Working Wisely Beware of the legal pitfalls of contract workers

February 8, 2016

16 - Wilson.K

Courts and labour tribunals typically categorize workers using two terms: independent contractors and employees. For the purposes of liability, organizations are generally held liable for unpaid payroll taxes, are at risk for wrongful dismissal claims, and are required to provide the minimum standards under the applicable employment standards legislation to employees. Independent contractors are not entitled to these same protections. They also enjoy some tax advantages that employees do not. As a result of those tax advantages, individuals often have a preference to be designated as independent contractors.

Unfortunately, simply designating an individual as an independent contractor is not sufficient to avoid the above noted employee obligations.

There is no set formula to determine if someone is an employee or an independent contractor. Canadian courts have provided numerous factors which are to be taken into consideration. Some of these factors include:

  • The degree or absence of control exercised by the worker
  • Ownership of the tools used to complete the work
  • Whether the worker has a chance of profit or risk of loss
  • The level of integration of work into the employer’s business
  • The parties’ intentions

Adjudicators will examine the real substance of the relationship as it operates on a day-to-day basis. Generally speaking, if an individual is acting in their own business, exercises a great amount of control over the work completed, owns the tools that are used to complete the work, bears the risk of loss and chance for profit and the work is merely an accessory to the employer’s business, they will typically be viewed as an independent contractor. Conversely if an individual has little to no control over the work performed, is performing work that is an essential part of the employer’s business, bears no risk of loss or chance for increased profit and does not own the tools or equipment used, they are likely to be categorized as an employee.

A party may be liable for significant wrongful dismissal damages if it has improperly characterized the contractual relationship as one of independent contractor when in reality it was employment. To further complicate things, even if it is not determined to be an employment relationship, damages similar to wrongful dismissal severance can still occur, if a court determines that the relationship is one of “dependent contractor”.

For example, in Keenan v Canac Kitchens Ltd, 2015 ONSC 1055, the Ontario Superior Court held Canac Kitchens Ltd. liable for $124, 484.04 in wrongful dismissal damages for terminating independent contractors that the Court found were in reality more properly characterized as “dependent contractors”. Lawrence and Marilyn Keenan had worked for Canac as employees from 1976 until 1987 installing kitchen cabinets. In 1987 they were told by Canac that they would carry on their work for Canac as independent contractors. The Keenans signed an agreement characterizing them as subcontractors.

The Keenans never incorporated their own business but did register a business name “Keenan Cabinetry”. They obtained the insurance required by their agreement with Canac and registered with WCB. Although the Keenans were responsible for cutting cheques to the installers they supervised, the installers were not their employees. Further, “Keenan Cabinetry” never registered as an employer with the Canada Revenue Agency. With the exception of a few jobs on weekends, the Keenans worked almost exclusively for Canac.

The Keenans considered themselves loyal employees of Canac. They enjoyed employee discounts, wore shirts with company logos and had Canac business cards. To the outside world, and in particular, to Canac’s customers, the Keenans were Canac’s representatives. In March 2009, the Keenans were told that Canac was going to close its operations and their services would no longer be required. Canac took the position that it was not required to give the Keenans reasonable notice that their services were being terminated because they were independent contractors.

The court found that the Keenans were not independent contractors but rather “dependent contractors” entitled to reasonable notice of termination, similar to employees. Lawrence and Marilyn, respectively, were found to have given Canac 32 and 25 years of service. The court concluded that 26 months severance was reasonable for each.

To mitigate or reduce the risks of an improper classification such as what occurred with Canac, a contracting party has two main options. First, the relationship can be characterized as that of an employee/employer from the outset if that is the accurate description. This places additional financial and administrative burdens on the employer, and minimizes certain tax advantages that may be available to the worker, but allows for certainty that the above noted risks will not unexpectedly come into play.

Second, the worker can be hired as an independent contractor and the contracting party can structure the relationship and day-to-day activities so that a majority of factors listed above support the conclusion that the relationship is truly one of an independent contractor.  The contracting party should also attempt to protect itself through contractual indemnities given by the independent contractor.

Contractual provisions that support a finding of an independent contractor relationship include those that define the worker as an independent contractor, define the term of the relationship and limit its permanence, and expressly state the contractor is responsible for all tax obligations. The relationship should not be exclusive, allowing the contractor to work for others (subject perhaps to some reasonable limitations such as confidentiality and conflict of interest policies). Payments should be made in accordance with invoices rendered rather than being similar to salary. Ideally, the contractor should not be reimbursed for expenses as they are part of his “cost of doing business”. Where possible, the contractor should also be required to provide his own office, tools, equipment, vehicle and staff.

Other contractual provisions that will help to limit the risks associated with an improper characterization include a properly worded termination provision that limits the damages owing for termination without cause, repudiation and breach of contract, even if the worker is later characterized as an employee or “dependent contractor”.

Some careful planning and structuring of the working relationship and care in drafting the agreement can avoid or limit the risks of adverse consequences down the road.

Author: Kevin C. Wilson, Q.C., MacPherson Leslie & Tyerman LLP, Saskatoon

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