Independent Contractor Agreements

Independent Contractor Agreements offer certain benefits including:

• Ability of the contractor to claim certain deductions from taxable income
• Flexibility for the contractor to arrange their own business affairs and work for multiple clients
• Employer avoidance of CPP and EI contributions
• Decreased administrative burden for the employer
• Ability to hire contractors to work on specific time-limited projects without taking on new employees

At the same time, it has become popular for employers to characterize individuals as independent contractors who would otherwise have been considered employees, so as to avoid the legal obligations that arise from an employment relationship. As employees often lack the ability to negotiate fair contracts, they can end up signing away the legal protections afforded to employees in order not to lose the job. For employers, the benefits of hiring independent contractors is often illusory when they find that the workers status is being challenged by the worker or the government.

Are You An Independent Contractor or Employee?

In some cases an individual can be an employee in everything but name. The law does not accept the validity of an independent contractor agreement at face value, but views it as one factor among many in making the determination.

The classic legal test attempts to determine if the individual in question is “in business for himself” (i.e. an independent contractor) by analyzing the following factors:

1. The degree of control exercised by the individual over their work
2. Whether the individual or the business owns the tools, supplies, and equipment required to perform the work
3. Whether the individual has a chance to make a profit
4. Whether the individual has assumed the risk of loss

In other words, is the individual truly in business for themselves or are they working for a superior who is calling the shots? Numerous factors can indicate the legal status of an individual as an employee or independent contractor including:

• The existence or absence of an independent contractor agreement, and the circumstances under which it was negotiated and signed
• Whether they are providing work on an exclusive basis or have the freedom to work for multiple customers
• Whether they work full time or part time
• Whether they attend company meetings, training, and events
• Whether they perform a key role at the core of the business or is more on the periphery

None of the above individual factors are determinative and all of the factors will be assessed in context as a whole to make the determination.

The Risk of Getting it Wrong

Employees should carefully consider any request to work under an independent contractor agreement. In addition to losing out on statutory worker protections, independent contractors are obligated to collect HST for goods and services they provide, and to file taxes as a business. Finding out you are in HST arrears for thousands of dollars can be an eye-opening experience to say the least!

For employers, the potential consequences of misclassifying an employee are potentially more serious. The risks include:

• Being assessed by Revenue Canada for failing to withhold and remit income tax on behalf of the employee, or improperly claiming input tax credits, along with interest and penalties
• Being assessed by Revenue Canada for retroactive payment of CPP and EI premiums including the employee’s portion, plus interest and penalties. Often times an audit is triggered when an individual makes a claim for EI benefits, opening up the company’s entire payroll to scrutiny
• ESA complaints for vacation pay, overtime wages, public holiday pay, termination pay and severance pay
• Common law claims for wrongful dismissal

A “Third Category”: The Dependent Contractor

Employment relationships exist on a continuum with independent contractors at one end, and employees at the other. However, the law also recognizes an intermediary working relationship known as the dependent contractor. Dependent contractors can be thought of as independent contractors who are exclusively, or highly dependent on, a single party as a source of income.

Dependent contractors must be provided with reasonable notice prior to the termination of their contract. In this way, they are treated the same as an employee, based largely on the fact of their economic independence on a single entity, and the unfairness that would result if the law allowed termination of their contract without notice.

How We Can Help

The employment lawyers at Haber Lawyers can assist workers and executives in negotiating employment agreements, and providing advice regarding the risks and benefits of working as an independent contractor. We frequently bring claims through Ontario court and tribunals based on the misclassification of workers as independent contractors, or claims based on “dependent contractor” status.

We also frequently advise businesses on drafting and enforcing independent contractor agreements, and defending against legal claims based on allegations that a worker was misclassified as an independent contractor.