Contractor or Employee? Explaining the Difference

[00:00:00] So, thinking you have an independent contractor when you really have an employee is pretty common and it is a headache to resolve. I'm Andrea Adams and today on the HR Hub I'm talking to Brady Farmer again about this topic. He's a partner at Matthew Dinstell & Clark in Calgary.

[00:00:22] They're a big Canadian employment law firm and today we're talking about this question of contractor or employee and why it's so easy to get it wrong. Hello Brady, how are you? I'm good. Thank you for having me again. I'm excited to be here. Yeah, thanks. Thanks for coming on. Okay, so independent contractor, employee, why is it so easy to get this wrong?

[00:00:52] Yeah, I think it's just the classic that there is no bright line test for distinguishing between an employee and an independent contractor. And really they can look very similar to each other at times. And so because it's that really fact-specific exercise, when determining between the two, it's easy for employees, employers and independent contractors to get confused by it. And really it's frustrating.

[00:01:19] The only ones who win about this are the lawyers. It's a specific exercise based on that specific relationship between the employer and the worker. And that one has to be assessed based on its own circumstances, which makes it really hard at times. Mm-hmm. I find the language confusing too because you talk about independent contractor, but employers, in my experience, were often putting employees on contract, meaning that there's an end date to their employee.

[00:01:48] And so that part gets confusing too. But tell me about the legal factors that help an employer or HR determine whether, in fact, an employee, well, are they an employee or are they an independent contractor? Yeah, absolutely.

[00:02:07] And at the end of the day, generally what some of the things that a court might consider, and different jurisdictions might have slightly different elements too, is depending on, you know, what province or territory you're looking into. But might consider things like the level of control that the employer has over the worker's activities. And generally speaking, the more control the employer has over the manner in which the work is being done, the more likely it's going to be an employee.

[00:02:33] So that would be where you perform your work, when you perform it. Is it nine to five? When are you taking your breaks? And what procedures are you using to do that work? The more control, the more it's likely going to be an employee. Because the idea is that, and again, it's not one size fits all, but a true independent contractor is going to be maybe setting some of their own hours, setting some of the procedures on their own.

[00:02:58] They're going to decide that how they get that job done as long as they just get whatever job done that they've been contracted to do. Another element would be whether the worker provides their own equipment and tools.

[00:03:12] Again, it's a typical thing that an employer would provide the tools and supplies for an employee, whether that's maybe some of the construction tools on a construction site or in an office setting, the laptop, computer, desk, chair, that type of thing, where sometimes the independent contractor is supplying their own tools. And there's going to be unique circumstances depending on what the relationship is.

[00:03:38] Yeah, maybe an independent contractor is bringing their own laptop or their own tools onto site to get the work done. And a court would also consider whether the worker actually hires their own employees. Because again, at the end of the day, sometimes an independent contractor will hire their own employees or subcontract from their work to others.

[00:04:01] Whereas traditionally speaking, an employee, a true employee can't hire other employees to do their work or for the employer. So yeah, you know, that's one of those things that might be considered as well. And the degree of financial risk or opportunity for profit or loss is something that will be considered as well.

[00:04:20] Because at the end of the day, an independent contractor may have a greater risk, but also an opportunity to actually earn more depending on maybe the quality of their job or maybe how fast they do it. Whereas a true employee often, and again, there's maybe bonuses or commissions, but a true employee is going to get their hourly wage or their salary. Regardless of how quick the job's done or maybe even how well it's done.

[00:04:48] If it's not being done well, maybe that's a disciplinary issue and that's something else entirely. But they're going to get their pay regardless of the actual work product and their base pay. Where for an independent contractor, that could be different. And I think lastly is, well, a court might consider the actual intention of the parties. That's not going to be the determining factor. But they would consider what did the parties plan on when they were entering into this agreement?

