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Don’t judge a relationship by its title: Misclassification of employees as contractors

Employment relationships are not always black and white, even if there is a written agreement between both parties. Such relationships exist along a continuum, with employees and independent contractors at either end, and dependent contractors falling somewhere in the middle. While independent contractors do not have the same rights and protections as employees do under employment standards legislation or the common law, dependent contractors are closer to employees and may receive similar protections.

In that regard, some employers seek to minimize their legal obligations by misclassifying employees as contractors; others are simply uninformed. In some cases, the employee is the one that wants to be a contractor, as there may be tax benefits. However, they often fail to recognize the rights and protections they give up. Employers and workers sometimes mistakenly believe that having an “ironclad contract”, such as an independent contractor agreement, is sufficient. However, the courts and the Canada Revenue Agency are not bound by such an agreement. Courts have repeatedly ruled that the written agreement is only one factor to consider, even where the parties confirm that their intention was to create an independent contractor relationship. Even where the individual uses a numbered company, there is no guarantee that they will  not be deemed to be an employee.

The misclassification of workers as contractors when they are actually employees has wide implications for employers, employees, and the economy. If you are an employer, such misclassification can expose you to potential liability for significant penalties, interest and legal fees, as well as outstanding payroll deductions. If you are an employee who has been misclassified as a contractor, you may be liable for unpaid taxes, and importantly, you have been deprived of key employment standards protections.

Courts will assess the reality of the situation rather than deferring to the parties’ characterization of the relationship – an employee by any other name is still an employee.

The legal test: Contractors vs. Employees

When considering the issue of whether an individual is an employee or an independent contractor, courts will consider various factors including:

  1. The degree of control that the worker has over her or his activities;
  2. Whether the worker or the employer provides the required equipment and tools;
  3. Whether the worker hires his or her own helpers;
  4. The worker’s degree of financial risk (chance of profit and risk of loss); and
  5. The worker’s responsibility for investment and management.

Other factors that may be taken into account include whether the worker can take on other jobs or must provide exclusive services; whether the worker is providing services through a corporation; and whether there are any other written agreements in place.

Each of these factors will be applied on a case-by-case basis. That said, the bottom line often comes down to whether the individual is truly an integrated or integral part of the organization, or whether the individual is carrying on business on his or her own account.

Practice tips

Organizations must understand the risks of misclassifying employees as contractors, even when the individual requests to be treated as a contractor. Similarly, individuals must understand that while there may be tax advantages to being a contractor, they may lose out on significant protections that they would otherwise have as an employee.

In that regard, employers would be well advised to do the following:

  • Analyze the character of the relationship before hiring. It is important to comprehensively assess the worker’s duties and responsibilities, the nature of the relationship, and the relevant factors outlined above, in order to evaluate whether classifying the worker as an independent contractor – rather than an employee – can withstand scrutiny by the courts and government agencies.
  • Be wary of exercising control. The degree of control that a worker has over his or her activities is an important factor that courts and government agencies will consider when assessing whether an individual is a contractor or an employee. Consequently, try to avoid directing your independent contractors with respect to how and when they do their work.
  • Ensure your contractual agreements are not only well drafted, but accurately reflect the parties’ intentions as well as the reality of the situation. As indicated above, some organizations misclassify employees to avoid their legal obligations; this does not help either party, and these issues can appropriately be dealt with through employment contracts that are not in breach of the applicable legislation, but are also reflective of the organization’s needs. It will save you time, money, and unnecessary stress to deal with this upfront rather than after the fact.
  • Seek legal advice, especially before hiring and firing workers, in order to ensure that your organization is meeting its legal obligations and to protect your organization from potential liability. For instance, if you misclassify an employee as an independent contractor, you may be ordered to pay employment insurance premiums, pension contributions, and the employee’s potentially significant entitlements under the applicable employment standards legislation or the common law.

Conclusion

As we have seen time and time again, courts and government agencies will see through the parties’ description of their employment relationship and assess the reality of the situation. Employers and workers alike should not assume that defining their relationship as that of a contractor will make it so in the eyes of the law – the worker may, in fact, be an employee, potentially resulting in serious consequences for both parties. This can be avoided by obtaining legal advice before hiring workers (for employers) and before accepting a job (for workers). Employers and workers are also advised to contact an employment lawyer when considering termination decisions and when faced with a termination, respectively, in order to ensure that employers meet their legal obligations, and that workers receive what they are entitled to.

By Nadia Zaman

Join Rudner MacDonald on Thursday, June 1st for a LinkedIn Q&A to learn how to avoid these pitfalls, how to ensure employees and contractors are not treated alike, and to discuss recent legal developments and issues in this area.

Registration is free and this session is available to anyone with a LinkedIn account.

Register Now


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