The law treats independent contractors and employees very differently. Employees enjoy greater legal protections in the workplace than independent contractors. As such, employers have greater legal duties to employees, which also extends into greater tax implications. Regardless of whether your company defines its worker as an employee or an independent contractor, it is possible that the worker may contest its status. Ultimately, there is no bright line test as to what qualifies the worker as an employee as opposed to an independent contractor. However, we provide an overview of the points of consideration.
What is an Independent Contractor?
An independent contractor is a self-employed worker who performs services to clients through his/her own business. Generally, the greater the autonomy the worker has, the more likely they will be deemed to be an independent contractor, if contested.
Independent contractors are not protected by most employment laws and are not eligible for employment insurance benefits. To that end, it is up to the company and the independent contractor to set the terms of work and compensation, without having to comply with minimum standards legislation.
Independent contractors must remit their own taxes and government pension contributions to the government, based on their earnings. They may also required to register for a HST account.
What is an Employee?
An employee performs services as part of the employer’s business. A company’s relationship with an employee is governed by employment legislation, which sets minimum wages, reasonable notices of termination, maximum hours of work, overtime restrictions and compensation, vacation and vacation pays, statutory holidays, etc. The employer is responsible for deducting Canada Pension Plan contributions, Employment Insurance premiums and income tax from amounts owed to the employee and remit those amounts to the Canada Revenue Agency. In addition, the employer must also make Canada Pension Plan contributions and Employment Insurance premiums on behalf of each employee.
If the worker disputes his/her status and is successful in determining that he/she is an employee, the company may be liable for payment of wages owed to the worker, including overtime pay, vacation pay and holiday pay, as well as compensation for workers who have suffered losses due to violations of minimum standards.
What are the Points of Consideration?
The characteristics of the working relationship are taken into account, when determining the crux of the relationship between the worker and the company. Below is a non-exhaustive list of factors, as established by the Supreme Court of Canada:
- How much control does the company have over the
- Independent contractors tend to be more autonomous in setting their hours, place and method of work
- Does the worker provide its own equipment?
- A worker who owns and supplies his/her own tools, materials, licenses and contacts required to perform the services is more likely to be considered owning his/her own business and providing those services to the company as an independent contractor
- Can/does the worker hire his/her own helpers?
- If a worker uses the help of external third parties to operate his/her business, this is more indicative of an independent contractor
- What is the degree of financial risk taken by
- Exposure to profit or loss on a work contract is indicative of an independent contractor.
- Investing in the ability to be able to perform those services is also indicative of an independent contractor
- What is the degree of responsibility for
investment and management held by the worker?
- A worker that is more integrated into the operational aspects of the company is more likely to be considered as an employee.
- What is the degree of exclusivity?
- An independent contractor is free to choose who they perform the services for. Demanding exclusivity or including a non-competition clause can be indicative of an employee.
- What are the intentions of the parties?
- In the lead up to the signing of the contract, context will be given to how the parties intended the working relationship to be.