Employee or independent contractor?

Determination important when complying with standards laws

Employee or independent contractor?
Credit: Prathan Chorruangsak/Shutterstock

A recently proposed class-action lawsuit highlights the importance of businesses properly classifying workers as employees or independent contractors under employment standards laws.

In January, Toronto-based law firm Samfiru Tumarkin filed a class-action lawsuit in the Ontario Superior Court against Uber Technologies, seeking $200 million in damages for Ontario residents who have driven for the ride-sharing service since 2012.

The lawsuit claims that the drivers are employees, not independent contractors as Uber classifies them.

“Uber drivers are employees in almost every sense, but are incorrectly classified as independent contractors,” said Lior Samfiru, a partner at the law firm. “Uber drivers are in fact employees, and are entitled to minimum wage, overtime, vacation pay, and the protection provided by the terms of employment.”

The court has not yet ruled on whether it will certify the case. As a result, the allegations have not been proven in court.

Payroll professionals know how important it is to properly classify workers as employees or self-employed individuals for federal (and Quebec) source deduction requirements. The correct classification is just as essential when it comes to employment standards laws.

When it comes to employees, employers must ensure that their policies for hours of work, overtime pay, minimum wage, vacation pay, statutory holiday pay, paydays, unpaid leaves and termination comply with the minimum requirements in employment standards law (unless the legislation exempts employees from them).

Self-employed workers, or independent contractors, do not have these protections.

An employment standards board may become aware of a questionable employment relationship through an inspection or because a worker lodges a complaint. If the board finds that an employer has misclassified an employee as an independent contractor, there can be serious consequences.

The board could require the employer to pay the individual outstanding vacation pay, statutory holiday pay and overtime pay going back a number of months. It could also compel the employer to pay wages in lieu of notice and severance pay, depending on the jurisdiction.

Properly classifying workers can be complicated by the fact that the Canada Revenue Agency (CRA) and employment standards boards may rule differently on whether a worker is an employee or is self-employed. A ruling by one body does not necessarily bind the other.

The Ontario Employment Standards Board’s policy and interpretation manual acknowledge that the employer-employee relationship is subject to the rules of other laws and the decisions of tribunals and courts under those laws.

“However, those determinations have limited application in the context of the Employment Standards Act, 2000 because the purposes of those other statutes are different than the purpose of (the act),” the Employment Standards Act — Policy & Interpretation Manual states.

“Therefore, for the purposes of the Employment Standards Act, 2000, the fact that a person is, or is not, considered an employee for the purposes of income tax, employment insurance, workers’ compensation, the Labour Relations Act, 1995 or the Canada Pension Plan is not of great relevance,” it adds.

The Manitoba Employment Standards Board also holds this position, saying, “Determinations made by these other bodies may be taken into consideration, but are not binding for the purposes of applying the Employment Standards Code.”

When determining if a worker is an employee or an independent contractor, employment standards boards consider a number of factors. While each board adopts its own criteria, the factors used generally come from relevant provincial, federal or Supreme Court case law and previous board rulings.

“The courts have developed some common law tests that may be useful, but they must be considered in a manner consistent with the definitions and purposes of the Act,” the British Columbia Employment Standards Board states.

The purposes of the employment standards laws are to “ensure that employees receive at least basic standards of compensation and conditions of employment, to promote fair treatment and open communication between employers and employees, to foster a productive and efficient labour force and to assist employees to meet work and family obligations,” the B.C. board states.

In its Interpretation Guidelines Manual: British Columbia Employment Standards Act and Regulations, the B.C. board says it uses a number of common law tests because, “No test is exhaustive in exploring the relationship. All tests must be examined and considered together.”

The Ontario board also says it examines more than one test or factor in making decisions. “There is no universal test to determine whether a person is an employee or an independent contractor,” it states in its policy and interpretation manual.

“The various factors developed by case law...are helpful in answering the central question: Is the person who has been engaged to perform services performing them as a person in business on his or her own account?” the manual states.

Common tests/factors that employment standards boards consider when examining an employment relationship are similar to the ones that the CRA uses. They include:

Control: This factor looks at whether the person/organization paying the worker is in a position to determine what work is to be done and how to do it. In examining this factor, boards consider issues such as whether the payer has the right to dismiss the worker, control how the worker does the work, and determine how much the worker is to be paid.

“Where such control exists, the courts have generally regarded the relationship as that of an employer and employee,” states the B.C. interpretation manual.

Who owns the tools and equipment: Independent contractors are generally expected to provide most of the tools or equipment that they need to do a job, while employers often provide them to employees and are responsible for the costs of maintaining or repairing them. The Ontario Employment Standards Board points out that the term “tools” can include any item used at the workplace, including telephones, forms, and manuals.

“A person who owns all the equipment necessary for the work he or she does is more likely to be an independent contractor than an employee. Likewise, if the tools are supplied by the purported employer, it is more likely indicative of an employee-employer relationship,” the Ontario manual states.

Chance of profit and risk of loss: These tests look at whether the worker has a chance to make a profit or risks a financial loss in doing the work for which he or she was hired. “Employees earn wages. They typically do not assume a risk of loss associated with their work or have the chance to make a profit,” states the Manitoba Employment Standards Board. “Independent contractors have full control to maximize profit as a price maker,” it states, adding that, “They can see a profit or loss as a result of services provided.”

Organizational or integration test: This test considers whether the individual’s work is an integral part of the employer’s organization or merely contributes to it. “The more integrated the work is with the employer’s business, the more likely it is that the person is an employee,” the B.C. policy manual states.

Length of relationship: The longer a relationship exists, the more likely it may be an employment relationship. The Manitoba board states that, “Employees often work for the same person or company on a frequent and ongoing basis.”

By contrast, it says, “Independent contractors are typically hired to provide a specific service with a defined end date.”

The B.C. board also warns employers not to assume workers are independent contractors just because they agree to work that way, have more than one job, submit invoices rather than time cards, work without much direct supervision or do not have source deductions taken from their earnings. On their own, it says these factors are not enough to determine that a worker is not an employee.

Another type of work relationship that employers should be aware of is that of a dependent contractor.

These individuals are similar to independent contractors, but are economically dependent on the person or company that hired them. This can happen in situations where a contractor works exclusively for one person or business.

While dependent contractors are not considered employees under most employment standards laws, there have been cases where courts have ruled that they are entitled to notice of termination because they have worked exclusively for one employer.

An employment standards review in Ontario has asked for public feedback on whether dependent contractors should be included in the definition of “employee” in its employment standards law, with possible exemptions from some standards.

At time of writing, the final report of the Changing Workplaces Review was expected to be released shortly. It is not yet known if it will recommend adding dependent contractors to the act.

Employers who are unsure of a worker’s status should contact the applicable employment standards board or consult a lawyer for more guidance.

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