Consequences of failure to properly classify a worker are serious and can include the imposition of fines
Organizations often look to reduce their costs, especially in difficult economic times.
A cost cutting measure that is being used more frequently is engaging workers on contract (independent contractors) rather than hiring employees.
Independent contractors come with fewer legal obligations than employees. For example, the remittance of statutory payroll taxes and deductions that apply to employee wages are not triggered for workers classified as independent contractors.
Consequently, this can make hiring independent contractors quite appealing.
However, the characterization of workers as employees or independent contractors should not be made arbitrarily, nor taken lightly. Careful consideration must be given to the circumstances of every particular case due to the serious legal consequences that can arise from an incorrect classification.
Workers’ compensation
An organization could be exposed to liability for the improper classification of a worker if the authorities empowered by provincial workplace safety and insurance legislation determine the worker is in fact an employee. In Ontario, as in all other Canadian provinces, most organizations that engage employees must be registered with the provincial workers’ compensation board and remit premiums.
However, this requirement does not exist for workers deemed to be independent contractors. An organization’s failure to properly classify a worker as an employee, to register with the proper authorities and to remit premiums could lead to a breach of applicable provincial legislation.
Consequences of such a breach are serious and can include:
•a formal investigation
•the payment of outstanding premiums, with interest
•a guilty finding in respect of a provincial offence
•the imposition of substantial fines
Canada Revenue Agency
Failure to deduct income tax, Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums from an employee’s wages could have significant repercussions for an employer who has incorrectly classified a worker as an independent contractor.
In such circumstances, not only will the employer be required to pay Canada Revenue Agency (CRA) the unremitted taxes, but also the employer’s and the employee’s share of unpaid premiums. In addition, the employer will also be required to pay penalties and interest.
Due to a recent increase in the classification of workers as independent contractors as a means to circumvent statutory withholdings and deductions at source, the issue of improper classification is being frequently adjudicated in Federal Court. Accordingly, not only are organizations exposed to costly premiums, interest and penalties if they are wrong, but also the costly legal fees incurred in defending challenges by the CRA in court.
Wrongful dismissal
Organizations may also be exposed to claims for wrongful dismissal damages following the termination of independent contractors who later take the position they were in fact employees.
Such damages include monetary claims that could exceed the minimum notice and severance requirements under applicable provincial employment standards legislation.
Independent contractor agreements typically include termination provisions which permit organizations to end the agreements with limited notice or pay in lieu of notice. This is because contractors do not benefit from the minimum statutory notice and severance requirements that apply to employees.
Therefore, if a dismissed worker is found by a court to be an employee rather than an independent contractor, a termination provision that provides less than the minimum notice and severance requirements pursuant to employment standards legislation will be completely disregarded, thereby exposing the employer to damages based on reasonable notice of dismissal pursuant to the common law.
Employment standards
The applicable provincial employment standards legislation sets out a number of obligations organizations must adhere to regarding their employees.
A “true” independent contractor will not enjoy the statutory benefits afforded to employees including, for example, overtime pay, pregnancy leave, parental leave and vacation pay.
Therefore, the incorrect classification of a worker as an independent contractor may result in an order requiring payment of these various obligations.
Employee versus independent contractor
It’s vital for organizations to be familiar with the manner in which the law distinguishes an independent contractor from an employee.
A non-exhaustive list of factors Canadian courts will consider in making this assessment includes:
•the level of control the organization has over the worker
•whether or not the worker provides his own tools and equipment
•whether the worker can subcontract the work
•whether the worker can take on other jobs or must provide exclusive services
•whether the worker is providing services through a corporation
•the degree of financial risk taken by the worker
•the opportunity for profit by the worker
•other factors including written agreements
The crux of the courts’ assessment will be whether the individual is performing services for an organization as a person in business on his own account.
Accordingly, the level of control an organization has over a worker’s activities will always be a factor.
Other factors will also be considered, however, there is no set formula as to their application. The relative weight of each factor will depend on the facts and circumstances of each specific case.
The parties’ stated intentions regarding the character of their relationship will not be ignored. However, the case law clearly establishes the courts will not be bound to the parties’ declaration as to the legal character of their contract.
Organizations must ensure contractual agreements are well drafted, and that the relationship with their workers is structured to accurately reflect the parties’ intentions.
To this end, employers should undertake a comprehensive assessment of the duties being performed and whether the classification of a worker as an independent contractor, as opposed to an employee, can survive scrutiny by the courts, the CRA and other authorities.
Cédric Lamarche is an employment lawyer with Whitten & Lublin in Toronto, a boutique employment law firm assisting employers and employees on various workplace legal matters. He can be reached at [email protected] or (416) 640-2667.
