As work environments become increasingly more flexible, with remote and hybrid arrangements, and to keep up with fast-paced business needs, we are seeing more and more employers outsource work by hiring independent contractors. By doing so, employers can manage costs, increase flexibility, and reduce their legal obligations. These advantages are particularly enticing for short-term projects or specialized tasks. However, the line between an independent contractor and employee is not always clear, and crossing it unintentionally can lead to serious legal and financial consequences.
Why classification matters
The distinction between an employee and an independent contractor is more than just a title; this classification determines a workers rights and protections under provincial employment legislations. In Ontario, all employees are protected under the The Employment Standards Act (ESA), which stipulates minimum entitlements for rights such as wages, overtime pay, vacation pay and time, notice of termination, and severance. Independent contractors, on the other hand, are not entitled to these same statutory protections.
Misclassifying an employee as an independent contractor may initially appear beneficial to an employer, with less paperwork, no need to withhold taxes, and fewer obligations, but these perceived advantages can quickly unravel if the classification is challenged.
Legal tests
When determining if a worker is an employee vs an independent contractor, the courts and tribunals use a range of factors to assess the employment relationship and will ask legal questions including but not limited to:
- Control: Does the employer control how, when, and where the work is being performed?
- Permanency: Does the employer provide essential training or supervise the worker? Is the contract for an indefinite term?
- Ownership of tools: Who provides the tools and equipment used for the work?
- Organizational: Is the worker economically dependent on the employer? Who pays the workers expenses? Does the employer make statutory deductions on behalf of the worker?
- Integration: Is the worker’s role integral to the business, or ancillary?
The Supreme Court of Canada has emphasized that no single factor is determinative. Each case must be considered in its entirety and on a case by case basis.
Risks of misclassification
Employers who misclassify workers expose themselves to various risk, which can be costly. These risks include:
- Back Payments and Penalties: If the Ministry of Labour or a court finds that a worker has been misclassified, employers may be ordered to pay retroactive entitlements such as vacation pay, overtime, termination pay, and severance. Penalties for non-compliance with the ESA can also apply.
- Tax and CPP/EI Liability: The Canada Revenue Agency (CRA) may reclassify the relationship for tax purposes. This can lead to liability for unpaid CPP contributions, EI premiums, and income tax withholdings, along with interest and penalties.
- Wrongful Dismissal Claims: Independent contractors who have been misclassified as same, and have been terminated may claim they were in fact employees and therefore are entitled to reasonable notice under common law, which often far exceeds ESA minimums.
- Reputational Damage: Employment disputes can result in negative publicity and damage to a company’s brand, especially if the matter becomes public or sets a legal precedent.
Best practices for employers
To mitigate these risks, employers should ensure they conduct a thorough and accurate assessment of each working relationship at the outset of the employment relationship, they should always use clear and well-drafted written contracts that reflect the nature of the relationship, and they should periodically review contractor roles to ensure compliance, especially as responsibilities may evolve.
Above all, we always recommend employers consult with an employment lawyer to ensure workers are classified correctly and their contracts reflect the appropriate working relationship. Greenwood Law is here to help. Get in touch for a consultation.
