Misclassifying employees exposes employers potential liability under employment standards legislation
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In our gig economy, organizations are increasingly looking to meet staffing needs through temporary and freelance positions, hoping to avoid costly overtime and termination pay that could otherwise be owed to an “employee.”
Individual workers looking for flexibility, independence and tax-friendly income may also be attracted to temporary and freelance work, often as “independent contractors.”
While this type of arrangement may seem like a win-win, misclassifying an “employee” as an “independent contractor” has always been risky for Canadian employers, exposing them to potential liability under employment standards legislation for unpaid wages, overtime pay, vacation and public holiday pay, and under the common law for reasonable notice of termination.
In Canada, these risks are now greater than ever.
Independent contractors: The new frontier for class-action lawsuits
Historically, employment-related class-action litigation in Canada has been relatively uncommon. No longer.
On Jan. 2, 2019, the Court of Appeal for Ontario released its decision in Heller v. Uber Technologies Inc., striking down a mandatory arbitration clause in Uber’s service agreement with its independent contractor drivers.
The decision paves the way for a proposed class-action lawsuit in which drivers seek a declaration they are “employees” of Uber — not independent contractors — and are therefore governed by the provisions of the Employment Standards Act, 2000, (ESA). The drivers claim damages for alleged violations of the ESA of $400 million.
In 2016, the Ontario Superior Court in Omarali v. Just Energy (leave to appeal refused) certified a class action filed on behalf of about 7,000 sales agents hired as independent contractors to sell products door-to-door.
Similar to the proposed Uber class action, the claim alleges the independent contractors were, in fact, employees, entitled to the benefits and protections of the ESA, including minimum wage, overtime pay, vacation and public holiday pay.
In most cases, a class action will be settled before reaching court. However, settlement still comes with a cost.
Amendments up the ante
Even if an organization does not engage a large number of independent contractors, exposing it to a potential class-action lawsuit, an independent contractor may still file a claim with the Ministry of Labour claiming she has been misclassified and is an employee for the purpose of the ESA.
A misclassification can result in a penalty of $250 for the first contravention, $500 for the second contravention in a three-year period and $1,000 for the third contravention in a three-year period.
In addition, a misclassified employee may have a claim for unpaid entitlements under employment standards legislation, including termination pay, minimum wage, overtime pay and vacation pay.
Equally significant for some employers is the fact the Ministry of Labour posts the names of offenders on its website — public shaming that may also be very costly.
The employee versus independent contractor test
It is a common misconception that if a worker operates through an incorporated entity, this is sufficient to establish the worker is an independent contractor. This is incorrect.
Furthermore, that a worker is found to be an independent contractor under one statute (for example, the Income Tax Act) is not determinative for the purposes of employment standards.
The reason is that employment standards legislation is “benefit conferring,” intended to ensure every employee receives certain minimum employment standards.
Employment adjudicators, therefore, apply a broad and generous interpretation to the meaning of “employee,” regardless of how the term is defined or applied in other legislation.
When assessing whether a worker is an employee or independent contractor, Canadian adjudicators ask this baseline question: “Is this worker in business for his own account?”
If the answer is “yes,” the worker will be considered an independent contractor.
To determine whether a worker is in business for his own account, six factors are considered:
• The level of control the entity has over the worker’s activities.
• Whether the worker provides his own equipment.
• Whether the worker hires his own helpers.
• The degree of financial risk taken on by the worker.
• The degree of responsibility for investment and management held by the worker.
• The worker’s opportunity to profit in the performance of his own tasks.
This is not an exhaustive list, nor is there a set formula for applying these factors. The weight of each factor will depend on the specific facts of the case.
When assessing “level of control,” common factors include:
• Does the entity demand exclusive service or can the worker provide service to others?
• Was the worker hired for a limited scope project or duration?
• Can the worker refuse a project?
• Does the worker have the ability to subcontract the work?
• Does the worker set his own hours of work?
• Does the entity have the ability to discipline the worker?
• Does the entity have supervisory responsibilities over the worker?
When assessing “financial risk,” common factors include:
• Does the worker bear financial risk associated with providing the services?
• Can the worker establish his rate of compensation?
• Would the worker’s compensation be negatively impacted if work is performed poorly or takes longer to perform than initially anticipated?
Transitioning from contractor to employee
To reduce the risk of liability, an organization may want to transition a worker’s status from contractor to employee.
This can be accomplished with proper planning and agreement among the parties (but should not be attempted without legal counsel).
However, even after a transition has taken affect, if the employment is terminated, an employer may still have to recognize the worker’s length of service as an independent contractor for the purpose of calculating any reasonable notice entitlement.
In the recent case of Cormier v. 1772887 Ontario Limited c.o.b. as St. Joseph Communications, Kelly Cormier had been “employed” with the defendant for eight years when her employment was terminated.
Prior to that, she worked with St. Joseph Communications as an “independent contractor.” The court concluded Cormier’s economic dependence on her employer and length of tenure rendered her a “dependent contractor” — a type of contractor between employee and independent contractor.
As such, her notice entitlement should be based on the total amount of time she had worked with the employer.
The court went on to state it would have reached the same conclusion even if Cormier had been an independent contractor rather than a dependent contractor:
“Even if I had concluded that Ms. Cormier was an independent contractor from 1994 to 2004, it would have been wrong in principle to ignore these years of their relationship in determining the reasonable notice period. The court should take all of the circumstances into account and in the immediate case, even if I had found Ms. Cormier to be an independent contractor, I would not have ignored these years of their relationship.”
Final thoughts
With recent legislative changes and new and burgeoning case law, the liability for misclassification is greater than ever.
Any organization that engages independent contractors, or is considering doing so, should carefully consider the associated risks and benefits, and seek the advice of experienced legal counsel.
Both lawyers at Sherrard Kuzz in Toronto, Sundeep Gokhale can be reached at [email protected] or (416) 603-6246 and Thomas Gorsky can be reached at [email protected] or (416) 603-6241.
