Independent Contractor or Employee?

In Ontario, the Employment Standards Act(ESA)is a piece of legislation that provincially regulated employers must follow with regards to their employees. The Act outlines many minimum standards such as the notice requirements upon termination, overtime hours and pay, vacation time and pay, minimum wage, etc. These provisions are in force to ensure that employees are protected and creates a base line for employers to follow. Other standard practices relating to Employment Insurance, Canada Pension Plan, benefits, CRA remittance etc. are also typically afforded to employees. While employees have the benefit of this legislation, independent contractors do not. Independent contractors are not afforded the same protection under law and the minimum entitlements do not apply to them due to the nature of their work

This is why it is extremely important that the line between an independent contractor and an employee is not blurred. Misclassifying employees as independent contractors can be very costly for employers and can be harmful for employees. The Employment Standards Act states in section 5.1 that an employer is not permitted to treat an employee as though they are not an employee and rather an independent contractor

While the classification of such employees is not always black and white, case law in Canada is very helpful in identifying the key factors or considerations that differentiate independent contractors from employees. The common law definition of an indepen dent contractor is an individual who is in business on their own account as opposed to an individual who is in the business of their employer. There is no exact test to determine the status of a working individual, but there are many factors to consider based on the circumstances of the working relationship. The Supreme Court of Canada outlined two major considerations in the leading case ofMcCormick v Faskin Martineau DuMoulin LLP, 2014 SCC 39 as:

1. The extent to which the employer controls the worker’s working conditions; and
2. The extent to which the worker is financially dependent on the employer.

The Ontario Court of Appeal provided some additional considerations when determining if an individual is an employee or independent contractor in the case of Keenan v Canac Kitchens, 2016 ONCA 79. This case showed the importance of “considering the full history of the relationship”. To help in the case-by-case analysis of this type of determination of a worker the following should be looked at:

1. Whether the nature of the work is controlled by the employer, including the time and place;
2. Whether the individual uses their own property to complete the skills (like personal tools, computer, software, etc.);
3. Whether the individual works only for the employer on an exclusive basis;
4. Whether the individual is part or integrated into the employer’s business;and
5. Whether the individual takes on risk or has a stake in the organization of the employer.

Power and control in the workplace could mean the ability to discipline, the freedom to choose what work will be completed, not needing to be supervised, planning and executing work without direct instruction, profiting in their own work, power to bargain with the employer, setting their own pay, etc. These things can also be examined in classifying workers. These factors are not exhaustive and not all of them have to be met, but it should be assessed based on the overall nature of the working relationship.

Using these factors to assess and classify workers is very important so that employers can provide the proper entitlements. If the employer treats an individual as an independent contractor to avoid having to pay or provide for some of the entitlements under the ESA and an issue arises later, then a court may actually determine that the worker was indeed an employee and theemployer could be liable for missed payments of EI, CPP, CRA remittance etc, damages, or other statutory obligations. This can be very costly, especially if the individual has been working with the employer for a long time.

Please note that an employer and individual cannot simply deem their relationship to be that of an independent contractor/employer dynamic because they agree to it whether in word or in written contract. If the actual treatment of the individual and the nature of the work is that of a true employee, then they will be considered an employee regardless of whether the parties have decided otherwise.

To make matters a little more complicated, there is also a difference between an independent contractor and a dependent contractor. If an individual is deemed to be a dependent contractor they will likely still be entitled to reasonable notice if the relationship is ended by the employer, whereas a true independent contractor would not be entitled to that notice or pay in lieu of. Dependent contractors are individuals who are not considered employees as they are self-employed, but a very large portion of their work and income comes form one client. The court again provides some considerations to determine if a contractor is in fact a dependent contract, but the most important factor is reliance on the employer for the success or income of their own business. In the past, duration and closeness of the relationship were looked at, but the most important factor is where there is dependency financially. Due to the fact that a dependent contractor relies heavily on the employer, if the employer ends the working relationship, then the employer must provide reasonable notice or pay in lieu of notice for such change. Case law does not state that other entitlements under the Employment Standards Act apply to dependent contractors, but just that if they truly are dependent, they will need notice if the relationship is going to end so they can take the appropriate measures to find other contracts or projects to supplement the loss of income that they have relied upon. There is no rule written in stone that states a percentage of income that would need to be derived by that relationship, however in Ontario the Court of Appeal has stated that percentages of about 40% of income from a single client (Thurston v Ontario (Children’s Lawyer), 2019 ONSC 640) are typically not enough as the percentage should be substantially more than 50% of the contractor’s income so as they rely on the contract for most of their income

The complexity of these issues is why it is so important that employers who deal with independent contractors seek legal advice from an employment lawyer to ensure that the right classification is chosen and the relationship is governed accordingly. Our team of lawyers can help! Call 705-268-6492 today.