Disclaimer: This article does not constitute legal advice. Information contained herein is intended to provide knowledge about Canadian employment laws to small business owners and to encourage small business owners, entrepreneurs and independent contractors to seek further education about the laws and statutes that govern their businesses. This article is the property of Okanagan Small Business Services, Inc. © 2020. All Rights Reserved. This document may not be reproduced, distributed or transmitted in any form without the prior written consent of the publisher.
When it comes time for a small business owner to hire help, they have a few different options to select from: 1) hire an employee, 2) hire an independent contractor, and 3) outsource temporary help from a staffing agency. In this article, we are going to discuss the first two options. We will explain the difference between an employee and an independent contractor, the pros and cons of hiring each option, and the potential consequences of blurring the lines between the two.
EMPLOYEES VS. INDEPENDENT CONTRACTORS: What is the difference?
Employee: an individual hired by an employer to perform work in exchange for a wage or salary.
Independent Contractor: a self-employed worker that is hired by a principal to perform specific work.
In most cases, the distinction between an employee and an independent contractor will be obvious. For example, if you call a plumber to fix your leaking faucet, it is obvious that the plumber is an independent contractor that you (the principal) have hired. The plumber is coming to perform specific work (fix the faucet), and after the job is done, they will be free to leave and perform similar work for other customers. Alternatively, if you apply for a cashier position at a shop that pays an hourly wage, and are subsequently hired and trained, it is obvious that you are an employee working for an employer (the shop).
In some cases however, this distinction may be more difficult to discern. For example, if a taxi driver owns their own cab, chooses which hours they work and which calls they answer, but they work exclusively for one taxi company - is this individual an employee or an independent contractor?
Hiring independent contractors instead of employees has increased in popularity in recent years. Younger generations are seeking more freedom in their work and modern companies are happy to avoid the paperwork and added expense of having employees on their payroll. While the principal-independent contractor relationship does provide benefits to both the principal and the independent contractor, mis-categorizing the relationship can create legal problems down the road.
PROS & CONS: Benefits of hiring an Independent Contractor?
As we mentioned, there are benefits to hiring an independent contractor rather than an employee. Three reasons a company may choose to hire an independent contractor are as follows:
BENEFIT #1: Lower Expenses
BENEFIT #2: Less Paperwork
BENEFIT #3: Less Obligations
While this may sound fantastic, hiring an independent contractor instead of an employee also has its drawbacks. To maintain a principal-independent contractor relationship, the independent contractor must be provided with much more autonomy than an employee when it comes to determining how to perform their work. This becomes troublesome when an employers wants to have control over when, where and how work is performed.
Next, we will discuss the courts perspective on how to distinguish between an independent contractor and an employees, and what can happen if the relationship is miscategorized.
THE COURTS PERSPECTIVE: How to determine the difference.
We have established that telling the difference between an employee and an independent contractor isn't always easy. So, the courts have established some rules for making this determination. No single factor is used to determine how the relationship is categorized; a four-part test is used to make this determination:
NOTE: It is important to note that the courts do not make their determination based on what is written in a contract, they make it on what happens in practice. If the courts look at the above factors and determine the individual is an employee, it will not matter if you have a written contract that explicitly states an individual is independent contractor.
POTENTIAL CONSEQUENCES: What is the worst that can happen?
Now that we have defined what an employee and an independent contractor is, the pros and cons of hiring each option, and the tests a court would use to classify the relationship, we will discuss the potential consequences of treating an individual as an independent contractor when in reality they should be classified as an employee.
There are a few potential legal issues that can arise from this situation. First, if a government agency questions the arrangement for any reason and determines that the individual should have been classified as an employee, the hiring organization (the “employer”) may be forced to pay thousands of dollars in outstanding statutory premiums (such as EI and CPP), penalties and interest.
Aside from government intervention, the individual (the “independent contractor”) may want to change their status to “employee” at some point down the road. For example, if the individual is involved in a workplace accident and wants to claim EI, they may argue that they were in fact an employee of the company so that they would be entitled to employee benefits that they would otherwise not be entitled to. If they are successful in their claim, the hiring organization (the “employer”) may, again, be on the hook for a hefty payment.
A similar issue may arise if the hiring organization wishes to terminate the independent contractor’s services. If the individual (the “independent contractor”) becomes disgruntled, they may claim that they were in fact an employee of the organization. This would entitle the individual to bring a wrongful dismissal claim. If they are successful in their claim, the hiring organization (the “employer”) may be ordered to pay the individual wrongful dismissal damages in addition to having to pay government agencies for outstanding statutory premiums, penalties and interest.
What we can take-away from this information is that there are times when hiring an independent contractor is more appropriate than hiring an employee, and vice versa. However, blurring these lines can have significant legal consequences that an employer should be aware of. It is always best to do your homework before hiring either one!
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Williams-Whitt, K., Begg, M., Harris, T. & Filsinger, K. (2017). Employment law for business and human resources professionals. Alberta and British Columbia. Toronto, ON: Emond Montgomery Publications Limited
Danielle Harshenin, BBA, leads the HR department at Okanagan Small Business Services. She is passionate about sharing her knowledge with small business owners.