Independent Contractor Vs. Employee
The main commercial benefit of using an independent contractor is normally one of efficiency. A contractor will usually only be paid for the actual time or tasks needed. A regular employee needs to be recruited and trained, and will normally need to be paid every hour, day, and week, regardless of what amount of work the employer requires. In addition, using a true independent contractor allows the employer to avoid paying overtime, public holiday pay, and vacation pay. It also allows the employer to avoid paying for WSIB coverage. It also allows the employer the ability to end the relationship with much less notice than an employee would be due. To some degree, it can also insulate the employer from claims for breaches of the Human Rights Code and some other employment law statutes.
At Rousseau Mazzuca LLP our knowledgeable employment lawyers have drafted hundreds of employment contracts for clients in various sectors, including banking, retail, manufacturing, construction, mining, legal, and transportation. We can review your existing agreements and make sure they are current, valid, and continue to protect your interests, or we can help you draft new contracts.
THE DIFFERENCE BETWEEN INDEPENDENT CONTRACTORS AND EMPLOYEES
Sometimes, however, employers label individuals as independent contractors when, in the eyes of the law, they are actually employees. Courts and tribunals will generally look at the day-to-day reality of the relationship, not at the label that was used. Getting it wrong can have very serious consequences for the employer, including:
Additional Pay and Severance:
When employees are terminated they are entitled at least to termination and severance pay under the relevant employment legislation, including the Employment Standards Act, 2000. If your contract did not consider the possibility that the contractor was an employee, you may be liable for “reasonable notice” of termination, which could reach 18-24 months.
Taxation and Statutory Deductions:
Employers are obligated to deduct and remit taxes, as well as other statutory deductions such as Employment Insurance and Canada Pension Plan premiums. Contractors normally do not have taxes deducted at source, and are relied upon to pay their taxes themselves. Where an employer fails to withhold and remit taxes, the Canada Revenue Agency can order the employer to pay all of the taxes that should have been withheld and remitted, for every employee, for the present and previous years. The employer can also be assessed penalties and interest.
Vicarious liability:
Where a worker is an employee, the employer also becomes vicariously liable for their actions in the course of their employment. Just as the employer is an easier target for the CRA, it is also an easier target for third parties claiming to have been injured by an employee. Negligence claims against employers for their employees’ actions and inactions are common.
At Rousseau Mazzuca LLP we can help employers understand the pitfalls of incorrectly classifying employment relationships, discuss best practices for moving forward, and will review or draft employment contracts for your workplace. Sometimes, small changes in the way the relationship is organized can make a big difference in tipping the contractor/employee determination one way or another. We provide knowledgeable advice and will assertively represent your interests if necessary.
DETERMINING IF AN INDIVIDUAL IS AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR: A TEST
A court will review the following factors in order to determine whether the worker is a contractor or an employee:
Control
Ownership of Tools
Chance of Profits
Risk of Loss
Control
The court will ask whether the worker controls the place, and manner in which their work is performed? Do they set their own hours? Working arrangements where a worker has a lot of flexibility over how and when their work is performed suggest an independent contractor relationship.
Ownership of Tools
The court will ask whether a worker controls his or her tools, supplies, work space, or equipment. A working arrangement in which a company provides highly specialized or expensive equipment points towards an employment relationship. On the other hand, a situation where a worker supplies their own equipment suggests a contractor relationship.
Chance of Profits
The court will review the workers earning potential. A worker who is paid an hourly rate, limiting their opportunity to increase their earnings, is more likely to be considered an employee. A worker who is paid piecemeal, meaning that greater efficiency may increase their profits, is more likely to be considered an independent contractor.
Risk of Loss
A court will assess a worker’s risk of loss. A worker that is at a greater risk for losing money if, for instance, work is not done correctly, is more likely to be considered an independent contractor.
