Employee? Independent Contractor? Something in between? What’s the differance and does it matter?

McKee v. Reid’s Heritage Homes Ltd., 2009 ONCA 916 (CanLII)

Aandrew-montgomery-lgre you an employee, an independent contractor or possibly something in between the two? The answer is not merely academic. It can have important and perhaps even unanticipated implications.  To make things just a little more complicating, the answer to the question is not so much found in the wording used in a contract to describe the relationship,  it is more in the character and in the nature of the relationship.  In other words, just because a written document may refer to an individual as an employee, or as an independent contractor, or something else, the words themselves do not necessarily make the individual one or the other.  The presence or absence of certain salient characteristics in the relationship must be examined in order to determine whether the relationship is one of employment or that of an independent contractor.

The court in McKee cited a test referred to as the Sagaz/Belton analysis that is used to determine whether a relationship is one of employment or that of an independent contractor.  The Supreme Court of Canada stated the test in its decision in 671122 Ontario Ltd. v. Sagaz Industries Inc., [2001] 2 S.C.R. 983, 2001 SCC 59:

“The central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account.  In making the determination, the level of control the employer has over the worker’s activities will always be a factor. However, other factors to consider include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.”

The Ontario Court of Appeal re-stated the Sagaz test in Belton v. Liberty Insurance Co of Canada, 2004 CanLII 6668 (ON CA) in the following five principles:

  1. Whether or not the agent was limited exclusively to the service of the principal;
  2. Whether or not the agent is subject to the control of the principal, not only as to the product sold, but also as to when, where and how it is sold;
  3. Whether or not the agent has an investment or interest in what are characterized as the “tools” relating to his services;
  4. Whether or not the agent has undertaken any risk in the business sense or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission;
  5. Whether or not the activity of the agent is part of the business organization of the principal for which he works.  In other words, whose business is it?”

As stated at the outset, the result of the application of the Sagaz/Belton test is not merely academic.  Numerous practical implications follow from the determination that a worker is an employee or an independent contractor.  What follows here is neither an exhaustive list of the implications, nor an in depth discussion of any one of them.  Included in the list of implications, however, are the following examples:

Statutory Remittances

Employers must deduct and remit on behalf of each of their employees, Income Tax, Employment Insurance premiums and Canada Pension Plan contributions.  Independent contractors make all of their own statutory remittances but, when it comes to Income Tax, they have the advantage of deducting all reasonable business expenses against income earned.  Subject to certain legal differences and procedures associated with different types of business entities, this advantage will apply whether the independent contractor is a sole proprietorship, partnership or corporation.

Pension Plan

Where made available, employees often pay into a pension plan with their employer and the employer will make contributions to the plan on behalf of each employee.  Independent contractors will not have this advantage, though they may create such a scheme for their own employees.

Compensation

Employees are generally paid a wage or salary.  They generally do not share in the financial risk with the employer and, consequently, have no expectation of sharing in the profits of the business.  Independent contractors  bear the financial risk of the  their business and, consequently, share in the profits of the business.  Depending on how they are organized legally as a business, they might take the profit in the form of a salary , dividends or some combination of the two.  They might also have the option of leaving some of the profit in the corporation, as an investment in the business.

Federal and/or Provincial legislation

Certain Federal and/or Provincial labour statues and workplace safety statutes which provide safeguards for employees will not have any application to independent contractors.

Entitlement to Reasonable Notice or Pay in Lieu

Barring just cause for dismissal, employees have both a statutory right and common law right to reasonable notice of dismissal or pay in lieu thereof.   Independent contractors have no entitlement to reasonable notice or pay  in lieu thereof.

Many more differences could be listed and much more could be said about the examples cited above.  One other very important legal distinction that McKee does remind us of, however, is that the courts have long recognized a special type of business relationship that falls somewhere in between that of the employee and that of the independent contractor.  It is the relationship of the “dependent contractor“.

In the case of a “dependent contractor” there is still no employer/employee relationship but, because of certain peculiar characteristics of the business relationship, the courts have been prepared to imply that reasonable notice of termination is a legally binding term of the agreement creating the relationship.  A dependent contractor relationship arises where there is a certain exclusivity and permanence of service being provided by a contractor that makes the contractor economically dependent on the business entity being served in the relationship.  For example, the courts have recognized a relationship of dependent contractor where self employed truckers have exclusive long term contracts with a mining company.  A dependent contractor relationship has also been found where self employed individuals act as exclusive distributors for a paper company.  The important thing to remember here is that where the relationship of dependent contractor is established, the contractor may well be entitled to reasonable notice of termination of the contract because of the economic dependency that often ensues with such a relationship.

Finally, to come full circle, a dependent contractor relationship, cannot be avoided simply by calling the business relationship in the wording of the contract that of an independent contractor.  It is the nature of the relationship that is all important.

If you are working as a self employed individual and providing services exclusively and  over the long term to one client, you may well be a dependent contractor and entitled to reasonable notice in the event of termination of your contract.  As always, if you have concerns about your specific circumstances, you should speak to a lawyer.

 

 

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