Renewal of independent contractor agreements

A fine balance between maintaining the contractual relationship and changing it to employment relationship

Colin Gibson

Question: Is there a limit to how many times a contract can be renewed before the relationship with an independent contractor changes? Is there language that can be included to maintain an independent contractor relationship indefinitely?

Answer: When an organization is designing a contract for personal services, it must begin by determining whether the service provider is an employee or an independent contractor. This distinction is important because while independent contractor relationships are generally subject only to basic principles of contract law, employment relationships are governed by an extensive and complex common law and statutory legal framework. For example:

• The common law implies certain terms into many employment contracts, such as the obligation to provide reasonable notice of termination of the employment relationship.

• The minimum requirements contained in employment standards statutes apply to most employees, but not to independent contractors.

• The employment-related discrimination provisions in human rights legislation apply to employees, but may not apply to independent contractors.

• The definition of “worker” in workers’ compensation statutes will apply to most employees but only certain independent contractors.

• If a worker is an employee, the employer will be required to make the applicable statutory deductions and remittances for income tax, employment insurance and the Canada Pension Plan. These requirements do not apply to independent contractors, who are responsible for looking after their own taxes and other remittances.

The most serious risks associated with a worker being found to be an employee are:

Workers’ compensation: If a person providing services is injured in a compensable accident and seeks compensation, and that person is found to be a “worker,” assessments, costs and penalties can be imposed upon the engaging company.

Statutory remittances: If a worker is found to be an employee, the company can be faced with a sizeable invoice from Canada Revenue Agency for income tax, employment insurance and Canada Pension Plan assessments, plus penalties and interest.

Employment standards claims: If a worker is found to be an employee, the employer may be faced with a significant claim for unpaid wages, statutory holiday pay, vacation pay, termination pay, or unauthorized deductions.

How is the line drawn between independent contractor and employee status? A contract of employment is said to be a “contract of service,” while an independent contractor agreement is a “contract for services.” It is not always easy to determine whether a worker is an employee or an independent contractor, because courts, tribunals and government agencies have identified a variety of factors that will influence this issue, none of which will necessarily be determinative. Also, the fact that one tribunal or agency recognizes a worker to be an independent contractor does not mean that the same decision will be made by another. Nor will the parties’ own characterization of their relationship be determinative, although the existence of a carefully drafted agreement will often be given significant weight.

In many situations, it will be obvious that a worker is either an employee or an independent contractor. An individual who is hired, works a full-time schedule, reports to a boss, has benefits coverage, and receives a regular paycheque will undoubtedly be an employee. At the other end of the spectrum, the contractor a homeowner hires to install a new roof on her house, who arrives with workers, tools, and supplies, and performs the work for a specified price, will clearly be an independent contractor.

In between these extremes lies a broad variety of relationships that can be less easy to characterize. A number of tests  have been developed to determine whether a worker was an employee or an independent contractor, including:

The control test. This test recognizes that in an employment relationship, the employer controls both the worker and the manner in which the work is performed. The employer determines what work is to be done, which workers will do it, and how, when and where the work will be performed. The employer also exercises control by setting the wages or other remuneration to be paid.

The four-fold test. This test examines not only control, but also ownership of tools, chance of profit, and risk of loss. Does the worker own the tools required to perform the work and pay the cost of their operation? Is the remuneration structured so that the worker has a chance of profit or risk of loss? Does the worker have a financial stake in the business, and cover business costs such as rent, office expenses, and insurance?

The organization or integration test: This test looks at whether the work performed by the worker forms an integral part of the company’s business, or whether it is simply an accessory. Also important is whether the worker is economically dependent on the company for her livelihood.

In 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., the Supreme Court of Canada observed that “there is no one conclusive test which can be universally applied to determine whether a person is an employee or an independent contractor.” The court described the key issue as follows:

“The central question is whether the person who has been engaged to perform the services is performing them as a person in business of his own account. In making this determination, the level of control the employer has over the worker’s activities will always be a factor. However, other factors to consider include whether the worker provides her own equipment, whether the worker hires her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.”

No single factor will be determinative. As the court noted in the Sagaz decision, the central question involves a determination of whether the service provider is in the business of providing the services in question.

Where a contractor is hired for a fixed period of time to perform specific services, this can be a factor that points toward independent contractor status. An indefinite term contract, on the other hand, may be interpreted as suggesting the service provider is integrated into the employer’s organization and is in reality an employee.

In the employment context, it has been held that where a fixed-term employment contract is repeatedly renewed, the employment relationship will at some point become one of indefinite duration. Similarly, an independent contractor agreement that is renewed repeatedly may be found to show the contractor is really an employee because the relationship has become indefinite in nature.

Having said that, there are independent contractor relationships that can have an indefinite term. An example would be a contractor that is hired to provide ancillary services to a business on an ongoing basis, such as an IT consultant or an outside accounting firm. In those circumstances, even repeated renewals of the independent contractor agreement should not result in the service provider being deemed to be an employee. See 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 CarswellOnt 3357 (S.C.C.).

Colin Gibson is a partner with Harris and Company in Vancouver. He can be reached at (604) 891-2212 or [email protected]

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