It is commonplace for businesses and persons working for them to seek to structure or modify their relationship in order to benefit from the workers being characterized as independent contractors. This allows the business not to have to make payroll deductions for the workers, and the latter can enjoy the tax benefits of being considered independent contractors. A popular model used for this purpose is for the parties to agree that the worker will incorporate and offer services to the business through the intermediary of his or her corporation. The business will pay for the work upon receiving invoices for services rendered. In such a context, it is important to take into consideration certain factors and to bear in mind that for a worker to be considered an independent contractor it is not sufficient that he or she be incorporated.
This is because several factors are examined by the courts when it comes to determining the nature of the legal relationship between the parties. In particular, this will be the case in the context of a complaint to the Labour Relations Board (Commission des relations du travail) for dismissal without good and sufficient cause, and of a claim for severance pay.
As opposed to the Civil Code of Québec, the Labour Standards Act includes in its definition of “employee” the notion of a “dependant contractor” and is thus more inclusive than the Civil Code. In all cases, the courts will examine the degree of subordination that exists between the worker and the person assigning the work. The examination will be comprehensive and based on all of the facts.
Below are some of the criteria and indicia established by case-law that courts use to characterize the relationship between the parties. In general, the following will militate in favour of independent contractor status:
- Remuneration is paid for the performance of work;
- The degree of subordination between the worker and the person assigning the work is minimal;
- The worker’s economic independence vis-à-vis the person assigning the work is reflected in the risk of loss he or she assumes or his or her opportunity to earn a profit;
- The possibility for the worker to be competitive;
- The worker’s freedom of choice in selecting the means for performing the work, as opposed to operating within a framework predetermined by the person assigning the work.
The following factors, on the other hand, are more compatible with an employee-employer relationship:
- Mandatory presence in a workplace, and the imposition of rules or a work schedule;
- The impossibility for the worker to hire or fire staff, or to have another person perform the assigned work in whole or in part;
- The obligation for the worker to give notice or obtain permission to take vacations or otherwise be absent;
- The obligation for the worker to make daily, weekly or monthly reports on the performance of the work.
Other factors will also be considered, such as the approach taken by the parties with respect to employment insurance, pensions, income taxes and the manner in which the worker is remunerated.
In order for the existence of a services contract to be recognized (i.e. a contract whereby an enterprise retains the services of an independent contractor) there must be no relationship of subordination between the worker and the person assigning the work in terms of the criteria mentioned above. The more indicia of subordination there are, the less likely it is that the contract will be characterized as a services contract. An independent contractor normally has broad latitude as to the way in which the work will be performed.
Consequently, businesses should abstain from requiring that persons working for them incorporate, if the underlying motive is solely to avoid them being characterized as employees within the meaning of applicable legislation, particularly the Labour Standards Act and the Civil Code of Québec. The intent that they be independent contractors should be evident from both the contract and the facts of their overall situation. Otherwise, courts called upon to determine the true status of workers may lift the corporate veil of any company they have formed and conclude that there is an employer-employee relationship between the parties1.