Written by Andrew Powell, Partner

In many businesses, the owners attempt to avoid employee issues altogether by just not using them.  They say, “I don’t have any employees.  I use contractors.”   To which, as lawyers, we generally say “are you sure”?  because quite often, perhaps even usually, they are wrong.  Hence, one major area of surprise liability for an employer is when they wrongly identify an employee as an independent contractor.
There are many reasons that an employer might want to use independent contractors instead of employees.  For one thing, the Employment Standards Act doesn’t apply to contractors, so you can be freer with work hours and overtime and holiday pay.  There are also tax reasons on both the part of the employer and the worker that make a contractor-type relationship more attractive: as an employer, you are responsible for withholding taxes and remitting them, and also for making payroll deductions – but if you use only independent contractors, you can pass that responsibility on to the worker by having them simply submit an invoice and pay them like they are an independent business.  The employer doesn’t have the administration headache, and the worker can get all sorts of benefits too, such as the ability to write expenses off against their “business” income.
But beware!  There are enormous issues with this structure, and you have to be extremely careful.
First: the Canada Revenue Agency is very skeptical by nature.  Your business will likely be subject to audit from time to time, and contractor status is an issue where the CRA likes to shine a very bright light.  You can insist up and down that your worker is a contractor, but it won’t matter.  If it is determined that the worker is an employee and not a contractor, then all the remittances that were not made will suddenly need to be made, and not by the employee, but by the company.  The liability for this is very real, and can be quite significant.

Next: provincially, the Employment Standards Branch is also very skeptical.  A contractor may well change his mind about his status, especially if his contract ends.  If for some reason, whatever reason, the worker decides that they want to take advantage of some provision of the Employment Standards Act, then that worker can file a complaint with the ESB.  If the ESB determines that the contractor is in fact an employee, then the Act and all its regulations will apply, and you can be subject to penalties and orders for violating hours of work or overtime or any other of a number of things, all in one sudden retroactive flash.   You may also be responsible for providing back pay – to someone you thought was an independent contractor.

Third: Courts are very skeptical. If the relationship ends (and eventually, for some reason, it will) the Courts will look at a contractor status and see right through it like it was a piece of stretched plastic wrap .  It is such a standard question that the Courts may not even bother going through a detailed analysis: they can just say, “dependent contractor”, and your company can be liable for employee rights, including severance or notice periods at common law.

So, at the end of the day, if you are going to have “contractors”, make sure they are actually independent contractors.  There are well established indicators for spotting true independent contractors:

              – Do they own their own tools?
              – Do they control their own schedule?
              – Can they hire or fire someone to help them do their work?
              – Do they have a chance of profit or a risk of loss?
              – Can they, and do they, work for other businesses?
             – And, basically, if you sniff this relationship, does the worker smell like an employee or a contractor?

Look at it like an outsider and decide.  If you are using a contractor status as a favour to an employee, then on behalf of your Company, think again.  The administrative savings to your business are likely not worth the risk.  If someone works for you, and only you, then you are better off to just call the relationship what it is: employment.