Employee v. Contractor

Know the Difference

Understand the Risks

As a business owner you may need to determine whether to hire full time employees or use independent contractors. Don’t make the mistake of thinking they are essentially the same thing. They aren’t. And the risk to you in mis-classifying them is increasing in Canada!

Anyone who works for you in much the same way as any of your other employees, is likely not an independent contractor and therefore you can not legally shield yourself from associated liabilities (wages, overtime pay, stat pay, payroll contributions, WCB, benefits… I could go on).

A true independent contractor more closely resembles someone like your lawyer, plumber or an HR consultant. These folks have other clients, works for themselves and works for you on their schedule. They have no expectation of receiving work from any one of them on any given day.

Let’s look at a recent headline.

 “Uber drivers in Ontario have launched a class-action lawsuit against the ride-sharing company asking the court to find that they are Uber employees rather than independent contractors”.

The Court of Appeal for Ontario just released its decision which paves the way for a proposed class-action lawsuit in which drivers seek a declaration they are “employees” of Uber and not independent contractors.

The Risk

If Uber is to be found to be an employer of these drivers, the company would have to pay previously unpaid pension, employment insurance and workers’ compensation premiums for each of its drivers. The retroactive liability on this, not including violations, could reach $400 million.

Back to your business.

You likely pay both kinds of workers to do tasks for your business, but they are not viewed the same by the Canada Revenue Agency (CRA). Go online and look to the CRA Employee or Self-employed Guide: RC4110(E) Rev.18, in which they examine whether a person is an employee or a self-employed individual using a two-step approach.

Step 1
Did the two parties intend to enter into a contract of service (employer-employee relationship) or did they intend to enter into a contract for services (business relationship)? To decide the parties’ intentions, CRA  gets a copy of the contract, or testimony by the parties and examine the parties’ actions. Both parties’ intentions form part of the context that they analyse.

Step 2
They ask the worker and the “employer” questions related to the following elements:

-the level of control the payer has over the worker’s activities
-whether the worker or payer provides the tools and equipment
-whether the worker can subcontract the work or hire assistants
-the degree of financial risk the worker takes
-the degree of responsibility for investment and management the worker holds
-the worker’s opportunity for profit
And any other relevant factors, such as written contracts.

Your exposure

An independent contractor working for you may file a claim with the Ministry of Labour if they feel they have been mis-classified. If you fail the two-step test, you may be found in contravention of Employment Standards Act, and like Uber- you may find yourself on the wrong end of a claim for unpaid and retroactive worker entitlements.

Closing thoughts

Know the law. If you do use the services of independent contractors, ensure they “pass the test”- and if doubt- seek counsel
(from a real independent contractor).