ENHANCED LEGISLATIVE FOCUS ON MISCHARACTERISATION OF EMPLOYEE, DEPENDENT CONTRACTOR AND INDEPENDENT CONTRACTOR: IS IT TIME TO REVISIT YOUR CONTRACTUAL AGREEMENTS?

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     In today’s competitive economy, entrepreneurs and employers must pick among a wide range of choices in building a high-caliber talent pool. From adding a permanent or part-time employee to retaining the services of an independent contractor, these decisions are made all the more complex by the multiplication of legislation, protective measures and administrative oversight imposed by several levels of government. 

A case in point is the inclusion of a specific prohibition to misclassify an employee as an independent contractor in the new Ontario Fair Workplaces, Better Jobs Act, 2017 (“the Act”). The Act now clearly puts the burden on the employer to prove that the person is not an employee for the purpose of the Employment Standards Act (Ontario) (“ESA”).  This will likely also become one of the key focus of the 175 new employment investigators being hired by the provincial government.

The new Act does not provide particulars of how to determine who is an employee and who is a contractor.  Hence, entrepreneurs and employers will need to rely on the legal test applied by the courts to make this determination. Interestingly, the Canada Revenue Agency produced a guide entitled “Employee or Self-employed?” that provides insights on how the CRA determines the employment status of a worker which is mostly based on the leading Canadian case laws.

Employee or independent contractor: a two-step approach The courts usually assess all surrounding circumstances to distinguish an employee from a contractor regardless of whether the written contract explicitly uses the language of “independent contractor”. The evidence must also show that both parties continuously treated their working relationship as a business relationship. 

1) Mutual intention of the parties
 First, the parties must have at the onset a common understanding of their mutual intent which is usually reflected in the terms of the contract. This can be supported by indices such as the worker clearly stating that he/she is “self-employed”, in addition to charging GST for his services and reporting business income on his/her tax return.

 2) Objective factors of the working relationship
 Once the intent between the parties is established, the second step is to see if the intent of the parties is reflected in the facts. Important considerations include: ·   the level of control and subordination: the employer-employee relationship is characterized by subordination, whereas an independent contractor has leeway in determining the manner in which services are rendered. The latter could also sub-contract the work or hire assistants;

·   the ownership of equipment and tools: the contractor provides his own equipment and tools including IT tools, office space, and covers the costs of his/her license to practice and liability insurance policy when required, while required tools and equipment are mostly provided to the employees by their employers;

·   the chance of profit or risk of loss: an employee usually receives a relatively fixed remuneration at regular interval, whereas the contractor bears the financial burden for capital investment and operating expenses. He also has certain expectation of profit associated with the delivery of his/her services;

·   the degree of integration: this factor measures the relative economic dependence of the worker on the other party based, for example, on the level of exclusivity that is required for his/her services by the company.

 Potential risks associated to a misclassification derived from recent jurisprudence

 ·   a relationship that evolves from an independent contractor to a “dependent contractor” or “employee” over time: this appears to be a recurring issue raised in several court decisions. A recent case pertains to a salesperson, who although officially self-employed and billing through his own corporation, was still found to be an employee because he worked full-time for the company, used the company’s support staff and supplies and was required to follow the company’s direction.[1] Another example is an independent contractor who started out by providing accounting and computer consulting services and who eventually became a “dependent contractor” when he took on a role akin to that of an employee by providing ongoing administrative services to a senior executive of the company.[2] 

·   the definition of “employee” and “worker” may vary among legislation: the definitions set forth in the respective legislation must be examined to ensure that any associated obligations are met. For instance, the Occupational Health and Safety Act (Ontario) defines “worker” as “a person who performs work or supplies services for monetary compensation”, which includes independent and dependent contractors as well as consultants and employees from temporary agencies. This definition was recently confirmed in a decision by the Workplace Safety and Insurance Appeal Tribunal where a bicycle courier hired as an independent contractor to collect and deliver mail was eligible for benefits under the Workplace Safety and Insurance Board policy since he is included in the definition of “worker” in the applicable legislation.[3] 

·   the increased risk of potential class action lawsuits: a class action may consist of a group of persons – employees or independent contractors – who have suffered the same or similar injuries and reunite to make a claim against the same party.  A recent example is the certification of a class action launched by several contract lawyers hired to review internal documents for a company. The alleged that they were hired as employees rather than independent contractors and were therefore entitled to ESA benefits such as termination notices.[4] 

In summary: The employment law has evolved in order to recognize the landscape of a modern workplace. Factors such as the duration and permanency of the relationship, the degree of reliance and closeness and the possibility of economic dependence should be considered at the beginning of the working relationship. In addition to the potential for operational disruptions, the mischaracterization of employees as independent contractors may effectively result in considerable employment and tax-related costs associated to, among others, unpaid ESA benefits (vacation, statutory holidays and termination notices), unremitted income taxes and contributions to employment insurance and pension plans.   A well-written contract signed by both parties that clearly indicates a common understanding of the mutual intention of the parties is critical.  Nevertheless, the ongoing relationship between the two parties must continue to reflect the terms of the written agreement. Given the latest set of changes to the employment legislation, entrepreneurs and employers may wish to review existing contractors’ agreements and conduct periodic on-site assessment to ensure that the contracting relationship has not evolved into a dependent contractor or employer-employee relationship over time.
[1] Hubert v. Way, 2014 ONSC 4426
[2] Glimhagen v. GWR Resources Inc., 2017 BCSC 761
[3] Decision No. 866/16, Workplace Safety and Insurance Appeals Tribunal of Ontario, December 2, 2016.
[4] Sondhi v. Deloitte, 2017 ONSC 2122