It’s increasingly common for payroll to handle pay for workers who aren’t employees
The line that distinguishes an employee from an independent contractor isn’t always clear. But blurring it can result in serious implications for both the worker and the employer.
With as many as one in four individuals in the workforce either on temporary contracts or working for themselves — according to Statistics Canada, 15 per cent of Canadians worked in temporary jobs and nine per cent considered themselves single-person businesses in 2001 — it’s increasingly common for payroll practitioners to handle pay for workers who aren’t employees of the organization.
Earlier this year the Federal Court of Appeal explored the various means by which the law distinguishes between an independent contractor and an employee in Royal Winnipeg Ballet v. Minister of National Revenue.
The Royal Winnipeg Ballet was appealing an earlier decision of the Tax Courts, which determined that dancers engaged by the ballet company were in fact employees.
The determination was significant in that it would require the ballet company to pay Canada Pension Plan contributions and employment insurance premiums on the dancers’ behalf.
From the dancers’ perspective, the determination meant that statutory deductions would be made at source and, ultimately, they would not enjoy the benefit of writing off business expenses reasonably incurred to earn income from self-employment.
The appeal court carefully reviewed the various tests that have been developed over time to differentiate between employees and independent contractors, beginning with the integration test. This test, first articulated by the English courts in the early 1950s, examines the relationship between an individual’s work and the business that engaged them. If the individual was employed as “part of the business” and their work was integral to the business, they would be considered an employee. On the other hand, if the individual provided services from outside and the services were accessory to the main operation of the business, they were regarded as an independent contractor.
This test has subsequently been discounted, as parties that have developed a “relationship of mutual dependence” are necessarily deemed to have an employment relationship. To replace it, certain courts began applying an “analytical framework” by posing the following question: “Is the person who has engaged her to perform the services performing them as a person in business on her own account?”
If the answer is yes, then the person is an independent contractor. If the answer is no, she is an employee. In order to answer the question, one must ask who exercises “control” in the relationship. For example, does the individual set her own hours, is she free to accept or refuse work, is she subject to company policy and discipline and is she free to hire others? In this regard, the question to ask is whether the so-called employer has the right to exercise control, not necessarily whether they actually do.
Reference was also made in the case to the historical “four-fold test.” Under this analysis, the following are indicators of an independent contractor relationship:
•ownership of tools;
•chance of profit; and
•risk of loss.
Chance of profit and risk of loss focuses on whether the individual is simply paid a salary or whether she actually stands to gain or lose depending upon how her services are provided.
The court in the Royal Winnipeg Ballet case concluded its historical analysis by considering what role the “intentions” of the parties play in determining the nature of the relationship. On the one hand, the law is sensitive to the fact that parties may create a “sham” independent contractor relationship in order to avoid certain obligations. On the other hand, the law has always recognized that people have freedom to contract and, accordingly, the intentions of the parties are somewhat relevant.
The court concluded that no one test or factor is conclusive. Rather, a court will examine all of the possible factors that may apply in a given situation. Not all of the factors will be relevant in all cases, or have the same weight in all cases, but the level of control the employer has over the worker’s activities will always be a factor. When, after an assessment of the total relationship between the parties, the true nature of the relationship remains unclear, regard ought to be given to how the parties viewed the relationship and conducted themselves.
What does all of this mean for the payroll practitioner? First and foremost, it means an individual is not simply an independent contractor because she would like to be or has been given that label. Due diligence requires a more in-depth analysis into the relationship to figure out whether that person is truly performing services as an individual in business on her own account. While no single factor is determinative of the nature of a working relationship, the following tend to indicate an independent contractor relationship:
•a written fixed-term contract for services;
•the worker is an employee or independent contractor of his own corporation and the contract is between that corporation and the contracting company;
•the worker may provide services to more than one company;
•remuneration is determined by negotiation and is piecemeal or by reference to the sales or the billings of the worker;
•the worker submits an invoice for services rendered and charges GST;
•the worker pays her own expenses;
•the worker supplies her tools and equipment;
•the worker sets her own hours and receives no vacation pay; and
•the contracting company does not supervise the worker’s activities.
On the flip side, hallmarks of an employment relationship include:
•no written contract;
•the worker participates in a company benefit plan;
•the worker receives a pension or retirement savings plan;
•the worker is integrated into the employer’s operations;
•the worker gets vacation pay; and
•the worker must perform services personally and exclusively.
What are the consequences if an individual is treated as an independent contractor and later found to be an employee? Statutory deductions will have to be made and paid retroactively, and could be accompanied by an order to pay interest and penalties.
Vacation pay may be due and owing and, in the context of a wrongful dismissal action, the individual will be entitled to reasonable notice of termination.
The importance of properly structuring an independent contractor relationship was underscored in a recent decision. In January of this year, an Ontario judge took the extraordinary step of forwarding his judgment to the Canada Revenue Agency (CRA) because of dubious payroll practices discovered during the trial that included paying certain employees as independent contractors (Fedorowicz v. Pace Marathon Motor Lines Inc.). Chances are good a CRA audit will ensue.
Payroll best practices dictate that one inquire into the true nature of an individual’s working relationship. At a bare minimum, there should be a written agreement in place. Further, as working relationships change over time, payroll professionals must ensure that individuals who begin as independent contractors do not start to look more like employees.
For more information, see:
•Royal Winnipeg Ballet v. Minister of National Revenue, 2006 CarswellNat 492, 48 C.C.E.L. (3d) 163 (F.C.A.)
•Fedorowicz v. Pace Marathon Motor Lines Inc., 2006 CarswellOnt 455, 48 C.C.E.L. (3d) 260 (Ont. S.C.J.)
David Whitten is an employment lawyer with the Toronto firm of Rubin Thomlinson LLP. He can be reached at (416) 847-1814 ext. 110 or [email protected]. David Whitten was awarded as one of the Best Employment Lawyers in 5-Star 2023. See the full winners here.
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