Structuring your Independent Contractor Agreements
Updated: Sep 13
What is an Independent Contractor Agreement?
An IDA is a commercial agreement that you use when you actually retain the third party service provider to work for you. Contractors are not employees of your company. The IDA includes confidentiality provisions. The IDA includes the actual business terms between the parties (i.e. payment, fees, services to be provided, deliverables, project milestones, quality of work, termination of relationship, etc.). It is also important to note that without entering into a written agreement, which provides for an assignment of intellectual property to your company, the assumption will be that the contractor will own the intellectual property it creates during the performance of the services. As such, the IDA also includes an assignment of intellectual property and waiver of moral rights. IDAs are an important business tool to ensure that your company owns all rights and title to the product created by the contractor.
How Does an Independent Contractor Differ from an Employee?
Proper classification of a worker or of a position to be filled is key to avoiding the liabilities described above. An independent contractor serves clients through their own business, while an employee works as a part of their employer's business. Several factors are considered by adjudicators in determining whose business a worker is working for. Briefly, these factors include:
1. Degree of control exercised over the worker. Control is the right to instruct how, when and where work is performed, and to determine who performs that work. The greater control exercised over a worker, the more likely that worker is an employee and not an independent contractor. A key indicator of control is whether the worker is permitted to sub-contract the work further or assign it to their own employees.
2. Ownership of tools. A worker who owns and supplies the tools required to perform agreed work is more likely to be operating their own business and considered an independent contractor. A worker who is supplied with these things by an employer is more likely to be part of the employer's business and considered an employee.
3. Chance of Profit/Risk of Loss. An independent contractor operating their own business may profit by completing work quickly and efficiently or may suffer a loss where expense in performing the work exceeds income. An employee is typically paid an agreed amount for time spent working and is not entitled to any increased profits achieved through the manner in which the work is completed. An employee does not bear the expenses or liability risks of the business.
4. Exclusivity. Someone who operates their own business is free to choose who they work for. A worker's freedom to work for any customer indicates independent contractor status. Requiring a worker to dedicate working time to one company or requiring the worker to enter into a non-competition agreement indicates employment status.
5. Intention of the parties. Adjudicators will consider the intentions of the parties when determining whether a worker is an employee or independent contractor. Such evidence includes the wording of their written agreement and whether the worker charges and remits sales tax for their services. However, this evidence is not conclusive, and adjudicators will review the entirety of the working relationship to determine the true nature of the working relationship.
What are the Risks of Using an Independent Contractor?
Engaging a worker as an independent contractor carries risk if that worker is treated like an employee. Employment relationships involve greater rights and obligations for both parties than independent contractor relationships. Adjudicators will look beyond the labels applied to a working relationship to the way the parties conduct themselves. If a worker is misclassified, the company could face significant liabilities, including the following:
· Employment standards. Employment legislation defines minimum working conditions for employment, including maximum hours of work, minimum wage, vacations and vacation pay, statutory holidays, overtime pay, termination notice, and severance pay. Failure to apply these standards may result in orders for back pay and fines for non-compliance.
· Payroll deductions. Employers must make mandatory payroll deductions, remittances and contributions including income tax, Employment Insurance premiums and Canada Pension Plan contributions. Failure to do so may result in a prosecution against the company requiring not only the payment of these amounts but also potentially imposing a fine.
· Workers' compensation. Employers are generally required to remit workers' compensation contributions to fund benefits provided to workers injured on the job. Failure to contribute on behalf of an employee may result in an order to make retroactive contributions, an order to bear costs associated with a workers' injury, charges for failing to report required information or fines for the Company.
· Common law reasonable notice. A non-unionized employee is entitled to common law reasonable notice of termination unless their employment contract specifies some other notice period equal to or greater than the statutory minimum. Common law reasonable notice is usually greater than minimum statutory notice and may exceed 24 months for long service employees. An employee who does not receive this notice may sue for the compensation they would have earned during the notice period.