Whether to treat someone as an employee or an independent contractor is something many Canadian businesses grapple with. A quick Google query returns many resources detailing the various factors courts and government agencies use to distinguish the two. Far fewer are resources setting out the potential consequences of a mischaracterization, which is what I will do here.
The best way to guard against these risks is to ensure that workers are appropriately classified. It is necessary not only to paper the parties’ understanding and intentions in well-drafted, binding employment and/or contractor agreements, but also to ensure that these intentions are mirrored in the underlying service relationship. If you have any doubts about how you or your employees are classified, you should contact experienced employment counsel.
Risk #1: Wrongful dismissal
Upon termination, employees are entitled to notice or pay in lieu under both the Employment Standards Code and the common law. Independent contractors are not (unless such notice is provided by contract). Sometimes, workers formally classified as independent contractors seek to characterize themselves as employees after termination to claim the benefit of reasonable notice. If successful, such an individual could be awarded damages equal to months or even years of wages, depending on the circumstances.
Consider, for example, Therrien v True North Properties Ltd, a case decided by the Alberta Court of Queen’s Bench. The plaintiff in that case was an accountant who left his 24-year job with an accounting partnership to work for a consortium of corporate clients full-time. A year later, the companies attempted to change the plaintiff’s engagement to part-time. Upset at this decision, the plaintiff resigned and sued for constructive dismissal. The companies argued that the plaintiff was not an employee, but an independent contractor, pointing to the facts that he provided services through a corporation, issued invoices as a precondition of payment, remitted his own income taxes, and was not eligible for employment benefits.
The Court disagreed, finding that the plaintiff’s corporation was merely a vehicle for him to receive payment and that the true nature of the relationship was one of employment. Despite the fact that the plaintiff had only worked in his position for about a year, the Court went on to award damages equal to 12 months’ wages due in part to the fact that the corporate defendants had induced the plaintiff to leave a secure, long-term position.
Risk #2: Vicarious liability
In an employment context, “vicarious liability” refers to liability imposed on an employer for the acts of its employees. Where an employee, acting in the course of employment, causes actionable harm, both the employee and employer will generally be named as defendants in the ensuing lawsuit. If the claim succeeds, there is a good chance the employer will be required to pay.
Independent contractors are different and are typically held liable for their own actions without any vicarious liability attaching to the person who hired them.
Plaintiffs will sometimes challenge a defendant’s independent contractor status so they can make a claim for vicarious liability against the person’s employer. If the plaintiff succeeds, and the individual is found to have been working in an employment capacity, the business owner will be liable for the acts of the individual the same as it would for its regular employees.
This was the case in Straus Estate v Decaire, a decision from the Ontario Court of Appeal involving a mutual fund agent who invested a client’s money in an “off-the-books” opportunity without their full knowledge or consent. The investment turned out to be worthless and the investors sued both the agent and the mutual fund companies he worked for during the relevant period. One company argued that it could not be held vicariously liable since the agent worked as an independent contractor.
On appeal, the Court rejected this argument finding that, although the contract did identify the agent as an independent contractor, the true nature of his job was one of employment. Among the factors considered relevant were that he did not hire his own employees, he followed the company’s business model, he was not free to pursue his own marketing strategy, and he obtained his license through the company. The company was therefore held vicariously liable to the investors for the actions of the agent.
Besides seeking legal advice to help determine which workers are truly considered independent contractors, business owners may also wish to contact their insurer to ensure that they are adequately protected.
Risk #3: Liability for payroll deductions
Independent contractors are responsible for making CPP contributions equal to both the employer’s and employee’s share. They are generally not required to make EI payments. In the event a contractor is reclassified as an employee by the CRA, the business owner may be liable for any shortfall in CPP payments and will be required to submit unpaid EI premiums. The business owner may also be liable for accrued interest and penalties imposed by the CRA.
Risk #4: Employment standards liability
Employees enjoy certain protections and payments under the Employment Standards Code which are not available to independent contractors. Besides the entitlement to notice upon dismissal (discussed above), employees are also generally entitled to vacation pay, general holiday pay, and overtime. Businesses who do not provide these statutory amounts to workers they consider independent contractors could be liable in the event their workers’ independent contractor status is successfully challenged. Take, for example, the case of Telsco Security Systems Inc v Wong, where the business was ordered to pay nearly $3,000 in vacation pay and general holiday pay to a worker it had erroneously treated as an independent contractor.
Risk #5: Loss of ability to deduct business expenses
Business expenses may be properly deducted by independent contractors but typically not by employees. Independent contractors reclassified as employees will be unable to continue taking advantage of this benefit.