[00:05:18] Do they want it to be an employee and employer? Or do they want it to be an independent contractor and an employer? That'll at least be taken into account when trying to figure that all out. And so what it really is, it's a combination of factors. And that's what makes it so difficult to distinguish between those two. As I said, it's not a bright line test.

[00:05:37] That's why in many cases, if there is a real question around that, I'd consider speaking to legal counsel to get that expert opinion on whether or not that individual may be a contractor or an employee. And it can have quite a few implications as well for that relationship. Yeah. Usually, you know, in either case, when I've come across this, there's a contract.

[00:06:05] You know, usually specifying that the person is an employment contractor or is an independent contractor. Sorry. Does the contract matter? Yeah, absolutely. So it goes directly to that intention of the parties. It's absolutely relevant what the parties intended with the contract. And if it's very clear, this individual is being retained as an independent contractor. That's going to be part of the consideration.

[00:06:33] But sometimes the idea is that the form of the relationship, so that contract, won't necessarily take precedence over the actual substance of the relationship, which is how is it actually taking place? How are they actually performing their work? How much control is there actually being levied over that particular individual? And so it's part of the consideration, but it won't be the end all.

[00:07:03] So, like this comes up actually quite a bit. So why do employers prefer independent contractors? And what happens when they're getting it wrong? Yeah. No, and that's a good question. Yeah. Why does this even come up? Exactly. Yeah, exactly.

[00:07:21] And usually there's a few different reasons, but really there's usually more flexibility in retaining an independent contractor because for most independent contractors, usually employment standards legislation will apply. So the employer doesn't have to worry about minimum standards around vacation, hours of work, overtime, things like that. So there's more flexibility and even less liability around termination.

[00:07:49] So, you know, the considerations around minimums, notice of termination under employment standards legislation or common law notice, those won't necessarily apply. The parties can just simply agree on how much or how little notice needs to be given on termination. So it's a good process there too. An employer may not even need to really supervise the work the same they would with an employee either. Like if it's a true independent contractor, you're kind of saying, this is what I need you to do.

[00:08:20] You go figure out, you know, how to do it in the processes. And sometimes there's going to be a little bit more control and supervision over an independent contractor in some settings than others. But yeah, that flexibility I think is a really big part of it. But to your question, you know, as well, you can't just call someone an independent contractor and make it so. And that's what we were getting at. It might work for a while. No one might question it.

[00:08:46] But if the relationship sours at any point, whether it's during the life of the relationship or maybe on termination, then you might be staring down the barrel of a complaint, whether it's employment standards or a civil claim. And now the employer is required to actually demonstrate that the relationship is an independent contractor relationship. You know, it was fine for years or months, whatever it might be. But now you got to defend it.

[00:09:13] And if the employer gets it wrong, they may end up on the hook for quite a few damages. And that could be things like maybe now this individual is saying, I'm entitled to hundreds of hours of overtime. Maybe it's holiday pay, vacation pay or termination pay because they say, hey, you just ended this relationship. I like the way things were going. But now I'm actually claiming termination pay and I've been working for you for 10 years as an independent contractor.

[00:09:41] But now, you know, I think I'm owed termination pay and they might say, I've been exclusively working for you for that entire time. And that's one of those considerations as well, actually, that would maybe go into that analysis of whether or not their employee or independent contractor is, are they working for anyone else? Or has it just exclusively been this one employer?

[00:10:02] Because if they're just working for that company, that might indicate that's an employee, not an independent contractor who's on their own jumping between multiple companies. And so this independent contractor might say, OK, well, it was fine while we were working together, but now I'm upset. Yeah. Yeah. So that comes into play.

[00:10:23] And on top of that as well, there would be tax consequences potentially where the employer wasn't necessarily remitting EI, CPP income taxes when they were treating the individual as an independent contractor. But everybody's favorite friend, the CRA might come knocking at some point and say, hey, you know, you didn't remit properly for that individual for this significant time period. And now one or both of you is on the hook to remit that to the CRA.

