Published August 1998
Legally Speaking: When is an Independent Contractor an Employee?
Often small business owners hire workers on contract and classify those workers as "independent contractors" not employees. This distinction between "independent contractor" and "employee" is crucial to the establishment of an employer's liability for payroll taxes during the relationship and severance pay when ending the relationship with a worker. Our courts, and Revenue Canada, often find employers have wrongfully classified employees as contractors.
An employer has fewer legal obligations when dealing with an independent contractor than an employee. An employer is responsible for remitting to the government all statutory payroll taxes and deductions (WCB, UIC, EHT, CPP) when paying an employee. Conversely, an employer has no such responsibility when paying an independent contractor because independent contractors are responsible for remitting all payroll taxes and deductions themselves.
Similarly, ending a relationship with an employee places more obligations on an employer. As a general rule, an employer cannot fire an employee without giving them adequate advance notice that they are to be let go. If an employer fails to provide adequate advance notice the employer may have to pay a considerable sum if the issue goes to court.
For instance, a court recently awarded twenty months pay to an employee who was fired by her employer without being given sufficient advance warning. With regard to an independent contractor, an employer has only to give minimal advance warning of their intention to end the relationship unless a contract provides otherwise.
What then, in the eyes of the law, distinguishes an independent contractor from an employee? That there may be a contract describing an individual as an independent contractor does not necessarily mean that he or she is, at law, an independent contractor. Various factors are considered by our courts to decide the issue including: the degree of control an employer has over the method of performing the work, whether the worker is subject to the employer's company policies and the economic dependency of a worker on one company. If control and other factors indicate an employment relationship, that status will not be affected even where payments are made to a personal corporation.
A well-crafted contract can go a long way towards eliminating any ambiguity regarding the status of a worker. Such a contract would establish responsibility for remittance of statutory deductions, the method of ending the relationship, any reporting requirements, the method of payment and a job description among other things. By protecting themselves in this manner business owners can minimize the potential liability to their company before, during and after a relationship with a worker.