In a recent decision the Federal Court of Appeal noted the increasing importance of properly determining whether an individual providing services is an employee or an independent contractor.

The Plaintiff, Connor Homes, operated foster and group homes for children with behavioural and development disorders. These services were delivered by a variety of individuals, including three women who had had signed written contracts to act as, among other things, child and youth workers. All three contracts stated that the individual was an “independent contractor” for an indeterminate period of time, and that the relationship could be terminated by the individual with 14 days’ notice and by Connor Homes at any time “for cause”. Additionally, the contract stated that the individual “shall not be entitled to any benefits and shall be responsible for payment of all necessary remittances, including Canada Pension Plan, Employment Insurance and Provincial and Federal Taxes”.

The Tax Court of Canada concluded that the three workers were employees and not independent contractors because: (1) Connor Homes exercised significant control over the workers; (2) there was no chance for the workers to increase their income by reducing expenses or producing more; and (3) that only a few tools were required from the workers, namely a cellphone and access to a computer. Notably, the Court added that it was the actual relationship between the parties and not their intent that was determinative. Connor Homes appealed the decision to the Federal Court of Appeal.

The Federal Court of Appeal affirmed the Tax Court’s decision. In doing so, it reaffirmed that the ultimate question when determining if a given individual is working as an employee or as an independent contractor is, simply put, “whether or not the individual is performing the services as his own business on his own account.” The Court’s comments regarding the increasing significance of this test, given the trend in the workforce of out-sourcing and short-term contracts, are particularly significant. The Court noted that this trend has led to much litigation in the Tax Court of Canada, that employment status directly affects an individual’s entitlement to employment insurance benefits under the Employment Insurance Act and also impacts how the individual is treated under the Canada Pension Plan, the Income Tax Act, and other legislation.

With this increasing trend towards engaging individuals who are, ostensibly, independent contractors, employers who do not wish to face potentially significant liabilities must take steps to ensure that the individuals it deems to be independent contractors are not, in fact, employees.

1392644 Ontario Inc. (Connor Homes) v. Canada (National Revenue), 2013 FCA 85