Ensuring a former employee who becomes a contractor is actually a contractor
Question: If an employer wants to terminate a full-time employee and offer him a position as an independent contractor, what must be done to ensure the relationship is that of a contractor and no longer an employee?
Answer: While there is no way to guarantee that an individual will be viewed at law as an independent contractor, there are steps the employer can take to increase the likelihood that such a relationship would be found.
1. Formally sever the employment relationship. For the employment relationship to properly end, it must be terminated with proper notice (or pay in lieu), severance (if applicable), etc. Alternately, the employee can resign by providing proper written notice. The employee should be provided with a record of employment which clearly indicates that the employment relationship has ended.
2. Prepare the independent contractor agreement. The individual and the employer should create an independent contractor agreement. The agreement should indicate, in the recitals, that the individual was formerly an employee but chose to become an independent contractor (IC) and that the employment relationship was properly severed. Any “employee” benefits to which the individual was previously entitled should cease; the fact that there are no entitlements to benefits (such as health and dental) should be clearly stated in the agreement. The new remuneration model should be based on invoices provided by the IC for work performed (as opposed to a regular “salary”).
Other terms of the agreement will vary, but they should include the key indicators of an IC relationship. One of the central considerations in determining whether the relationship is one of IC is how much control is exerted over the individual by the company (the less control over the IC the better), with regard to the following factors:
• The IC’s ability to control hours and place of work
• Whether the IC brings her own tools to the work (the more the IC brings to the workplace, the better)
• The amount of oversight the company has over the IC — the more oversight (daily direction, ability to discipline, etc.), the less likely the individual will be found to be an IC
• The degree to which the IC stands to profit or lose and how much risk is involved for the IC (the greater the chance of profit and loss and the more risk, the greater the arrangement looks like an IC arrangement)
• Whether the IC can hire assistants for completing the work (such assistants to be employees of the IC, not the company)
• Whether the IC can perform work for more than one entity (an IC should be able to provide services to a variety of entities).
This list is not exhaustive but provides a sense of the various indicators of an IC relationship. If any terms need to be changed during negotiations, keep the above factors in mind.
Finalize the agreement and clearly indicate that the IC was given an opportunity to seek independent legal advice (a best practice for any contract) prior to agreeing to the terms.
3. Act like the individual is an IC. The contract is very important, but so is the behaviour of the company and the individual. If the individual, in practice, is heavily controlled by the company, it is possible that the relationship will be found to be that of employee/employer. Therefore, the above factors must be considered not only with regard to the preparation, but also with regard to the execution, of the contract.
Brian Johnston, Q.C., is a partner with Stewart McKelvey in Halifax. He can be reached at (902) 420-3374 or [email protected]