When trying to determine who is a contractor and who is an employee, employers shouldn’t overlook the middle ground
Expanding the contractor definition
Many employers try to be careful when hiring contractors to perform work, using careful language in the contract to make it clear that the contractor is independent and free to make her own decisions regarding her business and work. However, if the relationship between the two parties doesn’t closely follow the boundaries of a contractor relationship, the language of the contract may not amount to much if the reality of the relationship is different and the relationship reflects an employer-employee dynamic.
Employment and labour law employer Jeff Landmann discusses the real factors that determine the difference between independent contractors and employees, and when circumstances don’t quite match the definition of either, creating a middle ground wherein exists the ‘dependent contractor.’
A common challenge faced by businesses seeking to gain new or additional talent is deciding whether to hire the talent as an employee or bring them on as an independent contractor. The reason for the decision is almost always financial. Independent contractor status removes the obligation on an employer to provide employment standards minimums such as notice of termination and severance, and to pay workplace safety and insurance premiums. Similarly, the individual providing the service may prefer to enter into an independent contractor relationship to avoid source deductions such as income tax, Employment Insurance and Canada Pension Plan remittances, or to utilize tax advantages which are unavailable to employees.
Whether parties are in an employment or independent contractor relationship depends on the actual workplace relationship between them, and not merely the language that may have been used in their written contract. In other words, calling an individual an “independent contractor” does not make her necessarily so. The facts are what determine her status. It is therefore critically important to know how to structure an independent contractor relationship to withstand an external challenge.
What is an independent contractor?
Generally speaking, an independent contractor owns her own “tools,” has a high degree of control over the provision of services, and assumes the chance for profit and risk of loss. By contrast, an employee’s relationship is characterized by a higher degree of subordination and exclusivity but much less risk. For example, an employee is more likely to provide services to only one employer who exercises significant control over what the employee does. An employee is also less likely to have any responsibility for paying operating costs, and often receives consistent payment for her services, regardless of fluctuations in business.
Professional services that require a higher degree of independence and discretion lend themselves more easily to independent contractor relationships than do non-professional services. For example, it is more likely that an architect could be characterized as an independent contractor than a parking lot attendant.
However, even if the parties structure their engagement so it purports to meet the legal test for independent contractor status, they may unintentionally miss the mark, creating a third type of relationship — the “dependent” contractor. A dependent contractor is an intermediate category between an employee and independent contractor. The key distinction is that, unlike an independent contractor, a dependent contractor is entitled to notice of termination just like any other employee.
The dependent contractor
Dependent contractor status is not a new legal concept. The hallmark of a dependent contractor is someone who otherwise meets the test for independent contractor status but who is economically dependent on the business to which she provides services. Economic dependency may be demonstrated by exclusivity, or near-exclusivity, in the provision of services.
Economic dependence gives rise to a duty to provide the dependent contractor with reasonable notice in the event of termination. The amount of notice is not typically as lengthy as that owed to an employee in similar circumstances; however, it is generally far in excess of the two-week or 30-day provisions most employers would expect from a commercial relationship.
While there is no exhaustive list of factors, indicators of exclusivity and economic dependence between a business and a contractor may include:
•The contractor has substantially no other clients except the business.
•The contractor performs services on a basis equivalent to full-time work that prevents the contractor from doing other work for other businesses.
•The contractor’s revenues are made up primarily of work obtained from the business.
•The business relies on only the contractor and nobody else to provide certain services.
•The relationship is long-standing and close.
Minimizing the risk of dependent contractor status
Assuming an individual retained by a business would otherwise meet the legal requirements to be considered a contractor, the following are some guidelines to minimize the risks associated with the contractor being classified as “dependent”:
•Use a written contract.
•Where possible, avoid any requirement the contractor provide services exclusively to the business and nobody else. Instead, a non-disclosure provision is advisable if protection of confidential information is a concern.
•While a carefully worded and limited non-solicitation provision or agreement may also be appropriate to prevent a contractor from unfairly soliciting a business’ customers, avoid the use of a non-competition clause. Restricting someone’s ability to accept business is generally considered inconsistent with contractor status and creates exclusivity and economic dependence.
•Ensure the contractor is not asked to perform services in such a manner that would realistically prevent the contractor from providing services to others.
•Confirm in the written contract the contractor is free to provide services to others.
•Where possible, avoid heavy reliance on a single contractor to provide certain services, particularly over a long period of time without considering at the outset the amount of notice the contractor should be entitled to if the contract is terminated.
•Include a written provision in the parties’ contract that clearly sets out how much notice the contractor is entitled to receive on termination of the contract and under what circumstances. A clear provision detailing the contractor’s right to notice will greatly reduce the uncertainty and risks if the contractor were ever found to be dependent.
Jeff Landmann is a lawyer with Sherrard Kuzz LLP, a management-side employment and labour law firm in Toronto. He can be reached at (416) 603-0700 (Main), (416) 420-0738 (24 hour) or by visiting www.sherrardkuzz.com.
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A contract doesn’t always mean independence
THE FOLLOWING are some Canadian cases where a contractor was determined to be an employee (and one a dependent contractor):
•Lavellee v. Siksika Nation, 2011 CarswellAlta 123 (Alta. Q.B.): A 50-year-old doctor signed a contract to work for the Siksika First Nation until his retirement at age 70. The contract was deemed unenforceable because of its length and the fact it wasn’t in writing, but the relationship was exclusive and the verbal agreement was permanent. The doctor was owed reasonable notice when the Siksika terminated the contract after 10 years.
•McKee v. Reid’s Heritage Homes Ltd., 2009 CarswellOnt 8053 (Ont. C.A.): An independent sales representative signed a sales and advertising agreement with Reid’s in 1987, where she sold a certain number of homes provided by Reid’s. Once the homes were sold, the rep continued to sell homes for Reid’s over 18 years. Though the rep hired her own employees, she worked only for Reid’s, followed its directives and used its materials, making her an employee.
•Therrien v. True North Properties Ltd., 2007 CarswellAlta 612 (Alta. Q.B.): An accountant was offered a contract to provide his services exclusively, with the expectation he would work for 10 years until his retirement. The company controlled his pay and all aspects of work, and it was the accountant’s sole source of income. He was an employee.
