If it looks like a duck, swims like a duck and quacks like a duck, it probably is a duck. Applied to the employment law context, even if a contract labels a worker an “independent contractor,” they may be an employee.
This article looks at the differences between employees and independent contractors and how to determine which classification applies to a worker. We also look at why this matters. In Ontario, misclassifying an employee as an independent contractor brings a number of risks for employers.
Employee or independent contractor?
According to the Employment Standards Act (ESA), an employee is a person who performs work for, or supplies services to, an employer for wages; who receives training from an employer, provided that the skill being trained is used by the employer’s employees; or who is a homeworker, that is, works for compensation from their residence but is not an independent contractor.
Employees have entitlements under the ESA, such as minimum wage, reasonable notice for termination without cause and vacation pay.
Independent contractors, on the other hand, are in business for themselves. They are not covered by the ESA and have more control over their work. For example, they determine when and where the work is performed and may be able to work for multiple clients at the same time.
Unlike employees, independent contractors are responsible for paying income tax directly to the Canada Revenue Agency (CRA). There are other differences, too. For example, while employers make Canada Pension Plan (CPP) contributions and pay Employment Insurance (EI) premiums for employees (and also deduct employee contributions), independent contractors are responsible for making CPP contributions.
H2: How do courts distinguish between employees and independent contractors?
Courts decide whether a worker is an employee or an independent contractor by trying to determine whether the person is in business on their account (independent contractor) or simply providing services for another entity (employee).
To answer this question, courts look at a range of factors, none of which are determinative. The relative weight given to each depends on the particular circumstances of each case.
Factors include whether the worker:
- and their activities are subject to the control of the entity;
- provides their own equipment or tools;
- hires their own assistants;
- takes on any financial risk;
- is able to provide services to other entities; and
- has the opportunity to profit from the performance of their tasks.
H3: Plaintiff was an employee despite being paid by another company
The recent case of Scamurra v Scamurra Contracting (Scamurra) before the Ontario Superior Court of Justice provides an example of how the court undertakes such an analysis.
The plaintiff worked full-time for a family company that provided disposal services. He drove a company truck, delivering and retrieving garbage bins from customers. He also hired part-time drivers, dispatching them to locations using a company phone. He had no written contract, but the company argued that he was an independent contractor because payments were made to the plaintiff by another family company that invoiced the disposal company for the plaintiff’s work.
Justice Petersen decided that the plaintiff was an employee. Her Honour found that the company provided all the required equipment, the plaintiff hired drivers but on behalf of the company, the plaintiff was not exposed to any financial risk and did not share in the company’s profits, and the plaintiff worked exclusively for the company for seven years.
The fact he was paid via another company, while relevant, was not determinative. Her Honour explained that compensation regimes may be structured differently for reasons other than relating to the existence of an employment relationship. In this case, the evidence showed that the disposal company paid the plaintiff through another company to conceal his income from claims by his ex-wife in family law litigation. While this was “deceitful and condemnable,” it didn’t impact whether the plaintiff was an employee or an independent contractor.
Why does worker classification matter?
Employers who misclassify an employment relationship, whether deliberately or in error, run the risk of expensive litigation and fines.
Potential claims by employees
An employee may bring a wrongful dismissal claim, even if classified by a contract as an independent contractor. They may be entitled to a period of common law reasonable notice. The court may also require back pay for other things, such as unpaid vacation pay.
For example, in the Scamurra case, the plaintiff was not given sufficient notice of termination and was wrongfully dismissed. The judge awarded the plaintiff a 22-month notice period, which, even after being reduced by six months to reflect the period the plaintiff returned to work for the disposal company, was still an award of approximately $120,000.
Possibility of fines under the ESA and other penalties
Employers may also be liable for extensive fines if they misclassify an employee. Under the ESA, misclassifying an employee as an independent contractor is prohibited. The maximum fine for a first offence for a corporation is $100,000.
In addition, penalties may be levied by other agencies. For example, employers may be pursued by the CRA for failing to pass on income tax, CPP contributions and EI premiums for employees.
Contact Haynes Law Firm in Toronto for Advice on Proper Worker Classification
Worker classification has important implications for both workers and organizations. Haynes Law Firm mitigates the risk for employers by ensuring all employment relationships are correctly classified by properly drafting employment contracts and designing internal policies concerning various employment relationships. The firm also helps workers obtain employment entitlements if misclassified as independent contractors.
Paulette Haynes, a preeminent Toronto employment lawyer, has considerable experience in the classification of employees. To discuss how Haynes Law Firm can assist you or your organization, please contact us online or by phone at 416-593-2731.