Independent Contractor vs Employee: A Costly Difference

Independent contractor versus employee, they may seem easy to distinguish but are you sure you know the difference?  The difference between the two can have huge financial implications and liabilities for both the employer and worker if a court or Canada Revenue Agency determines that an independent contractor is more like an employee.    

Companies are continuously shifting towards the use of independent contractors rather than employees as the backbone of their workforce.  There are many advantages to hiring independent contractors such as escaping Employment Standards legislation (especially as it pertains to termination, overtime, vacation, and work hours of employees), Worker’s Compensation Board, statutory remittances (such as employee income tax, Canada Pension Plan and Employment Insurance), and some performance liability concerns.  Having a worker agree that he or she is an independent contractor and not an employee is no longer enough to distinguish between the two as our courts dig deeper into the characteristics of the relationship between the parties. 

Dependent Contractor Status

Courts have determined that although an individual may have agreed to be an independent contractor, a person who works for him or herself but provides services on a consistent and regular basis to one company may fall in between the two and be deemed a “dependent contractor”.  Despite the term contractor, these dependent contractors enjoy some of the same rights as employees such as the right to reasonable notice of termination or “severance”.

Recently, our courts affirmed just that.  In this case a company contracted a husband and wife kitchen installation team to be independent contractors for the company.  Although the duo did do some work for others, most of their revenues were from one company.  After more than 20 years of work, the company informed the duo that the business was shutting down and their services were no longer needed. Since the duo were “independent contractors” the company did not provide notice of termination or “severance”.  The duo sued the company claiming that they were dependent contractors and entitled to reasonable notice of termination.  The court considered factors such as who supervises/controls the “when” and “where” of work, ownership of tools and equipment, the worker’s role within the organization, exclusivity of work with one company, and financial investment in the business in coming to a determination that although the contract between the company and the duo was framed as an independent contractor agreement, the contract was used to avoid employment responsibilities rather than truly reflecting the nature of their relationship.  The court awarded the duo 26 months’ severance.

This case is an important reminder that the nature of a working relationship is not only defined by the terms used by the parties (employee or independent contractor) but by how the parties conduct themselves.   At Collins Thomas, we can provide you with the tools needed to minimize your risk when hiring independent contractors and to ensure you don’t take on the liability of your independent contractor being deemed an employee or “dependent contractor”.  Call us today at 587.393.5220.