|Employee or Independent Contractor?|
By: Jayson Schwarz and Aaron Grinhaus
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The alarm clock fails to ring, and you wake up and bolt out of bed straight for the door. You make it into to work just before nine o’clock, gasping. What motivated this exasperating exercise? Was it a fear of being fired or a fear of losing business? In today’s marketplace we have bosses and employees, and then there are those who fall in the gray area of “consultants” or “independent contractors” (“IC”), who are “hired” or contracted by businesses, though not in an employment capacity. These ICs are self-contained, independent businesses, which, on any given day, could be easily confused with the employee occupying the office next door. Given this opaque distinction, how does one know if someone is an employee or a consultant, and why does it matter?
It is not easy to tell if someone toiling away in a business is an IC or an employee simply by observing his or her work activity or habits. In 67112 Ontario Ltd. v. Sagaz Industries Canada Inc., the Supreme Court of Canada sought to identify exactly what elements distinguished those who are ICs from those who are actual employees. The Court held that that “the central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account”, or in simple terms is the person really working for him or herself. The court considered the following factors:
The existence of these factors is a question of fact and will depend heavily on the circumstances of each case. The Court made this analytical effort in order to help clarify this distinction as the difference between an IC and employee has a significant practical effect on the employer’s obligations and the worker’s rights. Remember you are a contractor when you hire an IC and an employer when you hire an employee.
An employer has a number of legal obligations when it comes to employees. An employer is required to make source deductions from an employee’s paycheque and remit those deductions to the appropriate level of Government. These deductions may include without limitation: Income Tax, Canada Pension Plan, Ontario Employer Health tax and Employment Insurance, and require a significant accounting and administrative exercise on the part of the employer. If the Canada Revenue Agency discovers that these deductions have not been collected and remitted, or makes a determination that an IC is in fact an employee, the contractor now employer could face penalties and even interest charges on those amounts. In fact a contractor deemed to be an employer might end up paying an IC without deduction and then after an assessment having to remit the tax. A contractor hiring a true IC is not responsible for making these deductions. Furthermore, a contractor is not required by law to provide a true IC with vacation pay, overtime, severance or benefits, unless those items are specified in the contract negotiated by the IC. In certain industries an employer is also required to remit premiums under the Workplace Safety and Insurance Act, which is not required by a contractor when dealing with a true IC.
In addition, an employee is generally employed indefinitely, and an employer is required to give notice or pay in lieu of notice before termination. On the other hand an IC is usually hired for a fixed period of time to fulfill a specific need. Contractors can hire specialized staff for short term projects as opposed to spending time and money training existing employees to do one-off jobs. Once the IC relationship is over, generally the contractor owes no further obligations to the IC. This arms-length relationship also results in the contractor having less control over the IC, as opposed to an employee, demonstrating that the obligations owed to an employer/ contractor generally vary based on the classification of employee or IC.
The obligations owed to an employer also vary in that employees owe obligations of confidentiality, good faith and loyalty to their employer; whereas, unless the contract states otherwise, ICs owe only an obligation of good faith to the contractor. This is reflected in the obligations owed to an IC, which are few. An IC can expect fewer benefits, if any, as compared with an employee. Furthermore, employees are guaranteed minimum employment standards by statute.
Since the IC is running his or her own business, it is far easier for him or her to deduct expenses from taxable income, as opposed to an employee whose ability to do so is severely limited. The fact that source deductions are not being made for an IC means that the IC receives more immediate income, but it is the responsibility of the IC to report its own taxes. Being your own boss also allows the IC to choose who to work for, whereas an employee is relegated to one place of employment and one permanent employer; however, this also means that being an employee gives the individual peace of mind that he or she cannot be terminated without notice or pay in lieu of notice, as opposed to an IC whose employment is generally time limited. Finally, it is important to note that an IC may need a license or other form of certification to carry on its type of business. The IC will be required to pay for all licensing and certification on its own, as opposed to an employee who could have such expenses paid for by the employer. An IC also has to register a business name, incorporate, buy liability insurance, etc. in order to protect itself and meet regulatory requirements. Finally, if an IC does not have an office, it will have to ensure that he or she can run the business from home and not violate any zoning restrictions.
There, now that you have all of that there is one more twist. The law now suggests that the facts in any given case for wrongful dismissal may determine that the individual you thought was an independent contractor, was not independent, but dependent and in terminating the relationship you are still responsible for the common law periods of compensation if the termination was wrongful. The complexity suggests you should consult a lawyer to try and identify potential issues before you have a problem.
In the current marketplace which is characterized by uncertainty and unpredictable employment trends, it is difficult to gauge which choice would be best for someone with an opportunity to pursue an IC or employment route. A lawyer can help advise you on the best course of action given your financial circumstances, skill sets and the demand for your type of skill or expertise, and your potential rights and obligations under the law. Remember this is a critical question and failing to make the right decision could result in significant costs if there is an adverse finding in a Government audit.Jayson Schwarz is a Toronto real estate lawyer and partner in the law firm Schwarz Law LLP. Aaron Grinhaus is his Associate.