Aside from the common employee-employer relationship that we are used to seeing in workplaces, sometimes an organization will hire an individual based on an independent contractor-principal relationship. An independent contractor is a self-employed worker hired to perform a specific type of work or task. The two relationships are treated very differently in law and it can be difficult to distinguish one relationship from the other.
What are some differences between Independent Contractors vs. Employees?
In an independent contractor-principal relationship there are fewer obligations on the organization compared to the obligations of an employer to an employee. The following are some examples of obligations employers have to employees but not to independent contractors:
- Providing Statutory Benefits: such as vacation, statutory holiday and overtime pay. Statutory protections, such as leave of absences like parental leave. The benefits an independent contractor receives are determined by the terms of their contract
- Providing reasonable notice of termination or pay in lieu: Independent contractors are only entitled to notice of termination if their contract provides for it, there is no implied right to reasonable notice.
- Remitting appropriate health and income taxes, and contributing to and remitting Canada Pension Pan and employment insurance premiums: independent contractors remit their own statutory deductions and taxes.
It should be noted that courts now recognize an in-between category of workers, known as “dependent contractors.” While they are not employees, unlike independent contractors they are entitled to received reasonable notice of termination by having worked exclusively or almost exclusively and for a long period of time for a single organization.
What Tests Establish an Employee-Employer Relationship?
The definition of “employee” in employment-related statues are not very useful and so courts have relied on the common law tests for distinguishing between an employee-employer and an independent contractor-principal relationship. The following tests have developed through case law and it is important to note that no single fact determines the matter, the facts of each case are considered as a whole:
- Control Test: Does the organization control the individual’s work such as where, when, and how the work is performed? Is the worker free to hire others to perform the work? Are they free to work for other organizations? If the individual does not have independence and control over their day-to-day work it is likely the worker is an employee.
- Risk Test: Does the individual have an expectation of profit or have any risk of financial loss? If the worker does not face a risk of not receiving payment for their services they are more likely considered to be an employee.
- Organization Test: Are the services performed by the worker essential to the business? For example, an individual who is hired to clean the office after business hours is less likely to be considered an employee than a receptionist.
- Durability and Exclusivity Test: Where an individual performs work over a long period of time and has no other clients they work for, it is more likely that the courts will find that the relationship is an employer-employee.
- Tools Test: Does the worker have and use their own tools? If they do, this would weigh more in the favour of an independent contractor relationship especially if the cost of the tools are significant in value.
Jurisprudence is clear that it is the substance of the relationship that determines the employment status of the worker. In Mckee v Reid’s Heritage Homes Ltd., 2009 ONCA 916, the court outlined the following five principles for determining whether a worker is an employee or a contractor:
- Whether or not the agent was limited exclusively to the service of the principal;
- Whether or not the agent is subject to the control of the principal, not only as to the product sold, but also as to when, where and how it is sold;
- Whether or not the agent has an investment or interest in what are characterized as the “tools” relating to his service;
- Whether or not the agent has undertaken any risk in the business sense or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission;
- Whether or not the activity of the agent is part of the business organization of the principal for which he works. In other words, whose business is it?
Furthermore, whether or not the parties intended their relationship to be characterized in one way or another is generally irrelevant to the analysis of whether an employee-employer relationship existed. For example, in Ligocki v Allianz Insurance Company of Canada, 2010 ONSC 1166, the Plaintiff readily admitted that, at the time he entered into a contract with the Defendant, both parties shared a common understanding that, for tax purposes, the Plaintiff was to be characterized as an independent contractor. Citing Evans JA’s dissent in Royal Winnipeg Ballet v. M.N.R., 2006 GCA 97 the Court in Ligocki observed at paragraph 45:
As Evans J.A. notes, parties will likely be motived by self-interest in characterizing their contract, not necessarily looking to the factors that a court must consider
When the plaintiff sought to identify himself first as an independent contractor and more recently, after the fact as an employee, he was simply trying to take advantage of the benefits that each of those classifications had for him. This is the perfect example of Evan’s J.A.’s prediction and the reason why ultimately the intention of the parties does not assist in determining the legal character of the relationship.
This same approach was adopted at paragraph 11 of Legge v TEKSmed Services Inc., 2013 ONSC 5543:
In Ligocki v. Allianz Insurance Co. of Canada, 2010 ONSC 1166 (CanLII), 100 O.R. 3(d) 624, the Court found that the employee’s use of an incorporated entity did not trump the determination that he was, at all times, an employee. Justice Hennessey found that the situation in that case had no indicia of an independent contractor relationship except in the manner in which the Plaintiff was paid and how he reported his income.
This analysis applies to the case at Bar, where the employer himself suggested the incorporation to the employee. All job descriptions, decisions for promotions or demotions, all direction and instruction came from Mr. Ted Shipley who represented TEKSmed.
Finally, in a recent employment class action, Omarali v Just Energy, 2016 ONSC 9094, Justice Belobaba observed in paragraph 20 that “little weight is given by courts to how the parties describe their relationship in the contractual agreement because this is often self-serving.” Justice Belobaba continued:
A worker can simultaneously be an employee under the ESA and an IC under, say, the Income Tax Act. Rulings by the CRA or the WSIB or other administrative agencies that the Just Energy sales agents are ICs and not employees are interesting and to a point relevant, but they are not determinative. What counts, and the only thing that counts here is whether the ICs are employees under the ESA as determined by the application of the common law test set out above.
What is the takeaway of all this? Courts provide greater weight to the substance (what actually happened) of the relationship rather than the label (what the contract says) of the relationship. A worker is not an independent contractor only because the parties intended it to be that way.
Why is this distinction important?
An independent contractor-principal relationship can be a fruitful relationship when used in the appropriate circumstances. Unfortunately, organizations or employers misuse the label of independent contractor to avoid their obligations to the employees as an employer.
If you have been terminated and there are issues surrounding the status of your relationship, it is best to talk to a lawyer specializing in Employment Law as soon as possible. Please contact Monkhouse Law today for a free 30-minute phone consultation to discuss your options.