'You can't just create a relationship in the mold that you want'

'You can't just create a relationship in the mold that you want'

Recent cases confirm that calling someone an independent contractor doesn't make them one — and the costs of misclassification can reach far beyond termination

Two Ontario labour board decisions released this summer landed on the same conclusion by different routes: the worker was an independent contractor, not an employee, and was therefore owed nothing in termination pay.

While good news for employers, the cases are also a reminder of the persistent challenges of properly defining an employment relationship.

What consistently trips employers up is assuming the label they've applied will hold, according to Joshua Lerner, partner at Lerners LLP.

"You can't just create a relationship in the mold that you want, that you think is beneficial for your business,” he says. “[Employers] think they can just hire these workers in the form that they want without thinking about the repercussions of that.”

It pays for employers to be proactive about the issue, according to Leena Yousefi, CEO of YLaw.

"The law is really moving towards presuming that everybody is an employee unless the employer can prove otherwise. So, it's becoming more common for a lot of independent contractors to be considered employees — regardless of the contract or mode of payment and things like that.”

Why employers keep getting this wrong

Lerner says roughly 80 per cent of his employment law practice involves terminations, and classification disputes almost never surface during a working relationship; they surface at the end of one.

He says the most common problem isn't bad faith — it's that legal obligations simply aren't top of mind when a business is growing.

"People just don’t turn their minds to it. The legal requirements, worker protections — they can be an afterthought when people are running a business or building a business," he says. "The issue comes to a head when it's too late. Oftentimes employers… put themselves in a position where they are reactive to a legal issue rather than being proactive."

Another consideration? The contracts aren't always wrong to begin with — the problem is that relationships change, according to Yousefi.

“The nature of the relationship can transform and it may no longer represent what was entered into the contract decades ago. So, where the employers go wrong is that they think they can rely on that contract from several years ago and enforce it even though everything else has changed,” she says.

"The mistake is the employer is not revisiting the initial contract, not updating it, not amending it”.

A relationship that genuinely looks like independent contracting at the outset can drift into something much closer to employment over years.

"The employee can come back later and say, ‘There were a lot of unforeseen things that happened after, and I'm very dependent on this business, I work exclusively for this business. My finances, everything is tied to this business. Therefore, I'm an employee.’”

Classifying employees

In the first case, an engineer whose personal corporation invoiced the company monthly saw his strongest argument — letters sent to U.S. immigration authorities describing him as an employee — dismissed as documents written for visa purposes rather than as a reflection of the true arrangement. In the second, a physician at a Walmart-based clinic had a contract that explicitly disclaimed any employment relationship, and while some factors pointed the other way, the flow of payments to his professional corporation and his potential to grow his billings tipped the balance toward contractor status.

The key question is whether the worker is really operating a business of their own — and the answer depends on a cluster of factors weighed together, not a checklist ticked off one by one, according to Lerner.

Control over how the work is done, ownership of tools and equipment, the chance to profit and the risk of loss, integration into the business, and whether the worker has multiple clients or just one — all of these go into the analysis.

"It's all those things in the aggregate," he says. "It's not as simple as a checklist. It's a number of factors that indicate one way or another."

Yousefi says two factors rise above the rest.

"At the end of the day, it's all about dependence on the employer and control.”

She offers up the example of a truck driver, with their own truck, writing off expenses — on the surface, a textbook independent contractor. But if that driver has worked exclusively for one company for 14 years and their entire income flows from that single relationship, the picture changes, she says.

"They will be considered employees because despite the look of it — the fact that they have their own tools and they're only doing deliveries — they're completely financially dependent on one entity.”

The roles most at risk

A hairstylist is the example Lerner returns to most readily. Working with the salon's tools, booking through the salon's system, available only at that location — and yet classified as a contractor.

"They say, 'Oh, you're an independent contractor, you’re allowed to work wherever you want.' But, in reality, you're only working there," he says. "That's one that would raise red flags."

IT consultants, trades workers, and media freelancers who channel all their work through a single organization face similar exposure, he says.

Yousefi notes that professional services firms — including law firms — regularly encounter workers who have actively requested contractor status for tax reasons, only to assert employee status if a dispute arises.

"We have unfortunately had situations where they have their cake and eat it too. They say, 'I'm a contractor' as long as it works for them. But when they're terminated, they say, 'Oh, I was an employee.'"

Consequences of misclassification

When a court or tribunal finds that a worker has been misclassified, the consequences can be substantial and retroactive, according to Lerner: unpaid ESA minimums going back years, reasonable notice of termination under common law, potential Canada Revenue Agency audits, interest and penalties on years of unremitted CPP and EI contributions, and in some cases, class proceedings by groups of similarly classified workers.

There can also be issues around job-protected leaves, short-term disability or workers’ compensation considerations, which may not be available to independent contractors.

When an employer is before a judge for a wrongful termination lawsuit, having withheld benefits and refused notice — and the evidentiary record shows the worker was misclassified all along — the power imbalance is an issue, according to Lerner.

“It's a tough look to be an employer before a judge," he says. "Your negotiation position is going to change pretty dramatically, not in your favour."

The law's drift toward employee status isn't just playing out in individual tribunal decisions — class actions have been certified in Ontario and Alberta on behalf of Uber drivers across Canada, alleging that despite being classified as independent contractors, they are in fact employees, financially dependent on a platform that effectively sets their pay and controls their working conditions.

"With Uber, their pay is set basically per hour by Uber," says Yousefi. "They're saying that Uber is trying to avoid paying them their statutory obligations — vacation pay, EI, CPP, all the things that employees are entitled to — under the guise of them being independent contractors."

If you find a problem, here's what to do about it

Yousefi adds that once a worker is properly classified as an employee, a new contract needs to reflect all of it.

"Once they're determined to be an employee, they are governed by the Employment Standards Act. There's a whole host of rights that come with being an employee."

The law is also moving in a direction that makes inaction increasingly risky. Under changes passed in 2025, federal workers subject to the Canada Labour Code are now presumed to be employees unless an employer can prove otherwise, she says.

Her preferred approach: draft contracts that contemplate multiple scenarios from the get-go, regardless of the changing circumstances: “Contemplate everything in the initial contract and then you can forget about it.”

Lerner’s advice is to do the analysis proactively, before a termination forces the issue.

"If something doesn't pass the smell test, you want to be proactive and think about, 'OK, what do we need to do to get onside?'" he says, recommending legal advice on appropriate classifications. "Being proactive pays dividends."

Transitioning someone from contractor to employee status means offering fresh consideration — something of value in exchange for signing a new contract — and giving appropriate notice that the existing arrangement is ending.

"You provide someone notice, or you provide someone consideration, which is something for agreeing to enter into the new contract," says Lerner, adding that it’s always case-specific. "You're certainly not beholden to the contracts that have already been signed."

For employers still inclined to roll the dice, Lerner offers final words of advice: the cost of addressing misclassification proactively is almost always lower than the cost of litigating it after the fact — financially and otherwise.

"It can be so costly from a mental capital perspective, let alone financial, to deal with this stuff on your back foot. It's so helpful to proactively deal with it."