[00:10:52] And so that can be a really big issue. And it's, again, why I say that whenever there's a question, if someone is an independent contractor or employee, it's a good idea to speak with legal counsel and get that assessment of whether or not the relationship is being treated as it likely should be. Yeah. And do not mess with those tax agencies. Cheapers. No. They are not patient either.

[00:11:21] I wouldn't say it's my area of expertise, but it certainly finds its way into employment law every now and then. So if HR has a suspicion that someone is actually an employee rather than the independent contractor that they're classified as, what should they do about it? Yep. Fair enough. That's a tough spot to find yourself in. But it happens. Again, it's not the end of the world.

[00:11:48] First off, it might not be a surprise that I'd recommend speaking to legal counsel so you could talk about and understand the full extent and potential of liability in those circumstances. And then a plan to address it can be created. Like if you know, you get the sense that, oh, you know, this person absolutely is an employee, but we've labeled them and treated them as an independent contractor now.

[00:12:10] I think a plan can be created to try and transition that individual to a regular employment contract to at least try and fix and alleviate the issue moving forward. And in that case, you might want to consider something like providing the individual with consideration, like a signing bonus to sign a contract to get them to agree and buy into the new system. And again, make sure that, you know, you're fixing the problem at least going forward.

[00:12:38] What's happened in the past, unfortunately, that has already happened, but you can try to fix it going forward. And there, the messaging might be important as well. You might not want to just say, hey, we realize we've made a big mistake and screw up here. You might want to focus on what the benefits are of bringing that individual on as an employee.

[00:12:58] If they are getting company benefits or anything else, certain protection, things of that nature, maybe you want to focus on that and why, you know, maybe their skill set and everything else, you know, you want to make them an actual employee and how it's going to benefit them, including any, as I said, you know, a signing bonus or something like that. But I think that's where some of the messaging would be important as well.

[00:13:20] You don't necessarily want to just say, hey, we're trying to fix this giant mistake we made, but more so, hey, here's a good benefit for you. You know, we enjoy working with you. Here's what we'd like to do going forward for this relationship. Yeah. Does the liability for the years they were called an independent contractor, but actually an employee, does that liability continue even though they've signed on the contract and they're now unemployed? Does that go away?

[00:13:48] Yeah, and that's a good question from the tax perspective. I admittedly don't know how far back maybe the CRA might go looking. Now, for things like employment standards, that's a little more interesting because each jurisdiction, as far as I'm aware, has certain limits on how far back employment standards at least will go to awards, say, overtime or holiday vacation pay that wasn't paid to an individual, whether that's six months or a year.

[00:14:17] But then you also there's also the risk that if the individual were to start a civil claim in that sense, they could potentially go even further back. And again, that depends on the jurisdiction, you know, whether or not at that point maybe they're looking at a two-year time frame instead of something under employment standards for a six-month to a one-year time frame on what they can potentially claim there. But that would be part of the analysis and consideration around that as well.

[00:14:47] You know, like how much potential liability are we actually looking at here in terms of what has or hasn't been provided to the individual? So it's a really good question. And I think it'd be important when you're making those decisions. Yeah. Okay. All right. We have reached the end of this. Where can someone learn more about this and more, you know, and find you? You can certainly find out more about some of the, you know, this topic and my contact information can be found on my firm's website.

[00:15:15] So that's Matthews, Dinsdale and Clark LLP. And we have offices all across Canada. And I'm located in the Calgary office and you can shoot us an email and give us a call, including myself at any time. We'd be happy to help. Thanks, Brady. That was great. I'm thinking about really the potential costs of getting this wrong one. It's actually kind of alarming. So if you think you have a situation like that out there, fix it.

[00:15:43] Brady and I did a couple episodes, actually. We did one on constructive dismissal. That's right here. And we did another on severance. That's right there. Or if you're, you know, not seeing those links, it's also in my list of episodes. Thanks for watching others. See you next time.