Distinguishing between an independent contractor, dependent contractor, and employee is significant because of the substantial differences in legal entitlements and potential liability, associated with each classification. However, the distinction is not always easy to recognize at first glance. When an employment relationship exists, the employee is entitled to standard employee benefits, and the minimum standards as set out in the Alberta Employment Standards Code (although some employers provide employee benefits in excess of the minimum requirements under the Alberta Employment Standards Code).
Are you in the right relationship?
When an independent contractor relationship exists, the independent contractor is not entitled to employment-style benefits, and the expectations and requirements for compensation are determined by contract. The distinction between employee and independent contractor has exceptional ramifications for payment structure (for example, an independent contractor is normally responsible for payment of taxes and applicable GST, as well as Employment Insurance (“EI”) and Canada Pension Plan (“CPP”) premiums) and obligations which arise on termination of the contract. If employees expose employers to vicarious liability, they are entitled to receive reasonable notice for termination without cause and they draw employers into statutory regimes, such as CPP and EI. Further, in an employer-employee relationship, the employer is required to make source deductions for income tax and provide vacation pay - independent contractors are required to remit their own income tax amounts.
Unlike employees, whose primary obligations stem from legislation, independent contractors largely rely on contractual rights in order to guide their entitlements. Independent contractors enter into an entrepreneurial relationship, as opposed to an employment relationship. Due to the nature of the business relationship, independent contractors are not entitled to termination notice, vacation pay or employer CPP/EI contributions. Additionally, dependent contractors are a relatively new and somewhat unclear addition to the traditional employee vs. independent contractor distinction. On paper it is simple: a dependent contractor has an agreement that looks like an independent contractor relationship, but operates in a way that more closely resembles an employment relationship. Practically, it is far more difficult to clearly articulate the differences, particularly as it relates to an independent versus a dependent contractor.
The key difference for employers to be aware of is dependent contractors have similar entitlements to employees with respect to reasonable notice or pay in lieu thereof, upon termination of the relationship with the employer. This can lead to substantial liability exposure when an independent contractor is deemed to be a dependent contractor by a Court, and reasonable notice or wrongful dismissal damages are awarded.
The employee vs. independent contractor vs. dependent contractor distinction is determined by the nature of the relationship formed between the parties. The description of the relationship as set out in a contract is not solely dispositive of the issue. Courts look at the entirety of the relationship, including the context, history, risk allocation and dependency of the parties, when determining the classification of the relationship.
What’s your type?
Generally, the main factors courts rely upon to determine an employment relationship are control and dependency, as well as which party assumes the “business risk and corresponding ability to make a profit". 1 There is no set rule to determine whether someone is an employee, as the courts have emphasized that the totality of the relationship must be considered in order to determine whether someone is an employee or not.
Some questions to ask when considering whether or not someone is an employee include the following:
- Does the worker get to keep profits from service provided?
- Who bears the business risk, or the risk of loss of clients or customers?
- Is the worker supervised?
- Is the worker free to accept other work?
- Does the worker pay taxes, premiums and GST?
- Does the worker invoice the company for their services?
- Is the worker required to work at a particular place of business?
- Does the worker have control over their schedule or workload?
- Is the worker able to hire their own workers?
- Does the worker provide their own tools?
- Is the worker required to wear a specific uniform, or wear a company logo?
- Is the worker economically independent?
- Is the worker an independent business person?
- Is the worker treated the same as the company’s employees (i.e. do they receive health benefits, participate in a bonus scheme or get included in employee performance analytics or performance benefits)?
Independent contractors are akin to entrepreneurs who enter a business relationship or business transaction. Since independent contractors do not have an employee-employer relationship, employment standards do not apply. Instead, the specific contract will determine the legal requirements of each party.
New industries, modern working relationships, and the ‘gig economy’ have blurred the line between employee and independent contractor, sometimes making it difficult to classify the relationship. In particular, “peer-to-peer” styled businesses that connect service providers with consumers are changing our traditional understanding of employment.
A recent case arising out of the Supreme Court of Canada reiterated that two of the key factors for an independent contractor relationship are autonomy and the potential for risk/reward. Autonomy can be seen in exclusivity, control over method of provision of services (i.e. the difference between being told to provide certain services and being told where, when and how to provide those services). The potential for risk/reward speaks to whether the individual or corporation is in a position of making or losing money from the services (e.g. paying another company for the right to sell their products in an area vs. being a purely commission-based salesperson).
Questions to ask when determining whether an individual is an independent contractor include the following:
- Does the worker assume responsibility to ensure the performance and quality of services?
- Does the worker bear the business risk?
- Does the contract limit the worker’s ability to independently profit?
- Does the worker consider themselves to be in business for themselves?
On a spectrum from independent contractor to employee, dependent contractors sit comfortably (or uncomfortably) in the middle. The classification of dependent contractor is difficult to distinguish in practice because it shares characteristics with both independent contractors and employees. Dependent contractors, also referred to as intermediate workers, are contract workers like independent contractors, but they have an exclusive and/or economically dependent relationship with the person or company with whom they provide services for. Due to the power of imbalance in exclusive and dependent relationships, the law has expanded to provide protection for dependent contractors. In recent cases, these protections have been comparable to employee statutory entitlements. In some cases, notice requirements have actually exceeded statutory requirements.2 Even where contracts have defined workers as independent contractors, when the relationship includes dependency or exclusivity, courts have classified individuals as dependent contractors – in turn, entitling them to notice.3 These notice periods have been similar to, and even on par with, the notice periods granted to employees. This is particularly important to note for employers using independent contractor arrangements, because oftentimes the finding of dependent contractor status will do little to defray a notice period entitlement.
It isn't what you say, it's what you do
A large driver of the trend to create a third classification of employment relationship and afford employment-like protections to certain contractor relationships, is the gig economy and associated non-traditional employment relationships. As these unconventional working relationships continue to evolve and become more common, we may begin to see additional dependent contractor classifications.
Not only is it important to understand the different types of relationships and the legal requirements attaching to each, it is also important to understand that classifications can change over time based on the nature of the relationship. Even if a contract defines someone as an independent contractor and the employment relationship reflects that description at the outset, if the parameters of the relationship do not treat the contractor as such over time, the relationship may be construed as something else. While courts have clarified that dependency is based on the entirety of the relationship and cannot be determined at any particular ‘snap-shot’ in time, it is important to note that evaluations will very likely be biased towards weighing more heavily on the present or recent-past, as it will be easier to remember facts, find documents and produce witnesses for this timeframe.4
How to protect your independent contractor relationships:
If you want to hire and maintain independent contractors, it is important to ensure you continually treat your contractors as such and maintain an understanding of where they fit within your operation and how you fit into theirs. While the facts surrounding the relationship will carry the day, consider including language in the contract that covers the following:
Clarification that the contractor does not work for the company exclusively;
- Indicate that the contractor is required to comply with all licencing, permits, and statutory requirements.
- Indicate that, while the company can provide commentary on the quality of services, the contractor ultimately determines the method and timing for providing the services; and
- Termination provisions in the event the contractor is deemed to be an employee.
In addition, to further protect the independent contractor status, we recommend you:
- Seek accounting advice to ensure consulting services payment and taxes are properly being paid pursuant to an independent contractor status; and
- Be careful not extend employee benefits (whether it is bonus, incentive awards, performance recognition, expense allowances and other employment related perks) to an independent contractor.