Independent Contractor or Employee: Do You REALLY Know Which One You Are?

Independent Contractor vs Employee

One of the most common issues in employment law is determining whether a worker is an employee or independent contractor. Or perhaps they are a dependent contractor.

Identifying the status is important for the purposes of determining the worker’s rights while carrying out his or her work as well as upon termination.

There are also significant financial considerations for all parties involved. For example, pursuant to the Employment Standards Act (ESA), an employee has the right to:

• vacation pay and time
• statutory holidays
• overtime pay
• notice upon termination
• The right to collect employment insurance benefits

An independent contractor, on the other hand, does not have these rights unless it has been negotiated within the service contract.

Note that simply having an individual sign a contract stating that he or she is working as an ‘independent contractor’ and not an employee is not determinative of the issue. The courts, administrative tribunals and the Canada Revenue Agency will look beyond the wording of such contracts and delve into the relationship of the parties in order to determine its true character.

Although there is no bright line test set out on the issue, there are various key factors that are examined to make a determination of whether someone is an employee or independent contractor, including the level of control over the work each party has, ownership of tools and the opportunity for profit and loss.

Level of Control

How much control does the employer have over the worker? Who sets the hours of work? Can the worker refuse the work? Is the worker supervised?

In a traditional employment relationship, the employer sets the hours of work, determines the work that is to be performed, and supervises the employees performing the work. By contrast, an independent contractor would set his or her own hours of work, and scope of work with minimal supervision from the employer.

Ownership of Tools

Who owns the tools and equipment, and who is responsible for replacing them?

In a typical employment relationship, the employer owns the tools and equipment needed to complete the work and is responsible for replacing them. By contrast, in a business relationship the independent contractor would typically have his own tools and equipment to complete the work.

• Read about our Uber Class Action Lawsuit involving Independent Contractors

Opportunity for Profit and Risk of Loss

Can the worker negotiate his or her fee? Can the worker hire employees or subcontract the work? Does the employee bear any expenses in completing the work?

In a typical employment relationship, the employee is paid a set amount and bears no risk of loss, or incurs any expenses. By contrast, in a business relationship the worker has an opportunity to negotiate his or her fee, as well as incurs expenses directly related to the work being performed.

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Dependent Contractors

Workers who are determined to be contractors and not employees can still be entitled to reasonable notice upon termination, if they are deemed to be dependent contractors as opposed to independent contractors. Note that “dependent contractors” is not a third category alongside employees and independent contractors. Instead, they are a subset of contractors. In other words, when characterizing the status of a worker, the first step is to analyze whether the worker is an employee or a contractor. If contractor, then a determination is made whether the contractor is a dependent or independent contractor.

The relevance of this issue pertains to notice upon termination. In short, when a dependent contractor relationship exists, then reasonable notice will have to be provided on termination. Much like an employee, the length of the notice will vary on a case by case basis and can be specified in a contract. However, there are no minimum standard notice requirements for dependent contractors like there are for employees under the ESA.

There are various factors that are considered when analyzing whether somebody is a dependent or independent contractor. These include the factors cited above when determining whether a worker is an employee or contractor. However, the key factors are exclusivity and economic dependence. In a nutshell, if the contractor exclusively performs his or her work for one company, then the worker is entirely dependent on that one company for income. Accordingly, the worker would be in a position of economic vulnerability to the one company (much like employees are) and thus entitled to reasonable notice of termination as a dependent contractor.

Overall, employment relationships exist on a continuum with the employee and independent contractor at opposite ends of the spectrum and dependent contractors somewhere in between. The rights and entitlements of workers depend on the degree of their economic vulnerability to the employer. The more vulnerable the workers are, the greater the protections that are afforded to them.

Lessons for Employees

Do not assume! Just because your contract or employer calls you an ‘independent contractor’, it doesn’t mean you are one.

Always seek legal advice if you are fired from your job. This will ensure that you aren’t leaving severance pay entitlements that you’ve earned on the table.

Lessons for Employers

Define the parameters of the working relationship. If you wish to employ someone as an independent contractor, set out, in detail, an agreement which defines the parameters of the working relationship. Make sure that there is a concrete reference point if the characterization of employment ever comes under dispute.

Follow through with that agreement. Even more important than setting out the terms in an agreement is following through with them.

Use enforceable termination clauses. Take this approach for both contractors and employees so that, regardless of the legal characterization, your liability upon termination will be the same.