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How 'independent' are your contractors?

Worker may be happy to be paid as contractor, but tune can change when relationship is terminated

By Stuart Rudner

Organizations and individuals continue to find themselves in trouble as a result of mischaracterizing an employment relationship as “independent.”

As I discussed in a previous post, courts and government bodies such as the Canada Revenue Agency (CRA) can and will look beyond the way parties define their relationship and will assess the true nature of the legal relationship that exists. If an independent contractor is found to be an employee, the employer can face substantial liability. Furthermore, by being paid as a “contractor,” many individuals unknowingly give up significant rights.

In 1392644 Ontario Inc. (o/a Connor Homes) v. the Minister of National Revenue, the Federal Court of Appeal was called upon to assess a recent case where the nature of the working relationship was challenged. The case related to eight workers, all of which were found to be employees. In reaching its decision, the court reviewed the law and noted that:

“The ultimate question to determine if a given individual is working as an employee or as an independent contractor is deceivingly simple. It is whether or not the individual is performing the services as his own business on his own account.”

The court also noted that this is becoming an increasingly common issue, and the potential consequences thereof:

“Since the trend in the workforce for the past few years has been toward increased outsourcing and short-term contracts, this question has taken on added importance, and has led to much litigation in the Tax Court of Canada. Moreover, employment status directly affects an individual’s entitlement to employment insurance benefits under the Employment Insurance Act and has a considerable impact on how an individual is treated under the Canada Pension Plan, the Income Tax Act, R.S.C. 1985, c. 1 (5thSupp.) and various other legislative provisions.”

The difference between an employee and a contractor is not simply the manner in which they are paid. True independent contractors are, as the name suggests, independent and in business for themselves.

External lawyers or accountants would be examples. You expect them to provide services to you, but you would not set them up internally with an office, a corporate email address, a phone line, business cards, a title, a secretary and benefits. Generally speaking, if your human resources department is involved with the “new hire,” odds are the worker is really an employee.

If you expect the courts or government agency to treat the relationship as being independent, you should do so yourself. Do not expect to control the worker as you would an employee, do not carry out annual performance/salary reviews, and do not treat the individual as a part of the team. 

From the individual’s perspective, you should ensure you are operating in the manner in which you want to be treated. If you are truly an independent contractor, you are not entitled to the protection of employment standards legislation. For example, this means you're not entitled to statutory holidays, overtime pay, breaks or any of the other protections true employees enjoy. You cannot have the best of both worlds by paying taxes and deducting expenses as a contractor while being treated as an employee

I routinely deal with situations where individuals think they have found a way to beat the system by asking their employers pay them as contractors. While they may save some money on taxes, the reality is they also expose themselves, and the employer, to liability, while giving up many rights.

Perhaps the most significant loss for independent contractors is the fact the relationship can usually be terminated on very short notice. What often happens is the individual is quite happy with the arrangement of being an independent contractor until the company decides to terminate.

At that time, they may provide 15 or 30 days’ notice. The individual then realizes that, unlike many of their friends or colleagues that are entitled to a substantial severance package if they are dismissed, by operating as an independent contractor they have lost this protection. They then turn around and claim they were truly employees and make a claim for wrongful dismissal.

When I warn organizations about these risks, many tell me there is nothing to worry about because the individuals that are being paid as independent contractors are quite content with the arrangement. I always warn them that the issue will surface when the decision is made to terminate the relationship. In some cases, I have had employers assure me the individual would never do so, as they will have substantial tax liability. However, the reality is the employer will almost always have greater liabilities due to the failure to withhold and submit taxes, as well as to pay premiums for items such as employment insurance benefits and Canada Pension Plan (CPP).
The bottom line is that if the relationship is set up in such a way that it is truly independent, then both parties should not expect to have any potential liability. Where the individual worker is an employee in all but name, there is the central risk on both sides.

Stuart Rudner is an HR lawyer and a founding partner of Rudner MacDonald LLP, a Toronto-based firm specializing in Canadian employment law. He provides clients with strategic advice regarding all aspects of the employment relationship, and represents them before courts, mediators and tribunals. He is author of You’re Fired: Just Cause for Dismissal in Canada, published by Carswell. He can be reached at srudner@rudnermacdonald.com. You can also follow him on Twitter @CanadianHRLaw and join his Canadian HR Law Group on LinkedIn.

Stuart Rudner

Stuart Rudner, Employment Lawyer and MediatorStuart Rudner is the founder of Rudner Law (RudnerLaw.ca), a firm specializing in Employment Law and Mediation. He can be reached at stuart@rudnerlaw.ca, (416) 864-8500 or (905) 209-6999, and you can follow on Twitter @RudnerLaw.
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