Employee or Independent Contractor? Know the Distinction
In certain industries, it is common for employers to employ both employees and independent contractors. Although employees and independent contractors may carry out a common function within an organization, at law there is a distinction to be drawn between the two. A common question that arises in employment law is whether a worker is an employee or an independent contractor.
Unfortunately, for employers, the significance of the difference between these two types of workers does not become apparent until it is too late. An employer’s failure to properly document and manage a given working relationship can have serious legal consequences and can leave an organization exposed to lawsuits, fines, and penalties.
From a tax perspective, the distinction between an employee and an independent contractor is a distinction that matters to the Canada Revenue Agency (CRA). Employers are required by statute to deduct Canada Pension Plan contributions, income tax, and employment insurance premiums from an employee’s earnings and remit these amounts to the CRA. Employers who fail to do so face penalties and interest and may be held responsible for paying the employee’s share of any amounts owing. Although an employer may think that a given worker is an independent contractor, the CRA may arrive at different conclusion.
From an employment standards perspective, an employer’s failure to properly document and manage the nature of a working relationship with an independent contractor may lead her to believe that she is an employee. Employees are entitled to more rights and benefits than independent contractors are. For example, under the Employment Standards Act, employees are entitled to paid vacation, minimum wage and overtime pay. Furthermore, employees are entitled to certain rights upon termination that independent contractors may not be entitled to, such as reasonable notice or pay in lieu of notice and/or severance pay. An aggrieved worker whom an employer thought was an independent contractor may file a complaint at the Ontario Labour Relations Board or may sue her employer because she was under the impression that she was an employee and was entitled to certain rights and benefits that her employer failed to provide.
The challenge for employers is being able to accurately document and manage a given working relationship in a legally meaningful way. Even if an employer communicates to an employee that she is an independent contractor and this is expressed in a contract, this may not be enough. Employers often find themselves in situations where a working relationship with an independent contractor begins to resemble that of an employee-employer relationship, and may actually be characterized as such by a court or tribunal. If a tribunal or court has to determine the designation of a given worker, a number of factors will be considered, with a particular focus on the document that defines the relationship.
Therefore, to avoid potential fines and penalties imposed by the CRA, as well as unnecessary lawsuits and legal fees, it is advisable for employers to ensure that they have proper agreements in place that accurately define each working relationship. It is also advisable for employers to conduct regular reviews of the services provided by independent contractors so they can be sure that, from a legal perspective, the individual continues to be regarded as an independent contractor and not an employee.
Communications on this website are intended for information purposes only and do not constitute legal advice or an opinion on any issue. Readers are cautioned against making any decisions based on this material alone. The lawyers of Waterous Holden Amey Hitchon LLP would be pleased to provide additional details or advice about specific situations.