A declaration of independence

When it comes to filling labour needs, employers can choose to hire an independent contractor rather than a regular employee. It’s a strategy that can make a lot of sense for the employer and can simplify the relationship with the individual worker.

“It's not uncommon to retain the services of an independent contractor for a certain period of time,” says Paulette Haynes, an employment lawyer and principal of Haynes Law Firm in Toronto. “A big advantage to the characterization of the independent contractor is that it gives the employer the liberty of not making source deductions, or WSIB premiums, all of that - those kinds of expenses should be assumed by the contractor and not the company that's engaging in the contract for service.”

However, while hiring independent contractors has its business advantages, there is a significant risk of liability if the employer doesn’t handle the relationship properly and misclassifies the worker. According to Haynes, one of the most common mistakes employers make is mixing up the concepts of contractor and employee, leading to a blurring of the worker’s status.

“[An employer] will say that a person is an independent contractor, and they pay the person but have taken off source deductions, or they've paid things like vacation pay or bonuses, or they have provided a job title connected to their company,” says Haynes. “Those kinds of things would suggest that this person is an employee rather than an independent contractor.”

Another misstep employers can make is integrating the contractor into its business too much by giving them a job title, company equipment, an office, or other things that create the impression that they’re part of the company, according to Haynes.

“One of the challenges for employers - consistent with what we call the integration test - is sometimes they make their contractors to integral to the business,” she says. “If employers aren't vigilant about keeping those kinds of things separate, when the relationship breaks up and if it's challenged, then the employer is under scrutiny.”

Differentiating contractors from employees

The key for employers to avoid mixing things up and misclassifying a worker lies in clear knowledge of what differentiates independent contractors and employees, and drawing up contracts that provide that clarity, says Haynes.

“If there's ever a dispute about the classification of a worker, courts will often look to whether there's a written agreement, so the starting point for making the distinction is that written agreement,” she says. “Having a written agreement that it clearly delineates that the parties are not in an employer-employee relationship is key - that being said, courts have said that the written agreement in and of itself is not determinative.”

There are a number of legal tests that are used to help determine if a worker is an independent contractor, with a common one involving a look at the degree of control an employer has in the relationship, says Haynes.

“The more control that the company or organization exerts on the worker in terms of how the work is done, when the work is done, and what work is done, the more it's going to look like an employer-employee relationship as opposed to an independent contractor-type relationship,” she says.

If the worker in question is truly an independent contractor, then they won't have any entitlement to statutory termination or severance pay or common law reasonable notice. But if the contract mentions any of it, the lines could get blurred again.

“If you've got a contract that says this person is an independent contractor but then it references benefits, vacation pay, that kind of stuff, those are some of the indicia that would seem to suggest the relationship is more of an employer-employee relationship than that of an independent contractor relationship – I’ve seen this in my practice,” says Haynes.

The contractor-employee scale

Haynes suggests thinking of it as a scale, with the independent contractor on one end with no entitlements outside of the contract itself, and the employee on the other with full protection under employment standards, labour standards, and the common law.

However, in recent years, courts have added a new point on the scale – the dependent contractor, an intermediate class of workers in between the two.

“As its name suggests, it kind of resembles an independent contractor, but the relationship with the company or the organization is sufficiently permanent or dependent that courts have said these individuals are arguably entitled to reasonable notice if the relationship ends,” says Haynes. “You have somebody arguably who is a contractor who theoretically could be rendering services to various people or companies but ends up earning 60 per cent of their income with one entity, that person may be considered to be economically dependent on that entity.”

If the reality of the situation points toward an employment relationship, the employer risks being liable for employment standards and common law notice entitlements. Haynes points out that the Canada Revenue Agency (CRA) has its own criteria for establishing an employee status, which varies a bit from the other legal tests used by courts and adjudicators.

“The risk the employer runs for not properly framing and characterizing the individual is, it could trigger consequences from a CRA standpoint,” she says. “That could mean that the employer is going to have to remit EI and CPP deductions to the CRA, and misclassification may make a difference to the deductions for income tax - the employer could be exposed for that as well, not to mention a fine that the CRA can levy for that kind of error.”

Keep contractors separate

If an employer hires an independent contractor, it can protect itself by clearly defining the relationship, keeping the company and the contractor separate, and maintaining that separation throughout the relationship.

“More often than not, if decision makers think that it looks more like an employment than an independent contractor relationship, then there's going to be a problem, so just think very carefully about how you want to characterize the relationship,” says Haynes. “I wouldn't say don't ever use an independent contractor, but if you are going to characterize a person as that, then the agreement and the conduct of the organization should flow accordingly.”

“I would suggest to employers, if they know at the end of the day or they have a good sense that the worker in question is somebody who is going to work substantially for them, and maybe for a lot longer period of time, it might be better - and maybe a little cleaner - that the person be just characterized as an employee with an employment agreement.”