Toronto Employment Lawyer Advising on Independent Contractor, Dependent Contractor and Employee Status
The classification of a worker as either an employee or an independent contractor significantly impacts both the worker’s entitlements and the employer’s responsibilities under the law. Employers may use the services of an independent contractor to avoid obligations under the Employment Standards Act; however, misclassifying an employee as an independent contractor, whether it was done deliberately or not, may result in significant financial consequences for the employer. These include potential fines from the Ministry of Labour and/or claims from employees for unpaid wages, vacation pay, and pay in lieu of reasonable notice if their employment was terminated.
Haynes Law Firm in Toronto advises employers on worker classification to ensure compliance with current laws and mitigate legal liability related to misclassification. Paulette Haynes, the firm’s founder, is a respected employment lawyer and wrote the definitive guide on non-standard employment arrangements in Ontario. Paulette provides employers with proactive risk management solutions to incorporate into their hiring policies and practices, helps draft employment contracts, and develops internal policies to shield employers from potential claims arising from employee misclassification.
Employees: Defining Characteristics & Entitlements
The Employment Standards Act regulates employee-employer relationships within Ontario and defines an employee as:
- A person, including an officer of a corporation, who performs work for an employer for wages;
- A person who supplies services to an employer for wages;
- A person who receives training from a person who is an employer, if the skill is in which the person is being trained is a skill used by the employer’s employees; or
- A person who is a homeworker (a person who works out of their residence, but not as an independent contractor).
Under the Employment Standards Act, Ontario employees have certain entitlements, including:
- Vacation time or pay in lieu
- Sick days
- The right to take certain paid and unpaid leaves, including parental leave or bereavement leave
- Overtime pay
- Minimum wage
- Reasonable notice for termination without cause, or pay in lieu
Independent Contractors: Defining Characteristics & Entitlements
Independent contractors’ work arrangements are usually associated with the following features:
- More control over how they perform their work (including working conditions and hours, and the ability to hire a third party to complete the work on their behalf). This grants the independent contractor equal bargaining power with the employer;
- Ownership and responsibility for work tools, supplies, and facilities;
- The ability to simultaneously work for multiple clients and jobs of their choosing (if there is no exclusivity agreement);
- Responsibility for paying taxes and pension contributions from their pay;
- Eligibility for certain tax benefits and deductions not available to regular employees;
- No entitlement to statutory or common law employment benefits or protections, such as vacation pay, leaves of absence, or reasonable notice or pay in lieu thereof if the employer terminates the working relationship. Their remedies are instead limited to the provisions of their contract;
- Responsibility for profit and the costs incurred in pursuit of profit, as well as responsibility for loss;
- Liability for errors and wrongdoing.
Employers may be tempted to categorize employees as independent contractors to avoid paying statutory benefits owed to employees and save on operating expenses such as rent, payroll taxes, employee health benefits and technology costs. The penalties for incorrectly classifying employees, however, far outweigh the expense of providing employee benefits.
It is also important to note that independent contractors are distinct from fixed-term contract employees, who are correctly categorized as employees for the duration of their employment contract. Unlike independent contractors, fixed-term employees are entitled to the statutory minimum benefits set out in the Employment Standards Act.
Dependent Contractors: Defining Characteristics & Entitlements
The common law in Ontario has recognized a third type of employment relationship that acts as a middle ground between an independent contractor and an employee: the dependent contractor. Dependent contractors are not employees and are likely to have a contract classifying them as an independent contractor. Dependent contractors, however, work primarily for one employer and earn at least 50% of their income from that employer.
There is not a determinative factor that points to a worker being a dependent contractor. Courts instead review the entire nature of the working relationship, including the following factors:
- The degree of permanency of the relationship;
- The presence of economic dependency;
- The degree of exclusivity in the relationship;
- Length of service;
- Restrictions against working with competitors; and
- The extent to which the worker is devoted to the company.
Like independent contractors, dependent contractors are not employees and are not afforded protection or benefits under the Employment Standards Act. Unlike independent contractors, however, courts have determined that dependent contractors are entitled to reasonable notice of termination or pay in lieu of notice because of their financial reliance on a single employer. The amount of reasonable notice owed to a dependent contractor is not governed by the Employment Standards Act and instead is determined by courts on a case-by-case basis, through consideration of the nature of the employment relationship.
How Courts Determine a Worker’s Employment Status
To determine the nature of a working relationship and a worker’s employment status, courts examine several factors, most of which compare the employer’s level of control to the worker’s level of independence. A greater level of employer control over the work performance suggests an employer-employee relationship, whereas a greater level of independence enjoyed by the worker indicates a client-contractor relationship.
The terms of the employment agreement are not definitive when determining the employment status of a worker. Courts also consider the circumstances of the working relationship, including:
- Who provides the tools needed to perform the work;
- Whether the worker is free to work for multiple clients concurrently or is beholden to one primary employer;
- The worker’s level of control to decide which work to do and how to do it;
- The worker’s risk of financial loss or chance of profit;
- The length and continuity of the working relationship;
- Whether the worker was contracted to achieve a certain objective or result as opposed to being hired for personal services with no specific objective;
- How integral the worker is to the business.
Employer Liability for Worker Misclassification
Employers face steep fines from the Ministry of Labour and potential lawsuits from employees for intentionally or unintentionally misclassifying an employee as a contractor. When a court determines a worker is an employee and was incorrectly classified as a contractor, the employer may be required to pay the employee retroactive vacation pay, overtime pay, and pay in lieu of notice if the employee has been terminated. In situations involving long-term employees or class-action lawsuits brought against an employer by a group of misclassified employees, the cost of court-ordered damage awards can be astronomical.
Additionally, the employer may also face hefty fines, tax bills, interest, and other penalties for avoiding tax obligations through misclassification, such as:
- Income Tax
- Employment Insurance
- Canada Pension Plan premiums
- Workers Compensation premiums
Contact Haynes Law Firm in Toronto to Limit Liability Through Proper Worker Classification
Worker classification has a direct impact on the employment relationship from the moment the employment contract is signed. Employers who misclassify an employment relationship, whether deliberately or in error, run the risk of costly litigation and fines in the future.
Haynes Law Firm, led by Paulette Haynes, is a preeminent Toronto employment law firm with considerable experience in the classification of employees. The firm mitigates the risk of potential fallout for employers by ensuring all employment relationships are correctly classified from the start. Paulette’s seasoned and experienced team of employment law professionals drafts and reviews employment contracts, designs internal policies concerning various employment relationships, and provides guidance with respect to termination requirements. To discuss how Haynes Law Firm can assist your organization, please contact us online or by phone at 416-593-2731.