Workers can largely be classified into two types of categories: contractors and employees. Employees and contractors have different types of rights at work. Getting it right (or wrong) is crucial for both workers and employers.
Employees are covered by employment laws such as the Employment Standards Act, the Canada Labour Code, or the common law. These laws provide important protections to employees, including:
notice of termination, termination pay, severance pay;
vacation time and pay, and overtime pay;
sick days, maternity and parental leave
easier access to employment insurance (EI), and others.
Probably the most important right that employees have that most contractors do not is a right to severance when they are dismissed. Employees also have access to specialized courts to enforce their rights, like the Ministry of Labour (MOL), Ontario Labour Relations Board, or Canada Labour Code Adjudication.
Contractors are viewed largely as independent of the company they are providing services to. While contractors do not have the protections that employees have, they have advantages such as:
Not having their pay deducted by employment insurance (EI) contribution if they do not self-enroll;
They control their taxes, and the company who pays them do not have to withhold their taxes;
Able to determine and control their own work, including providing services to other companies;
While independent contractors are not entitled to severance, they can potentially earn much more than a similar employee and have a higher degree of flexibility in their day-to-day.
How do we tell the difference?
Just because a worker and company wants to be in an independent contractor relationship doesn’t mean it is automatically such a relationship. The Canada Revenue Agency (CRA), Ministry of Labour (MOL), Labour Board, and the courts can all make an independent determination of whether you truly are who you say you are.
Further, just because a worker incorporates a company to provide services to another company, does not mean they cannot be an employee. The substance of the relationship matters.
There are several factors factor into the determination of whether a worker is a contractor or employee at law. A worker is likely an employee if:
The company exercises a large degree of control over the worker;
The company provides the tools and equipment for the worker to use;
The worker cannot subcontract or hire their own workers;
The worker takes little financial risk; and
The worker does not have a great opportunity for profit in the performance of their work.
One helpful question to ask is, “Whose business is it?” If the worker is operating their own business they are a contractor. If it looks like the worker is integrated and carrying on the business of the company, than they may be a worker.
A simple example is the plumber who is called in to fix a busted sink. The plumber brings their own tools and does their work their own way. The plumber bears the risk and opportunity to profit.
Problems with Misclassification.
It is all too common that employers want to hire workers as independent contractors rather than employees. It saves time and money, and offers great flexibility. However, there can be huge liability to a company who hire employees and call them independent contractors. Here are some examples:
Bad Contracts and Severance Obligations
If there is a contract between the independent contractor and the company, the contract will likely not have an enforceable termination clause. The absence of such a clause will mean that the worker, if found to be an employee, will be entitled to severance at common law, much more than what they would be entitled to had the contract had a clause that provided they would only be provided the minimum severance under the Employment Standards Act.
Similarly, independent contractor agreements provide an end date for when the agreement ends, i.e. a fixed term contract. The problem with fixed term contracts, in combination with an unenforceable termination clause, is that the severance owed to an employee who is terminated before the term will be the compensation they would have earned for the remainder of the term! This can be quite substantial if the worker is dismissed early on in the fixed term contract.
The above poses huge liability to companies who classify their contractors. On the flipside, employees who find themselves in these situations will be entitled to substantial severance.
Vacation and Overtime Pay
All employees under the Employment Standards Act are entitled to vacation time and vacation pay. Employees with less than five years’ service are entitled to two weeks or 4% pay. Employees with more than five years are entitled to three weeks or 6% pay. Most independent contractor agreements will not provide that the worker will be paid vacation pay. If the company requires a lot of independent contractors, and they are all found to be employees, then the liability for vacation pay can quickly add up.
Most employees are also entitled to overtime pay at 1.5 their basic rate after every hour worked in a week over 44, even if they are paid an annual salary. Again, overtime pay can quickly add up over time and over many workers.
Employees who are owed vacation pay and overtime pay can file a claim with the Ministry of Labour (MOL), free of charge. An Employment Standards Officer will make a determination, which can be appealed to the Ontario Labour Relations Board (Labour Board). While the process is free for employees, the process can be resource-consuming for employers.
EI and CPP Payments
If the Canada Revenue Agency determines that a company’s independent contractor is actually an employee, the company will have to pay the proper EI and CPP payments that it ough to have paid during the employee’s tenure.
For workers who worked as independent contractors and are subsequently found to be employees, they could apply for EI and be entitled to employment insurance benefits provided they meet the requirements. True self employed independent contractors cannot receive EI if they do not enrol into the EI program.
Not all contractors are independent. Even though not an employee, some contractors may be dependent contractors because of a worker’s reliance or exclusivity with the company. The major difference for dependent vs independent contractors is that dependent contractors are entitled to notice of termination at common law, or severance at common law.
It’s best to get relationships right.
For employers, be sure to accurately assess whether the worker you have is an independent contractor or employee. The longer you employ a misclassified employee, the greater risk you may face. Some businesses put contingencies in their independent contractor agreements to help reduce liability in the event their worker is found to be an employee.
For employees, just because the company you work for calls you an independent contractor does not necessarily make you one. In the event of a termination, you should seek legal advice to determine whether you have any rights to which you may be entitled.