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 (Okanagan Small Business Services, Inc.).
When it comes time for a small business owner to hire help, they have a few different options to select from:
EMPLOYEES VS. INDEPENDENT CONTRACTORS
Let’s begin by defining what an employee is and what an independent contractor is. An employee is an individual hired by an employer to perform work in exchange for a wage or salary. An independent contractor is a self-employed worker that is hired by a principal to perform specific work. In some cases, this distinction may be obvious, but in other situations it may be difficult to discern. For example, when a homeowner hires a plumber to come fix their leaking faucet, it is quite obvious that the plumber works for a plumbing company and the homeowner has no intention of employing the plumber on an ongoing basis. This one-time use of the plumber’s services exemplifies a Principal (homeowner) – Independent Contractor (plumber) relationship.
Alternatively, if an individual walked into a shop and gives the shop owner a resume, this action would indicate that the individual is seeking employment. If the shop owner proceeded to hire the individual, the individual would expect to work certain hours on certain days and be provided an hourly wage in exchange for their time. This situation exemplifies an Employer (shop owner) – Employee (individual) relationship.
In some cases however, this distinction is not so cut and dry. For example, if a taxi driver owns their own cab, chooses which calls they answer, and selects their own hours of operation – but they work exclusively for one taxi company, is this individual an employee or an independent contractor? Another example would be a plumber that owns their own plumbing company but provides services exclusively to one company (perhaps a large real estate company that requires full-time plumbing services). Is this plumber an employee or an independent contractor? As you can see, the distinction is not always clear.
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
As we mentioned, there are benefits to hiring an independent contractor rather than an employee. Some of the reasons a company may opt to hire an independent contractor are as follows:
While this may all sound fantastic, hiring an independent contractor instead of an employee also has its drawbacks. In the following sections, we will discuss the courts perspective on how to distinguish between “independent contractors” and “employees”, and what can happen if the relationship is mis-categorized. As you will see, independent contractors must be provided with much more autonomy over their work than an employee, which becomes troublesome if an employer wants to have control over when, where and how work is performed.
HOW TO DETERMINE THE DIFFERENCE
In the eyes of the law, there are some fundamental differences between employees and independent contractors. Although no single factor is used to determine how the relationship is categorized, the court's frequently use the following four tests to make this determination:
What we can infer from these tests is that in order for a relationship to be categorized as a principal-independent contractor, the individual performing the work must have significant autonomy over how, when and where the work is performed and they must be free to provide their services to multiple customers, among other relevant factors.
NOTE: It is important to note that the courts will not make their determination based on what is written in a contract, but rather 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 – your contract will be irrelevant.
OK. So now that we have defined what an “employee” and an “independent contractor” are, the pros and cons of each option and the tests a court will use to determine the relationship, we will now 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 these benefits. If they are successful in their claim, the hiring organization (the “employer”) may 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 and claims they were in fact an employee of the company, they can bring a claim of wrongful dismissal. 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. However, when an employer wants to have decision-making authority and control over how, when and where the work is performed, hiring an employee is their best option. Blurring these lines can have significant legal consequences.
If you are considering hiring an independent contractor and want to ensure the relationship maintains this classification, contact the knowledgeable HR professionals at Okanagan Small Business Services to book a consultation meeting. Getting the right information can save you thousands of dollars (and many headaches) later on.
Okanagan Small Business Services, Inc.
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 is the Director of Human Resources at Okanagan Small Business Services. She is passionate about sharing her HR knowledge with local small business owners.
Okanagan Small Business Services Inc. is a small group of professionals who are committed to helping local entrepreneurs grow their businesses. We provide a wide range of support services in the areas of Human Resources, Marketing, Accounting and Law. Our mission is to provide solutions to everyday problems faced by small business owners in the Okanagan and throughout BC.
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