Why Is it Important to Know Whether an Individual Is an Employee or an Independent Contractor?

A worker’s employment status directly impacts their entitlement to various benefits and rights available under employment legislation, including vacation time/pay, sick days, paid and unpaid leaves, overtime pay, minimum wage, and reasonable notice for termination without cause.

Do Independent Contractors Fall Under Employment Standards Laws in Ontario?

No. In Ontario, many employees fall under the Employment Standards Act, while non-unionized employees may be governed by the standards of provincial or federal labour laws. Independent contractors are not protected by the standards in any legislation applying to employees. They are only entitled to the same rights if they are expressly incorporated into the contract between the employer and the independent contractor.

Is a Written Agreement Sufficient Proof That a Worker is an Independent Contractor?

A written agreement between the client (employer) and the independent contractor may act as evidence that the independent contractor is not an employee. The contract should carefully set out the pre-determined terms and conditions of the engagement and clearly state the nature of the working relationship.

However, simply stating a worker is an independent contractor in an agreement may not be sufficient evidence of a client-contractor relationship if the true nature of the arrangement is more akin to employer-employee. In the event of a dispute, a court will look at several factors to determine whether the independent contractor is, in fact, an employee.

What Are the Advantages of Hiring Employees vs. Independent Contractors?

Hiring workers as employees offers several benefits to employers, including:

  • The ability to set the days and hours during which the employee will work;
  • Facilitating close working relationships with the ability to supervise and monitor the employee’s work;
  • Retaining ownership of work product and copyright in most cases; and
  • Encouraging company loyalty and streamlined training as the employee grows with the employer’s business.

There are also several advantages to hiring independent contractors. These include:

  • No requirement to provide notice of termination or severance pay;
  • The employer is not responsible for withholding remitting tax or contributions to the Canada Pension Plan (CPP) or Employment Insurance (EI) on behalf of the independent contractor;
  • No need to provide training or pay for benefits;
  • Independent contractors are often highly skilled in particular areas, allowing for increased work production efficiency; and
  • Staffing flexibility – for example, an independent contractor might be hired to provide their expertise and skills for a short-term or limited project.

What Happens if an Employer Misclassifies an Employee as an Independent Contractor?

If a court determines that an employer misclassified a worker as an independent contractor when they were an employee, it can create substantial liability for the employer. The employer could face steep fines from the Ministry of Labour and hefty tax bills, interest, and penalties owing to Canada Revenue Agency for avoiding tax obligations (e.g., income tax, Employment Insurance, CPP premiums, and Workers Compensation payments). Further, the employer may face lawsuits from misclassified employees, including claims for unpaid vacation pay, overtime pay, and pay in lieu of notice.