A cost cutting measure that is being used more frequently is engaging workers on contract (independent contractors) rather than hiring employees.
Independent contractors come with fewer legal obligations than employees. For example, the remittance of statutory payroll taxes and deductions that apply to employee wages are not triggered for workers classified as independent contractors.
Consequently, this can make hiring independent contractors quite appealing.
However, the characterization of workers as employees or independent contractors should not be made arbitrarily, nor taken lightly. Careful consideration must be given to the circumstances of every particular case due to the serious legal consequences that can arise from an incorrect classification.
Workers’ compensation
An organization could be exposed to liability for the improper classification of a worker if the authorities empowered by provincial workplace safety and insurance legislation determine the worker is in fact an employee. In Ontario, as in all other Canadian provinces, most organizations that engage employees must be registered with the provincial workers’ compensation board and remit premiums.
However, this requirement does not exist for workers deemed to be independent contractors. An organization’s failure to properly classify a worker as an employee, to register with the proper authorities and to remit premiums could lead to a breach of applicable provincial legislation.
Consequences of such a breach are serious and can include:
•a formal investigation
•the payment of outstanding premiums, with interest
•a guilty finding in respect of a provincial offence
•the imposition of substantial fines
Canada Revenue Agency
Failure to deduct income tax, Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums from an employee’s wages could have significant repercussions for an employer who has incorrectly classified a worker as an independent contractor.
In such circumstances, not only will the employer be required to pay Canada Revenue Agency (CRA) the unremitted taxes, but also the employer’s and the employee’s share of unpaid premiums. In addition, the employer will also be required to pay penalties and interest.
Due to a recent increase in the classification of workers as independent contractors as a means to circumvent statutory withholdings and deductions at source, the issue of improper classification is being frequently adjudicated in Federal Court. Accordingly, not only are organizations exposed to costly premiums, interest and penalties if they are wrong, but also the costly legal fees incurred in defending challenges by the CRA in court.
Wrongful dismissal
Organizations may also be exposed to claims for wrongful dismissal damages following the termination of independent contractors who later take the position they were in fact employees.
Such damages include monetary claims that could exceed the minimum notice and severance requirements under applicable provincial employment standards legislation.
Independent contractor agreements typically include termination provisions which permit organizations to end the agreements with limited notice or pay in lieu of notice. This is because contractors do not benefit from the minimum statutory notice and severance requirements that apply to employees.
Therefore, if a dismissed worker is found by a court to be an employee rather than an independent contractor, a termination provision that provides less than the minimum notice and severance requirements pursuant to employment standards legislation will be completely disregarded, thereby exposing the employer to damages based on reasonable notice of dismissal pursuant to the common law.
Employment standards
The applicable provincial employment standards legislation sets out a number of obligations organizations must adhere to regarding their employees.
A “true” independent contractor will not enjoy the statutory benefits afforded to employees including, for example, overtime pay, pregnancy leave, parental leave and vacation pay.
Therefore, the incorrect classification of a worker as an independent contractor may result in an order requiring payment of these various obligations.
Employee versus independent contractor
It’s vital for organizations to be familiar with the manner in which the law distinguishes an independent contractor from an employee.
A non-exhaustive list of factors Canadian courts will consider in making this assessment includes:
•the level of control the organization has over the worker
•whether or not the worker provides his own tools and equipment
•whether the worker can subcontract the work
•whether the worker can take on other jobs or must provide exclusive services
•whether the worker is providing services through a corporation
•the degree of financial risk taken by the worker
•the opportunity for profit by the worker
•other factors including written agreements
The crux of the courts’ assessment will be whether the individual is performing services for an organization as a person in business on his own account.
Accordingly, the level of control an organization has over a worker’s activities will always be a factor.
Other factors will also be considered, however, there is no set formula as to their application. The relative weight of each factor will depend on the facts and circumstances of each specific case.
The parties’ stated intentions regarding the character of their relationship will not be ignored. However, the case law clearly establishes the courts will not be bound to the parties’ declaration as to the legal character of their contract.
Organizations must ensure contractual agreements are well drafted, and that the relationship with their workers is structured to accurately reflect the parties’ intentions.
To this end, employers should undertake a comprehensive assessment of the duties being performed and whether the classification of a worker as an independent contractor, as opposed to an employee, can survive scrutiny by the courts, the CRA and other authorities.
Cédric Lamarche is an employment lawyer with Whitten & Lublin in Toronto, a boutique employment law firm assisting employers and employees on various workplace legal matters. He can be reached at [email protected] or (416) 640-2667.
