill in which the person is being trained is a skill used by the employer’s employees; or
- a person who is a homeworker.
The ESA’s definition poses some problems: it is open-ended, broad, and does not provide a definition of or carve out for “independent contractors”. As a result, courts have created a framework for distinguishing between employees and independent contractors. Factors a court may considered to determine the nature of a working relationship include:
- Control: if a business exercises a significant degree of control over the worker’s activities, the worker is more likely to be considered an employee.
- Equipment: if a worker provides their own tools, supplies, or equipment, they are more likely to be an independent contractor.
- Risk: if a worker has an opportunity to share in the profits of a business or has taken a financial risk, they are more likely to be an independent contractor.
- Exclusivity: if the worker’s ability to perform work for others is restricted, they are more likely to be considered an employee.
- Ability to delegate: if the worker can hire others or delegate work, they are more likely to be an independent contractor.
- Integration: if the worker is integrated into the business’ operations, (i.e. the nature of the work performed by a worker is essential to the functioning of the business) the worker is more likely to be an employee.
Importantly, no single factor is determinative of whether a worker is an employee or independent contractor. Also, while subjective factors, such as the contract, the behaviour of the parties, and invoices for services rendered, are relevant, they will not override the practical reality of the relationship. Therefore, businesses cannot unilaterally declare a worker an “independent contractor” simply by having them sign a contract that defines them as such. This is not to say that employment or independent contracts are meaningless, they govern the relationship of the parties, such as their respective duties and responsibilities, the financial terms of services provided, etc.
Main Differences Between Employees and Independent Contractors
There are substantial differences between employees and independent contractors that businesses should consider before onboarding new workers.
- Independent contractors do not benefit from statutory benefits and protections under provincial employment legislation. In Ontario, these benefits and protections include minimum wage, overtime pay, personal emergency leave, parental leave, notice of termination, severance pay, etc.
- Employees are paid wages with payroll deductions (e.g. Canada Pension Plan, employment insurance and income tax) taken by the employer. By contrast, independent contractors invoice the business for their work and make their own remittances to the government.
- The profitability of the business does not generally impact the salary or wages paid to employees, while independent contractors assume risk for the business profitability or losses.
- Employees are generally provided with the tools, supplies, or equipment to do their job, while independent contractors furnish themselves with everything needed to perform services for the business.
- Employees generally perform their work themselves and cannot hire someone to do their job while independent contractors are free to delegate and otherwise control the way they provide services.
- Independent contractors cannot sue for wrongful dismissal, while employees can. A contractor may be entitled to reasonable notice of termination or payment in lieu of notice if they are a “dependent contractor” or in an employment-like relationship with the business.
- When a business is insolvent, federal bankruptcy law and other legislation (e.g. Builders’ Lien Act) provides that employees take priority over other creditors, up to certain amounts. Independent contractors, on the other hand, have no such priority.
- Businesses may be liable for the misconduct of its employees because of the relationship between them. This concept, known as “vicarious liability”, does not typically apply to independent contractors.
- Copyrightable works made by employees “in the course of employment” are automatically owned by the employer by operation of the Copyright Act, absent an agreement to the contrary. The same is not true of work made by independent contractors.
Risk of Misclassifying an Employee as an Independent Contractor
Employers may be tempted to classify workers as independent contractors because it is cheaper in the circumstances to do so. However, employers across Canada potentially face significant liability for misclassifying employees as independent contractors.
If a decision-maker, such as a court, determines that an employee has been misclassified as an independent contractor, that employee can make a retroactive claim for amounts that should have been paid under provincial employment legislation. In Ontario, for example, this would include minimum wage, vacation pay, public holiday pay, overtime pay as well as termination and severance pay. Employers may also be required to backpay unpaid Canada Pension Plan and employment insurance contributions to the government in respect of that employee.
Businesses that hire several independent contractors also run the risk of class action lawsuits by these workers alleging misclassification and claiming significant financial liability.
Unfortunately, avoiding liability is not always straightforward. Businesses should actively examine the nature of workplace arrangements in light of the criteria courts have identified as indicative of an employee-employer relationship at points before, during, and after entering into a working relationship.
A payer, employer, self-employed worker or employee can also request a ruling from the CPP/EI Rulings Program to confirm whether a worker is employed or self-employed and, if the worker is an employee, whether their work is pensionable for CPP or insurable for employment insurance. See this link on the CRA website for more information.
Meet the Authors:
Dylan Gibbs | Student-at-Law
John Durland | Lawyer
© 2021, Gilbert’s LLP. All rights reserved. This post is provided for general information purposes only and does not constitute legal advice or opinion of any kind. Gilbert’s LLP does not warrant or guarantee the quality, accuracy, or completeness of any information in this post. This post is current as of its date of publication. It should not be relied upon as accurate, time, or fit for any particular purpose.