Stiff New Penalties For Hiring Independent Contractors Who Are Really Employees
Alan Riddell and Kyle Van Schie
Recognizing when your
workers are "employees" and when they are "independent contractors" is vital, particularly given the new prohibitions and penalties that the Ontario Government introduced this past Fall, on all employers who misclassify their employees as “independent contractors.”
Doing so is also vital to avoiding significant future claims from the CRA and from your own staff. If your workers are in fact "employees." you owe both them and Revenue Canada a number of financial and legal obligations, including the obligation to provide them with reasonable pay-inlieu of notice, statutory termination pay and statutory severance pay upon termination of their work, the obligation to deduct and remit income tax from their pay and the obligation to pay into statutory compensation funds (Worker's Compensation, Employment Insurance, EHT, etc.)
On the other hand, if your workers are "independent contractors" or “consultants” you owe none of the aforementioned obligations to either Revenue Canada or the workers themselves.
Many people wrongly believe that the distinction between employee and independent contractor turns on whether the worker calls him/herself an independent contractor and has an HST number. This widely held misconception causes many employers to mistakenly assume that their workers are independent contractors, rather than employees, simply because their workers signed contracts explicitly stating that they are independent contractors rather than employees.
Kyle Van Schie
This misconception can prove highly costly to employers who terminate a worker’s employment in the honest, but erroneous, belief that he/she is an independent contractor who can be terminated pursuant to the terms of his/her contract, rather than an employee who is entitled to termination pay and severance pay under the Employment Standards Act.
The failure to pay into worker's compensation and employment insurance funds in the mistaken belief that the worker is an independent contractor exposes your company to the risk of being ordered to pay all of the accumulated unpaid arrears owing to these funds, when it is later proven that the worker is, and always was, an employee. In addition, the Income Tax Act makes you liable for all income tax owed to the federal and provincial governments by any of your workers who fail to pay such tax themselves, and who later turn out to have been employees rather than independent contractors.
Finally, commencing this past Fall, your organization will now face the risk of stiff fines, pursuant to new Bill 148, for mistakenly classifying any of your workers as “independent contractors” rather than as “employees.”
In reality, a contract or any other Agreement between yourself and your workers stating that they are working for you as "independent contractors" rather than "employees" is largely irrelevant to the determination of whether or not they truly are your employees in law. The same is true of the assignment to these workers of an HST number. The courts have said that the determination of whether a worker is an employee or an independent contractor turns on the substance of the working relationship, that is to say, on what he or she actually does in his or her work, rather than on the description given to that relationship.
The courts have also repeatedly ruled that, depending on the substance of the working relationship, a worker may be an employee and not an independent contractor even though both that worker and his/her employer hold the honest belief that that is not so! As in many areas of law, an honest but mistaken belief, on this issue, is no defence to the consequences of your mistake.
In law, the determination of whether a worker is an employee or an independent contractor turns on the following questions:
1. Who controls the manner in which the worker carries out his/her work?
Who determines when he/she starts and leaves, where he/she does the work, and how he/she does that work? The more it is the worker, and not you, who exercises control, the more likely it is that a court will accept that the worker is an independent contractor rather than an employee.
2. Who owns the tools or equipment which the worker uses to carry out his/her work?
Does the worker provide his/her own computer, vehicle, cell phone, etc., to carry out his/her work during the working day? Does he/she work out of his/her own office or out of an office that you, yourself, or one of your clients supplies?
The more it is the worker, and not you, who provides these tools/equipment for carrying out work assignments, the more likely it is that a court will accept that he or she is an independent contractor rather than an employee.
3. In carrying out the work, does the worker run a risk of personal financial loss or stand a chance of profit?
Is he/she paid a fixed hourly or weekly salary, which is due to him/her regardless of the speed and efficiency with which he/she discharges his or her work assignments? Or is he/she paid on an assignment-by-assignment basis, or by piecework, such that the speedy execution of the assignment can result in his/her being able to take on new assignments and hence personally earn additional remuneration for his/her gain?
The more the worker personally runs a risk of loss or a chance of profit in the discharge of work responsibilities, the more likely it is that a court will find him/her to be an independent contractor rather than an employee.
4. How well is the worker integrated into your company?
Does he/she work on-site or out of his/her own work premises? Is he/she working for your company on a permanent basis or simply working on a temporary, one-time assignment? Does he/she work exclusively for your company or does he/she work simultaneously for other companies?
The less the worker is exclusively, completely and permanently integrated into your company's workforce, the more likely it is that a court will find him/her to be an independent contractor rather than an employee.
A court will look at all of the aforementioned variables when determining whether the substance of the relationship between you and your employees is that of an independent contractor or that of an employer/employee. There is no magic formula or arithmetical equation for making this determination. The court may very well determine that your workers are independent contractors, even though only one of the four variables listed above points to them being independent contractors, if the case is particularly strong on that one variable. Conversely, the court may very well determine that your workers are employees, even though three of the four variables point to them being independent contractors, if the Court determines that one variable to be an extremely important one.
Accordingly, when there is any doubt as to whether the relationship between you and your workers is one of employer/employee or independent contractor, a quick phone call to a lawyer who is well-versed in employment law would be highly advisable. Ultimately, that phone call could save you from having to later pay hundreds of thousands of dollars in (i) accumulated unpaid statutory remittances to Revenue Canada, (ii) fines to the Ministry of Labour and (iii) pay-in-lieu of notice to the workers themselves.
Alan Riddell and Kyle Van Schie are Ottawa lawyers who specialize in labour and employment law and who work at the law firm of Soloway Wright LLP.