A look at recent court cases provides some clarification
Are all the workers in your organization correctly classified as employees or self-employed individuals? Properly determining a worker’s employment status is an essential part of complying with payroll-related laws.
If the workers are employees, the Canada Revenue Agency (CRA) requires payroll to take deductions for Canada Pension Plan (CPP), employment insurance (EI) and income tax from amounts paid to the employees and remit the deductions, along with the employer’s share for CPP and EI contributions, to the CRA. Employers with Quebec payrolls have similar responsibilities for making Quebec-specific remittances to Revenu Québec.
If an employer does not deduct the required CPP contributions or EI premiums, the CRA will require it to pay both the employer’s and the employee’s share of CPP contributions and EI premiums owing, as well as penalties and interest.
To determine if a worker is an employee or is self-employed in all jurisdictions but Quebec, the CRA uses a two-step process that examines the relationship between a payer and a worker. It is based on precedents set in court cases on employment status.
The first step looks at the intentions of both the payer and the worker when they entered into their working arrangement. The second step examines the total relationship between the two to determine if the actual working conditions are consistent with the intent of the relationship.
This involves analyzing a number of factors, including the level of control the payer has over the worker, whether the worker provides tools and equipment for the job, whether the worker can hire assistants, as well as issues around financial risk, investment and management and opportunity for profit for the worker.
If an employer or a worker does not agree with a CRA determination on employment status, they can appeal the decision to the Minister of National Revenue and, beyond that, to the Tax Court of Canada.
2 court cases
To illustrate how the court uses the two-step process, here is a look at two recent cases with different outcomes:
The first case, Lippert Music Centre Inc., and the Minister of National Revenue, concerns two music teachers at a music school in Toronto. The school viewed the teachers as independent contractors; however, the Minister of National Revenue said they were employees.
The CRA assessed the music school CPP contributions and EI premiums for the workers from Jan. 1, 2008, to Dec. 31, 2010. The music school appealed the ruling and the assessment to the Tax Court of Canada. The court ruled in May 2014 that the workers were employees.
In making the decision, Justice David Graham looked first at the intentions of the workers and the music school when they entered into the working relationship. Based on witness testimony, he concluded both parties intended for the relationship to be that of independent contractors.
Next, Graham looked at the level of control the music school had over the teachers’ activities. The teachers did have a lot of flexibility when it came to setting their teaching hours. They were allowed to run their own teaching business outside of the school. They could work for competitors — all signs consistent with the workers being independent contractors.
However, other factors showed the music school had a level of control over the teachers that was more consistent with an employer-employee relationship. For example, they could not give a student a mark lower than a B or miss work without the school’s permission.
In addition, the school controlled the scheduling of music lessons, and the teachers had no say over which students they would teach and when they would teach them. The school also required the teachers to use its invoicing document.
In looking at all of the issues around control, the judge found "the objective reality of the control that Lippert exercised over the workers does not support their subjective intention to be independent contractors."
Graham also examined the teachers’ risk of loss and opportunity for profit. He found they had no real risk of financial loss and no ability to earn more money through sub-contracting, which did not support the intention to be independent contractors.
"I consider the control factor to be the most important factor in this case. Therefore, overall, I must conclude that the workers were employees," said Graham.
The second case, Ontario Real Estate Association and the Minister of National Revenue and Stephen Paul Armstrong, looked at whether individuals who worked as test centre operators (TCOs) and assistant test centre operators (ATCOs) for the Ontario Real Estate Association (OREA) were employees or independent contractors.
The case began when a CPP/EI rulings officer determined a worker was an employee engaged in pensionable employment with OREA from Jan. 1, 2008, to Jan. 10, 2012. This prompted the CRA to examine the status of other individuals working with OREA. As a result, it found many (including all of the TCOs and ATCOs) were employees. It issued Notices of Assessment for CPP contributions and EI premiums and charged OREO interest and penalties.
OREA appealed the decision to the Tax Court of Canada. The court ruled on June 20, 2014, that the workers were not engaged in pensionable employment during the period in question. To arrive at the decision, Deputy Judge Rommel Masse looked at the intent of the parties and the total relationship between them.
He found there were no written or oral work agreements. The only document was an authorization allowing the workers to operate a test centre for OREA.
"There was no probationary period, no performance reviews, no benefit, no at source deductions, no termination or severance pay, no vacation or holiday pay, no paid leaves of absence, no pension plan and no bonuses. All of this would contra-indicate any intention to establish an employer-employee relationship," said Masse.
The court then looked at the relationship factors. Overall, Masse found that, "on the balance of probabilities," the workers were independent contractors and not employees. ing control and subordination. He found OREA exercised "little control" over the workers as long as they maintained the integrity of the exam process.
OREA only paid the workers for exam-related work and the workers were free to work for anyone else and did not need OREA’s permission to do similar work. The workers did not have to prioritize OREA’s work over any other work and no one from OREA went to the test centres to supervise, oversee, direct or review the way work was done.
Other factors that weighed in favour of the workers being independent contractors were that the TCOs could hire assistants without any direction from OREA. It was the TCO, not OREA, who offered work to an assistant and the assistants were free to agree to the work or not without any consequences.
In examining the factors of chance of profit and risk of loss, the court found they, too, tended to indicate an independent contractor relationship. OREA did not guarantee the workers a net income and their ability to make a profit was completely within their own control.
Another factor that the court looked at was the extent to which the workers were integrated into OREA’s operations. Masse found that the workers were not included in the association’s operations in a meaningful way. They did not have an office at any OREA premises, they did not have business cards, they were not assigned a telephone number for students to reach them and they could be dismissed at any time.
While Masse stated this is not an important factor on its own, it did indicate that the relationship was not one of employer-employee.
The only factor that indicated a possible employer-employee relationship was that of investment and management since the workers were not required to invest anything into their work except for time and effort.
Overall, though, the deputy judge said the evidence pointed to the workers being independent contractors.
Even though the results were different, in both cases the courts looked at the intention of the parties and the specific facts of their relationship to determine employment status. Organizations can follow the same principles to make sure that they properly classify their workers.
