2. Re-Characterisation of Independent Contractors as Employees
a. Laws and Guiding Principles
It is crucial that parties clearly define whether or not they have an employer-employee or an independent contractor relationship. Nevertheless, simply labelling a worker an “employee” or an “independent contractor” is not sufficient to establish such a relationship. The intention of the parties is but one of many factors that will determine how the relationship is ultimately viewed. Rather, the total relationship between the parties will be examined.
In engaging in such review, courts and adjudicators will consider the Wiebe Door factors noted above. Courts will also review the degree of economic independence in the employment relationship (that is, whether a party is carrying on business for himself/herself or on behalf of a superior). The duration of the relationship between a worker and a company is also an important factor. If an independent contractor has been providing services to a company for many years, is providing little (or no) services to other companies, and has become dependent upon the company for income, this may indicate that the worker is a dependent contractor or an employee rather than an independent contractor.
Such tests are open to a great deal of interpretation, and the aforementioned factors are not exhaustive. However, they are important considerations that will be looked at in examining the status of an employment relationship.
b. The Legal Consequences of a Re-Characterisation
The issue of whether an individual is an employee or an independent contractor is significant because an individual’s status as an employee will trigger the application of a variety of statutory rights and benefits under a number of pieces of legislation.
In Ontario, for instance, employers’ specific obligations to employees may arise under the following statutes: the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan, the Employment Standards Act, the Workplace Safety and Insurance Act, the Pay Equity Act and the Labour Relations Act.
c. Judicial Remedies Available to Persons Seeking ‘Employee’ Status
The remedies available to those seeking employee status depend on the forum in which the status is sought.
Pursuant to the Employment Insurance Act7 and the Canada Pension Plan8, workers may apply to the CRA for a determination of their status. A ruling will determine whether a worker is “self-employed” (i.e. an independent contractor) or an “employee”, and thus, whether that worker’s employment is pensionable or insurable under the Canada Pension Plan and/or the Employment Insurance Act. If an individual is found to be an employee by the CRA or the Tax Court, he or she may be eligible for EI or CPP benefits.
Further, an individual who has been found to be an employee may be entitled to damages for wrongful dismissal (i.e. common law notice) in the courts.
In other cases, newly reclassified employees may choose to file an employment standards claim to seek remedies under employment standards legislation, such as notice and severance pay, vacation pay, public holiday pay and/or overtime pay.
d. Legal or Administrative Penalties or Damages for the Employers in the Event of Re-Characterisation
Mischaracterization of the relationship between an employer and a worker can result in liability for the employer under a number of statutes.
Employers are obligated to deduct employment income at source from all employees for tax remittance purposes. Such deductions are not required for independent contractors. Where an independent contractor is subsequently deemed to be an employee, the employer may be liable for the deductions that should have been made from the worker’s income. When this occurs, the CRA generally will first turn to the individual for the outstanding amounts; however, the employer will remain liable if the individual is unable to pay, or cannot be located. The CRA can assess a penalty of 10 percent of the amount of CPP, EI, and income tax an employer fails to deduct, and can apply up to a 20 percent penalty to a second or later failure to deduct in the same calendar year, if such failure was made knowingly or by gross negligence.
Pensions and Insurance Implications
CPP payments and EI benefits are both administered by the CRA. The same factors used to determine whether an individual is an “employee” for income tax purposes are also considered in determining whether an individual is an employee or an independent contractor for the purposes of the application of both the Employment Insurance Act and the Canada Pension Plan. For both CPP and EI, employers are required to make an employer’s contribution, and to deduct the employee’s contribution to remit to the CRA.
With respect to CPP, employers are not expected to make contributions for independent contractors. An employer who fails to deduct required CPP contributions from an employee has to pay both the employer’s share and the employee’s share of any premiums owing, plus penalties and interest. Therefore, where an individual who has been operating as an independent contractor is deemed to be an employee, there are significant financial repercussions for the employer.
With respect to EI, independent contractors do not receive benefits, and no contributions are required. However, it is not unusual for independent contractors to dispute their status as independent contractors after their contract is terminated. If it is determined that they were, in fact, employees, they will be eligible for EI benefits. In such circumstances, an employer may be liable for the payment of both the employee’s and the employer’s contribution for a period that includes the current year, and up to the three previous years, including interest and penalties.
The current prescribed interest rate (as of September 20, 2016) for unremitted income tax, CPP, and EI contributions is 5 percent, compounded daily. Interest applies to the penalties described above as well.
Workplace Safety and Insurance Act Implications
Pursuant to provincial workers’ compensation legislation, such as Ontario’s Workplace Safety and Insurance Act (the “WSIA”), certain individuals are entitled to benefits if they are injured while at work. Whether or not a specific individual is covered under the WSIA (and is thus eligible for benefits) frequently will depend upon whether that worker is considered an “independent operator” or a “worker”. Workers, defined under the WSIA to include any person who “has entered into or is employed under a contract of service”, are generally entitled to benefits if they are injured at work. In contrast, so-called “independent operators”, or those working under contracts for services, may not be entitled to benefits under the WSIA, unless they voluntarily apply to the Workplace Safety and Insurance Board (the “WSIB”) for optional insurance coverage.9
Workers may file a complaint with the WSIB against employers who do not fulfill their obligation to pay benefit contributions. In addition, the WSIB may audit employers to ensure that premiums are being paid on behalf of all workers. The WSIB has broad powers of enforcement. If an employer fails to pay the premiums in respect of a worker, the employer may be ordered to pay the amount of premiums payable for one year, and as a penalty, may be ordered to pay that amount again.10 Employers may also be liable to a worker for any losses suffered by that worker as a result of the employer’s non-compliance. As such, if an individual is injured and it is determined that they are, in fact, an employee and not an independent operator, then there may be serious implications for the employer.
Wrongful Dismissal Claims
Generally, independent contractors cannot claim damages for wrongful dismissal; however, if a court finds that an alleged independent contractor was actually an employee or a dependent contractor, that individual may be entitled to reasonable notice of termination at common law or payment in lieu thereof.
As noted above, employment status issues in wrongful dismissal claims commonly arise following the dismissal of a worker who has been functioning as an independent contractor for the duration of his or her tenure with the Company. When that independent contractor realizes, for instance, that he or she is not receiving a severance package, the independent contractor may claim that he or she was actually an employee and thus should have received reasonable notice at common law.
The length of the reasonable notice period owing to an employee will depend upon a number of factors, including the age of the employee, his or her length of service, the position he or she held when he or she was terminated, and the availability of alternate employment. As stated above, dependent contractors will generally be entitled to less notice than employees.
Vicarious Liability of Employers
In general, an employer is vicariously liable for the acts and omissions of an employee where such acts or omissions are committed by the employee “in the course of employment”. By contrast, employers generally are not vicariously liable for the actions of an independent contractor. If an independent contractor is found to actually be an employee, the employer may then be liable for the acts and omissions of that individual.