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Spot the Difference: Contractor or Employee?

Updated: Mar 7, 2018

More and more, companies are using contractors instead of employees, for many reasons. From the company's perspective, it may want to avoid providing benefit coverage, making CPP and EI contributions, and paying payroll taxes. The individual worker may also want to be classified as a contractor, due to the availability of tax deductions.

However, it's a common mistake to rely on the title of "contractor", instead of looking at the reality of the relationship and the legal test used by the courts or the CRA. If someone assumed to be a "contractor" is later deemed to be an employee, this can result in costs to both employer and employee, such as back taxes, penalties, interest, and CPP and EI premiums. Not only that, if the "contractor" sues for wrongful dismissal and is found to be an "employee" by a court, the employer may be on the hook for significant damages, in lieu of providing reasonable notice.

So how do you tell if someone is a contractor or an employee for termination purposes? The most important point is that you can't solely rely on the title in the contract. A court doesn't care whether someone is called a "contractor" on paper; the judge will look at both the subjective intention of the parties, as well as the objective reality of the relationship to determine whether the indicia of employment are present. Similarly, even if the worker provides services through their own corporation, this won't preclude a finding that the worker is actually an employee.

Unfortunately, there is no simple, universal test to determine whether a person is an employee or an independent contractor (as confirmed by the Supreme Court of Canada). The courts have developed a number of tests over the years, and will look at the following issues:

1. Control

The court will look at the degree of control exercised over the work. In short, a business will tell a contractor what to do, but an employer will tell an employee how to do it. A contract that requires a person to work exclusively for the business and prohibits sub-contracting is likely to lead to a finding the person is an "employee".

2. Ownership of Tools

The "tools" commonly used to get a job done may have changed over the decades, but whether a person is using a shovel, a car, or a laptop, if they provide and pay for the tools, they are more likely to be found to be a contractor. To ensure a worker is properly treated as a "contractor", the business should make sure worker is responsible for both providing and maintaining the tools required to perform the services.

3. Chance of Profit and Loss

A true independent contractor carries the risk of a loss and the chance of profit. As well as paying for the "tools", an independent contractor usually covers the costs of licensing, insurance, advertising and paying workers or sub-contractors, and the "return" on these expenditures depends on how efficiently the contractor does the work.

4. Integration

Generally, the more integrated the person is with the business, the more likely it is they will be found to be an employee. If the person performs essential functions of the business, generates revenue for the company, or is part of the management structure, the person is likely to be an employee. However, this test should be approached with caution in the modern business environment, given the increasing inter-dependency between separate businesses.

Like many areas of the law, the question of whether a contract creates a true independent contractor relationship, or whether the worker will be treated as an employee, is fact-dependent. The best way to create certainty for the business is to use a well-drafted contract that doesn't just call the worker a "contractor", but actually creates an arms-length relationship between the parties, as separate businesses. Best practices would also mean including a termination provision in the contract that would be valid regardless of the status of the worker as employee, contractor, or somewhere in between. Given the many variables, this in one area where it makes sense to talk a lawyer before signing the contract.


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