By Alan Riddell and Kyle Van Schie
In order to avoid future, costly surprises, it is vital to determine whether your workers are “employees” or “independent contractors.”
By recognizing the nature of the relationships between your company and your workers, you can avoid expense claims from the Canada Revenue Agency (CRA) and your own staff, and stiff fines and penalties under the Employment Standards Act (ESA) and Income Tax Act, for mistakenly classifying any of your workers as “independent contractors” rather than as “employees.”
If your workers are in fact employees, you owe both them and the CRA a number of financial and legal obligations, including statutory termination pay and statutory severance pay upon termination, the deduction and remittance of income tax, and payment to Worker’s Compensation and Employment Insurance. On the other hand, if your workers are independent contractors or “consultants,” you owe them and the CRA none of the aforementioned obligations.
Many people wrongly believe that the distinction between employee and independent contractor depends on a signed contract explicitly stating that the workers are independent contractors rather than employees or the worker having their own HST number. In reality, your worker having an HST number or the existence of a contract, or any other Agreement, between yourself and your workers stating that they are working for you as “independent contractors” rather than “employees” are largely irrelevant.
Courts have ruled that the proper classification of a worker as an employee or an independent contractor depends on the substance of the working relationship, (i.e. the work actually performed by the worker for your organization) which can be determined by answering the following questions:
1. Who controls the manner in which the worker carries out his or her work?
Who determines working hours, where the work is done, and how it is done?
The more it is the worker who exercises control, the more likely it is that the worker will be deemed to be an independent contractor and not an employee.
2. Who owns the tools and equipment which the worker uses to carry out his or her work?
Who owns the computer, vehicle, cell phone, and other tools used during the working day? Does the worker use his or her own office, or one that you—or one of your clients—supplies?
The more it is the worker, and not you, who provides these tools and equipment for carrying out work assignments, the more likely it is that the worker will be deemed to be an independent contractor and not an employee.
3. In carrying out the work, does the worker run a risk of personal financial loss or stand a chance of profit?
Is pay determined by a fixed hourly or weekly salary? Or is the worker paid on an assignment-by-assignment basis, such that the speedy execution of the assignments can result in more work and additional remuneration?
The more the worker personally runs a risk of loss or a chance of profit in the discharge of work responsibilities, the more likely it is that the worker will be deemed to be an independent contractor and not an employee.
4. How well is the worker integrated into your company?
Is the work usually completed on-site or at the worker’s own office? Is the worker working on a permanent basis or simply working on a temporary assignment? Does the worker exclusively work for your company or does he or she work simultaneously for other companies?
The less the worker is exclusively, completely and permanently integrated into your company’s workforce, the more likely it is that the worker will be deemed to be an independent contractor and not an employee.
Courts will consider each of these factors in making its determination whether a worker is an independent contractor or an employee. There is no magic formula or number of factors that need to be met, but the Court will look at the presence and strength of each of the above-listed factors when making its decision.
When there is any doubt about the nature of the relationship between you and your workers, a quick phone call to a lawyer who is well-versed in employment law is highly advisable.