Independent Contractor vs. Employee
By LawyerLinx,
September 08, 2015

Whether you are an individual looking to be hired or a business owner doing the hiring, knowing the difference between an independent contractor and an employee is important. While functionally, the work done may be quite similar, legally, the differences can have serious implications for all parties involved. Knowledge is power, and choosing the right form of employment for your particular needs is key to any successful venture.

Why does it Matter?

Your rights and obligations as an employer change dramatically depending on the classifications of the individuals you have working for you. Generally, employees have more statutory rights than independent contractors. These may include a right to collect benefits, a right to reasonable notice of termination, paid vacation, public holidays and protection under the Ontario Human Rights Code. Secondly, under the Canada Income Tax Act and the Canada Pension Plan Act employers have an obligation to withhold income tax as well as contribute to the Canada Pension Plan (CPP) or Employment Insurance (EI) on behalf of their employees. The same cannot be said for independent contractors.

For the above reasons, hiring an independent contractor can be very alluring and when done correctly, a valuable and useful means to achieve your business goals. The danger arises when an employee is incorrectly classified as an independent contractor. If the court finds that an independent contractor was incorrectly classified as an employee, penalties, interest, unpaid taxes, CPP and EI premiums will all have to be paid.

How does the court decide who is an Independent Contractor and who is an Employee?

The lines between hiring an Independent Contractor and an Employee can easily become blurred; luckily the courts have developed a series of tests and factors to consider when determining if the contract of employment is one of service or one for service. The former being drafted between an employee and employer and the latter applying to work done by independent contractors. While the subject has been considerably adjudicated it is important to note that there is no single conclusive test. Rather, the court will look at the total relationship between the parties and asks if the person engaged to perform the services is performing them as a person in business on his own account OR for someone else, i.e the business owner. (671122 Ontario Ltd. v. Sagaz Industries Canada Inc).

The Test

In the Montreal (City) v. Montreal Locomotive Works Ltd (1946) case, the courts developed a 4-pronged test to determine a workers status. The test considers:

  • the extent to which the worker is subject to the control of the payer
  • whether the worker provides his or her own tools;
  • whether the worker has a chance of profit;
  • whether the worker has a risk of loss.

This test was applied and developed in Wiebe Door Services Ltd. v. M.N.R., a leading cases on the subject. Wiebe Door was a business that installed and repaired overhead doors, hiring independent contractors to perform the work independently. The Minister of National Revenue disagreed with this classification and claimed the independent contractors should be assessed for EI and CPP. The courts applied and developed the test in Montreal Locomotive, weighing the various factors as well as considering the extent to which the employees work was integral to the business. It found an independent contractor’s work is an accessory to the business while an employee’s work is integrated into the business. The court ruled in favour of the Minister and the test is still widely used today.

Intention

In a recent 2013 decision of 1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue), the Federal Court developed a two-step test. Under the first step, the court considered the subjective intent of the parties as demonstrated through contracts between the parties, GST registration, invoices for rendered services, and income tax filings. Although the subjective intention of the parties is relevant, the court confirmed that it, “cannot trump the reality of the relationship as ascertained through objective facts."

Applying the Weibe Door and Sagaz test, the second step was to determine “whether an objective reality sustains the subjective intent of the parties.” The Court found that although the intention of the parties may have been to work as independent contractors, in reality they were treated and doing the same work as a regular employee, thus they should be classified as employees and NOT independent contractors.

Consequences for Employers and Employees

So what does this all mean for a business owner who regularly hires employees and/or independent contractors? The takeaway here is twofold:

First, consider the legal relationship you are intending to establish. Explicitly state the relationship the parties intend to achieve. Consider the tests and factors examined by the courts in the Weibe Door and Sagaz cases and be certain that the terms of the contract are consistent with those intentions.

Second, act consistently with the relationship as outlined in the contract. As seen in the Connor Homes case, when deciding on the status of the relationship, courts will consider the objective facts and actual relationship of the parties and are not restricted from looking outside the written employment contract.

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This article should not be relied upon as legal advice - the comments may not be applicable to you and may not be up to date. If you have any questions, you should contact a lawyer.