Businesses increasingly use a mix of employees and independent contractors in order to operate as efficiently as possible but there is a risk of incurring unexpected costs if employers, employees or contractors are mistaken about the nature of their working relationship.
Canada Revenue Agency, courts and various administrative tribunals all have the ability to determine whether a worker is an employee or an independent contractor. Employers need to be aware that even a clear agreement setting out the working relationship with a worker will not prevent a court or administrative tribunal from coming to its own conclusion about the worker’s status and this can result in penalties and other unintended consequences.
Consequences for Employers
Whether the relationship between an employer and a worker is one of employment or contract can have significant implications for an employer. Employers should be aware that establishing an employment relationship, either purposely or unintentionally, will bring with it certain obligations which include:
- making contributions to the Canada Pension Plan and paying employment insurance premiums for employees;
- deducting employees’ income taxes;
- paying WorkSafeBC assessments to protect employees;
- complying with minimum employment standards set out under the Employment Standards Act;
- providing reasonable notice of dismissal (or payment in lieu of) when dismissing employees without cause; and
- potentially being found vicariously liable for employees’ actions.
Employers should also be aware that there are benefits to an employment relationship that are not automatically present when a worker is engaged as an independent contractor. Some of these benefits include:
- employees owe a duty not to disclose confidential information about their employer’s business;
- employees owe a duty of good faith and fidelity to their employers; and
- certain employees may owe a fiduciary duty to their employers.
Employers need to keep in mind the obligations and the benefits associated with an employment relationship both when considering what type of arrangement to enter into with new workers and when evaluating the arrangements they have in place with existing workers.
Determining a Worker’s Status
Courts and tribunals have considered the distinction between employees and independent contractors in a variety of different contexts from wrongful dismissal to vicarious liability, taxation and bankruptcy cases. What has emerged is a litany of legal tests and indicators courts and tribunals use to differentiate an employee from an independent contractor.
The leading case in this area is the decision of the Supreme Court of Canada in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc. In this case the Supreme Court stated there is no one conclusive legal test for determining whether a worker is an employee or an independent contractor. Classifying a worker as an employee or an independent contractor requires looking at the total relationship between the worker and the employer with a view to determining: “whether the person who has been engaged to perform the services is performing them as a person in business on his own account”.
Courts and tribunals will consider a number of different factors when determining if a worker performs services as a person in business on his or her own account. Some of these factors include:
- the level of control an employer can exercise over the worker’s activities;
- whether the worker provided his or her own “tools” or hired his or her own workers;
- the degree of financial risk to the worker in delivering services;
- the degree of responsibility for investment or management assumed by the worker;
- whether the worker had an expectation or opportunity for profit associated with the services provided;
- whether the worker was exclusively working for the employer; and
- whether the worker provided a service that was an integral part of the employer’s business.
This is not a complete list of the factors that a court or tribunal can consider when classifying a worker and the courts have said the list of factors is not closed. The applicable factors depend on the specific facts of the working relationship as does the weight that will be given to any particular factor.
Courts and tribunals will take into account the intentions of the parties when considering whether a worker is an employee or an independent contractor. That said, intention is only one factor to be considered and it is not determinative. Courts and tribunals can look past the intention of the parties and will apply the various factors listed above which may result in the court or tribunal classifying a worker in a way that differs from what the employer and the worker planned.
Recently, courts have taken a two-step approach of first looking at the subjective intent of the parties in forming their working relationship, as evidenced by things such as written agreements, GST registrations, and tax returns and then determining whether the parties’ subjective intention reflects the reality of their working relationship. That reality will be determined by looking at those factors listed above, such as the degree of control a worker has with respect to tasks, limits on a worker’s ability to profit, and the absence or existence of any significant financial risks or investments made by the worker. What is clear is that employers cannot rely on a written agreement as conclusive evidence that no employment relationship exists if the facts of the working relationship suggest otherwise.
Considerations for Employers
Employers need to carefully weigh the costs and benefits when deciding whether to hire workers as employees or contractors. Employers need to ask how they want a working relationship to be characterized, why they want it characterized that way, who it serves to have it characterized that way, and whether it can be characterized that way in light of what will be involved with the worker’s position.
When evaluating existing arrangements with workers, employers should be aware of the kinds of factors courts and tribunals will look at when classifying workers as either employees or independent contractors so that they do not find themselves operating on a misguided assumption as to a worker’s status. Specifically, employers need to avoid hiring workers under independent contractor agreements only to later treat those workers as employees as this exposes employers to the risk of a court or administrative tribunal reclassifying those workers which can result in penalties and other negative consequences.
Lastly, employers who decide to engage workers as independent contractors will want to make sure the contractors enter into written agreements that explicitly address aspects of an employment relationship such as confidentiality, competition, and ownership of products that are implied when a worker is an employee but may not be if a worker is a contractor.
EKB’s Employment Law team is experienced and knowledgeable in these areas and can assist you further.