It can be enticing to hire independent contractors to provide services for your business or organization.
As self-employed workers, independent contractors are responsible for setting their own workplace standards. Employers are not required to provide independent contractors with minimum entitlements under the Employment Standards Act, reasonable notice of dismissal, or withholding/contributions under federal and provincial legislation for income tax, Canada Pension Plan, Employment Insurance, WorkSafeBC premiums and liability insurance.
While this may seem to be an attractive alternative to an employment relationship, there are significant risks and liabilities with hiring an independent contractor (discussed in detail below).
The mutual understanding of the employer and the independent contractor is not the only factor in determining whether an individual is providing services as an employee or independent contractor. The intent of the parties is actually one of many factors which need to be considered in making this assessment.
There is no universal test to determine whether a person is performing services as an employee or an independent contractor. All relationships in the workplace exist on a spectrum; on the one end, there are employment relationships and on the other, are relationships of independent contracting. It can be difficult to determine where on this spectrum the relationship is located, and the consequences of error can be significant.
In considering whether an individual is performing services as an independent contractor, Courts and Administrative Boards consider the key question: “whose business is it” and review the following factors:
Level of control over the worker’s activities;
Whether the worker provides his or her own equipment;
Whether the worker hires his or her own helpers;
Degree of financial risk taken by the worker;
Degree of responsibility for investment and management held by the worker; and,
Opportunity for profit for the worker in the performance of his or her tasks.
No one factor is determinative of the relationship between the parties, and all six factors must be considered together in their entirety and taken together as a whole.
If an individual is incorporated and providing services through this corporation, this is only one factor to be considered. The individual may decide for tax or other reasons to provide services through a corporation and the fact that an individual is paid through a corporation is not determinative of whether an employment relationship exists.
Risks and Liabilities of Independent Contractors:
If the working relationship has been structured as one of independent contracting, but is later deemed to be an employment relationship, the newly deemed “employer” will be responsible for unpaid wages, payroll deductions, remittances, penalties, fees and interest. Consider the following situations:
An independent contractor applies for employment insurance benefits. Employers are legally obligated to remit payroll deductions for income taxes, CPP contributions and employment insurance premiums. If Service Canada deems the independent contractor to be an employee, the employer would be liable to pay retroactive employment insurance premiums, pension contributions, penalties and interest.
The independent contractor may be audited when filing income taxes. If the Canada Revenue Agency determines the independent contractor was providing services as an employee, the employer would be liable to pay retroactive payroll deductions, penalties and interest. The independent contractor may become injured at the workplace and file a claim for workers compensation benefits. At that time, it would be up to the Workers Compensation Board (i.e. WorkSafeBC in British Columbia) to determine if the person was providing services as an employee or independent contractor. If the relationship has been misclassified, the employer would be responsible for, at a minimum, the retroactive payment of unpaid premiums, penalties and interest.
The independent contractor files a claim with Employment Standards for entitlements to unpaid wages such as termination pay, minimum wage, overtime pay, statutory holiday pay, and vacation pay. If Employment Standards determines the contractor was providing services as an employee, the employer will be obligated to pay all unpaid wages in addition to administrative penalties, plus interest. Once a complaint has been initiated, Employment Standards has the discretion to audit the employer for further contraventions which may include deeming other contractors to be employees, and attracting further unpaid wages, penalties and interest. The independent contractor is informed that his/her services are no longer required and commences a legal action in Court for wrongful dismissal damages, claiming that he/she was an employee, and not an independent contractor.
To avoid these types of situations (or to have a defensible argument in place in the event claims/complaints arise), it is important to consider the actual working relationship between the parties and whether it is an employment relationship or one of independent contracting.
Takeaways for Employers:
Considering these risks, it would be prudent for any organization or business that engages independent contractors, or is considering doing so, to carefully consider the risks and benefits and seek the advice of an employment lawyer with experience in making these determinations.
Contact Kelsey Wheelhouse at Davidson Lawyers for legal advice about the right structure to fit your needs. To assist in making the right decision, we provide our clients with the information and tools to classify their workers correctly every time.
Davidson Lawyers – advice you can rely on.
This article is intended for general information purposes only and is not intended to provide legal advice or opinions of any kind. We encourage you to seek legal advice from an employment lawyer for guidance about your particular workplace.