When a worker is an independent contractor and not an employee, there are important differences for an employer.
An employer is not required to deduct and remit to the government statutory payroll taxes and deductions such as income tax, Canada Pension Plan, Ontario Employer Health tax and employment insurance for independent contractors.
In addition, independent contractors are not covered under the Employment Standards Act, 2000, nor are they entitled to common law notice of termination. This often makes the relationship more attractive for employers. However, when hiring someone as an independent contractor, employers must ensure that the reality of the relationship is that of an independent contractor and not an employment relationship.
Although the intention of the parties is given some weight, it is only one factor the courts will take into account, and a statement in the contract will not be determinative. The totality of the relationship must reflect the independence required to support a contract for service. The courts (and the Canada Revenue Agency) have developed a four-part test to determine whether an employment relationship exists. The key factors taken into account are:
Control (how much control the employer has over the worker’s activities);
Ownership of tools (generally, a contractor supplies his own tools, but this will depend upon the industry norms);
Chance of profit/risk of loss (the financial risk taken by the worker, such as investments in equipment and materials, and whether the worker can realize a profit); and
Integration into the employer’s business.
Health, dental and life insurance benefits add significant value to workers’ contracts and are often specifically sought out by workers. However, the provision of these seemingly innocuous benefits can be problematic and can result in major legal ramifications if provided to contractors.
The provision of health and welfare benefits to a worker has been noted by the Tax Court of Canada as demonstrating a degree of control by the employer that suggests an employment relationship. Although this is one factor to be considered when assessing the relationship in its entirety, it could be the one to tip the scales towards an employment relationship.
There is no one conclusive “test” to be applied in determining whether a person is an employee or an independent contractor.
Courts will instead look at the totality of the relationship between the parties. Accordingly, employers should examine all aspects of their independent contractor relationships to determine whether they can satisfy the above tests, including the provision of benefits. Otherwise, the employer may be on the hook for significant, unanticipated costs.