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Independent Contractors

Determining whether a worker is an employee as opposed to an independent contractor is an issue receiving increased attention. In the age of globalization, corporate restructuring, and employee mobilization an increase in self-employment is not surprising. Gone are the days where the work relationship is best characterized by an employee who works on the employer's premises on a full-time continuous basis and is under the employer's supervision.

Even though you have been hired as an independent contractor, you may actually be entitled to the same rights as a full-time employee when terminated. We can look at your specifics, determine your best course of action and fight for your rights.

Determining whether or not a particular working relationship constitutes an employment relationship is of central importance to Canadian employment law when “employee” status is the gateway to most (but not all) employment protection at common law and under employment-related legislation.

The Tests

When determining the nature of the working relationship between parties, courts have assessed four tests which must be considered. These include:

  • Degree or absence of control exercised by the “employer”;
  • Ownership of tools;
  • Chance of profit and risk of loss;
  • Integration of the “employee's” work into the “employee's” business.

Employment status has been addressed and the Supreme Court of Canada unanimously found there is no conclusive test that can be universally applied to determine whether a worker is an employee or an independent contractor. Rather, the totality of the relationship must be considered. Rather, a judge must consider all information collectively. Clearly the evaluation is fact specific and largely dependant upon control, ownership of tools, chance of profit, risk of loss and integration into employer's business.

Advantages of the Independent Contractor Relationship

There are advantages resulting from the working relationship being characterized as one of independent contractor. Workers performing services for an organization as an independent contractor basis are not subject to payroll deductions for employment insurance, income tax or Canada Pension Plan. For income tax purposes the worker can deduct from self-employed earnings expenses incurred traveling to and from the work site and expenses for maintaining a home office. In contrast, employees have a much narrower range of deductions available. An independent contractor has potentially greater flexibility in setting his/her working hours in comparison to an employee. Finally, a hirer of services could potentially “pass on” to the independent contractor some of its savings from not having to hire an “employee”, in the form of a higher contract price.

Correspondingly, the hirer of services is afforded advantages by structuring the relationship as one of independent contractor. The hirer does not have to provide the worker benefits required under Employment Standards and other protective legislation. The termination obligation of the hirer is limited to the contract terms. Therefore, there is no need to provide the worker with notice of termination in accordance with Employment Standards legislation and/or common law principles. The hirer avoids employment insurance premiums, Canada Pension Plan, and workplace safety and insurance liability. Finally, the hirer avoids costs associated with hiring and training the worker and an independent contractor relationship provides greater flexibility to respond to market forces.

The advantages afforded to a hirer of an independent contractor largely correspond to the disadvantages endured by the worker. Independent contractors do not have access to Employment Standards and other related legislation. Employment Standards legislation establishes a minimum protection of rights which cannot be undermined by an employment contract. Guaranteed rights can only be improved upon by the parties within an employment relationship.

Consequences of Incorrectly Classifying the Relationship

The consequences of incorrectly characterizing a work relationship as an independent contractor arrangement include:

  • Penalties, interest, and liability under the Income Tax Act of Canada;
  • Director liability under the Income Tax Act of Canada as a result of a corporation's failure to withhold and remit income tax on behalf of its employees;
  • Liability under the Employment Insurance Act as a result of an organization's failure to withhold and remit employment insurance premiums;
  • Liability for Canada Pension Plan contributions; and
  • Liability under the Workplace Safety and Insurance Act .

Corporate restructuring along with the related trend to non-standard employment relationships has intensified the frequency of non-traditional working relationships. Those workers who wish to capitalize on the advantages associated with an independent contractor relationship, must also accept the corresponding disadvantages as well as the risk that they may incorrectly characterize their working relationship. In light of the undesirable consequences associated with incorrectly characterizing a working relationship, it is imperative that parties wishing to enter into an independent contractor arrangement seek legal advice to ensure that their relationship is properly documented.

While it is true no one factor is determinative of the nature of a working relationship, jurisprudence offers guidance. The following factors tend to indicate an independent contractor arrangement:

  • A contract indicating a hirer/independent contractor relationship
  • No exclusivity of employment i.e., the worker may provide services to more than one hirer;
  • Remuneration is by reference to the sales or the billings of the worker a percentage amount;
  • Submission of an invoice by the worker to the hirer for payment for services rendered;
  • The worker charges GST;
  • The worker is not paid if no services are rendered;
  • The worker pays for any expenses he/she incurs during the performance of his/her work such as paying rent for the use of office space or equipment;
  • The worker owns the tools and equipment required for the job;
  • The absence of any restrictions on the hours of work and vacation time;
  • No vacation pay or bonuses;
  • The worker is not required to report to the hirer's premises;
  • The worker is not required to perform the services personally; he/she may subcontract to a third party;
  • The hirer does not supervise the worker's activities;
  • The contract between the worker and the hirer is for a limited period of time; and
  • The contract is between the hirer and the corporation and the worker is an employee or independent contractor of the corporation.