Are they an employee or a contractor?

For the majority of my 23-year career as an employment lawyer and mediator, there have been issues with “contractors” who are really employees in all but name.

As I have written and spoken about countless times, it doesn’t matter what the parties or the contract says; courts and CRA will look at the factual reality of the relationship to assess whether it is truly an independent business relationship or an employer-employee relationship. Misclassification can expose both sides to liability, though the risk is usually greater for the organization.

This issue has become even more prevalent with the rise of the gig economy and increase in non-traditional work. In many cases, the line between an employee and a contractor has blurred, and we have ongoing litigation relating to Uber-type relationships.

Although those are standard arrangements with no room for negotiation, many other employers make the mistake of asking a prospective employee “whether they want to be paid as an employee or a contractor”; that is entirely wrong, as the way they are paid will depend on the nature of the relationship, and not the other way around.

Just to complicate things, the courts have developed a third “hybrid” category of workers: the dependent contractor. Such workers do not enjoy most rights that employees do, but they are entitled to “reasonable notice” of termination, unlike an independent contractor.

The difference between an independent contractor and a dependent one, as the name implies, relates primarily to the degree of dependence that the worker has on the one relationship. Truly independent contractors have several clients and sources of income, whereas dependent contractors derive all or almost all of their revenue from one source (like an employee).

Ontario case looks at distinction

Recently, the Superior Court of Ontario had occasion to consider the distinction between the two types of contractors in 1159273 Ontario Inc. v. The Westport Telephone Company Limited. As sometimes happens, this was a case where the worker had changed status, from employee to contractor, over the course of the relationship. The worker was employed for roughly 19 years before incorporating and beginning to provide services through his company.

Interestingly, he continued to be an employee and director of the employer for many years and even held an ownership interest in it.

When the employer purported to terminate the relationship with relatively minimal notice or compensation, the worker commenced an action based on the allegation that he was a dependent contractor and therefore entitled to reasonable notice of termination.

The court examined the following factors:

• exclusivity
• control
• ownership of tools
• business risk or expectation of profit
• integration.

The analysis included the following:

Exclusivity: The court found that the portion of his revenue that came from the worker was:

1. 1996 to 2010: between 52.83% and 71.48%
2. 2011 to 2013:, more than 88%
3. From 2014 to 2019: at best, 70%.

The court concluded that revenues of between 52% and 71% of total revenue do not suggest exclusivity, though when the percentage climbs above 80%, it would.

Control: The court found that the employer did not exercise control over the worker.

Tools: The court found that the employer provided the worker with equipment, an office and staff in his capacity as an employee and not as a contractor.

Business risk or expectation of profit: The court found that the personal representative of the worker could earn a profit or suffer a loss due to his role as a shareholder of the employer.

Integration: The court took note of the fact that the worker was never shown on the organizational charts and did not have a title.

As a result, the court declined to find that there was a dependent contractor relationship, and found that the worker was an independent contractor (separately and apart from his role as an employee).

Pith and substance

We constantly caution employers against haphazardly treating people as contractors. Doing so can lead to significant liability if the relationship is truly one of employer-employee, and can lead to liability even if it is more akin to a dependent contractor relationship.

If the “contractor” is found to be an employee, there can be substantial penalties imposed by CRA, as well as the additional notice of termination that both employees and dependent contractors enjoy. Even if they are found to be a contractor, liability can result if they are to be dependent to be treated as a traditional contractor.

Ultimately, the question is whether the worker is in business for themselves, or a part of the organization. The factors listed above and others should be considered.

If you want to set up an independent contractor arrangement, it is not simply a matter of having your lawyer document it properly; you must ensure that the relationship is structured in a manner that is consistent with your characterization of it.

Above all, be prepared to explain how the relationship is independent, and ensure that contractors are not treated in the same manner as employees. One common mistake we see is an organization treating their contractors in a manner that is indistinguishable from the way they treat their employees.