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Independent Contractors

Employers and employees are often seeking ways to reduce their costs of business, maximize their tax deductible expenses or the potential expense associated with the termination of an employee.

One of the strategies being increasingly utilized is to create what is known as “independent contractor” relationships with their workers. I would suggest that those companies and individuals considering this avenue tread carefully because inappropriately setting up such a relationship can expose the worker and the company to penalties, liability and a host of potential problems. But if you are thinking of structuring your work relationships in this way, you may find the information below helpful.

Employees are entitled to substantial statutory rights and protections. Those who choose to provide their services by way of independent contractual relations are not generally entitled to the same protections as employees. While the employee “serves” the employer, the independent contractor provides a “service”. The independent contractor relationship must be delineated from that of a “term contract employee” who serves the employer but only for a limited term. The Courts have criticized paper “independent contractor relationships” as a mode of dismantling hard-won employment protections over the last century.

The benefit to the independent contractor is the ability to deduct, as business expenses, sums related to their earning a living, which are not available for deduction by employees, the ability, based on their bargaining power, to set their own fees, and their avoidance of payment for the social safety net, apart from taxes and the CPP contributions required by law. It appears that workers are often very enthusiastic about avoiding such costs – until they need to call upon the social safety net themselves.

The Courts now recognize that an independent contractor can BECOME a dependent contractor over time – who is entitled to considerable severance upon the termination of a relationship – in certain circumstances.  If you are in a relationship of this nature that is dissolving,  you would be advised to contact us to determine your rights and obligations.  

Substance and Form in the Determination of Status

One can’t simply call an employee an independent contractor to set up such an arrangement! Thus, a written contract merely stating that the individual is an “independent contractor” is not determinative of the issue. Courts are instead keen to determine the true substance of the relationship. That’s not to say that a contract written by the parties and the title given are of no significance. What it does mean, however, is that these are pieces of evidence rather than determinative factors.

For example, if a contract between a worker and company states that the worker is an independent contractor and contains the indicia of independence, such as non-payment of expenses and the ability to work elsewhere, the Court or Government bodies will look closer at the day to day realities of the situation. If the worker occupies an office in the workplace, has no expenses, has no other clients and is under the direction and control of a company supervisor, these daily realities may determine the status of the worker as an employee – not the statement of “independent contractor” noted in the contract.

Call employment lawyer Maureen Currie to schedule a consultation at 905-847-2826.

Legal Tests

The case law is replete with “independent contractors” who, upon termination of the relationship, file for Employment Insurance or commence a wrongful dismissal claim alleging that he or she was, in essence, an employee – regardless of any written contract to the contrary. In those cases, the employers find themselves facing a bill for arrears of EI and CPP premiums, secondary liability for taxes not withheld, interest and penalties, plus potential significant termination costs, either at common-law or by statute.
A number of tests have successfully been used to assist in a determination of whether the contract is one “of service” or “for services”. The first test utilized by the Courts was whether a worker was under the control of the employer or was responsible for him or herself.

Control Test

Fourfold Test

Integration or Organizational Test

Four-in-One Test

Contract Issues

Both independent contractor relationships and employment relationships are contract relationships. Many employees have a contract with their employer. It would be rare, however, to find an independent contractor or company who does not expect a formal agreement in an independent contractor situation. In such contracts, the worker is specifically stated to be an independent contractor, and responsible for G.S.T. and taxes is allocated to the contractor. Express termination and proprietary provisions commonly appear.
Another difference between employment and independent contractor agreements is the treatment of briefer severance/notice periods.

In theory, statutory obligations (the Employment Standards Act) which affect employees, have no impact on independent contractors. However the nominal characterization of a relationship as independent is insufficient to prove the point. If your worker is found to be an employee, various regulatory regimes will come into play:

Income Tax Act

Employment Insurance and Canada Pension Plan

Employment Standards Act

Employment Standards legislation governs hours of work, overtime, minimum wages, holidays, vacations, various kinds of leaves, notice of termination and, in some cases, severance pay.
True independent contractors do not have the benefits of protection set out in Employment Standards legislation. However, if an independent contractor is held to be, in reality, an employee, and has not received vacation pay, termination/severance pay, or appropriate overtime pay, the employer is liable.

Contracting out of Employment Standards legislation is prohibited and consequently a provision which provides for less notice than an employee is entitled to under the legislation is void if the worker is found to be an employee. For the same reason, an independent contractor in name who is an employee in substance is fully entitled, despite the contract, to seek to enforce Employment Standards legislation against the employer in appropriate circumstances.

Contracts to set up Independent Contractors

Do’s & Don’ts

Your Company Should Not:

In my practice I strongly caution workers and human resource professionals to take a very close look at the situation with the above factors in mind and to obtain legal advice and expertise to draft the contract before entering into this type of relationship.

For a consultation with our employment lawyer please call 905-847-2826.

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