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Employee Versus Independent Contractor: The difference and the risks of misclassification

By Neala Kielley, Associate Lawyer, Cox & Palmer, and Anna Cook, Partner, Cox & Palmer

The law treats independent contractors and employees very differently. Employees enjoy greater legal protections in the workplace in part because employers have heightened legal obligations toward them. On the other hand, independent contractors are generally free to negotiate the terms of the relationship (i.e., hours of work, price, and delivery of services) and are not as tethered to the employer.


Employers beware

Calling your employees independent contractors to avoid fulfilling your obligations as an employer will not score you any points and may result in significant liability for your business. A mere statement in a written contract that the individual is an independent contractor is not enough.


Employees

An employee is an individual who provides services exclusively to the employer’s business. The employee is a party to a “contract of service” (think of the staff who are listed on your payroll).


Independent contractors

An independent contractor is an autonomous, self-employed individual who provides services to clients through the contractor’s own business for a specified period of time. They are a party to a non-exclusive “contract for services” with the employer (think of the IT person you call).


Key differences from an employer’s standpoint

The following are some examples of obligations employers have to employees but not to independent contractors:

Statutory benefits

These benefits include annual vacation, public holidays, and overtime pay, plus statutory protections, such as leaves of absence for parental and sick leave.

Notice of termination

Employees are entitled to reasonable notice of termination or pay in lieu of notice at common law.

Remittances

Employers are responsible for remitting appropriate taxes and contributing to and remitting CPP and employment insurance premiums.


Risks of misclassification

Misclassifying workers may give rise to the following liabilities:

  • claims for unpaid wages, payroll taxes, or CPP contributions, and penalties for failing to deduct and remit income tax and premiums

  • claims for reasonable notice or pay in lieu thereof at common law (which generally ranges from two to four weeks’ pay per year of service, depending on the circumstances), if the employer terminates the working relationship

  • penalties for failing to comply with minimum employment standards under employment standards legislation


How to tell the difference

While there is no single test for determining whether a worker is an independent contractor, the central question that employers should ask themselves is whether the person is performing the services as a person in business on their own account. If so, they are more likely to be an independent contractor. However, for greater certainty, employers should consider the following factors:

  • the level of control the employer has over the worker’s activities (e.g., hours of work, supervision, etc.)

  • whether the worker provides their own equipment

  • whether the worker hires their own helpers whether the worker is free to work for other employers simultaneously

  • the degree of financial risk taken by the worker

  • the degree of responsibility for financial investment and staff management held by the worker

  • the worker’s opportunity for profit


Mitigating risk

Prior to engaging, employers should perform the following tasks:

  • Ascertain whether the worker will be engaged to perform the services on their own account or under the employer’s control.

  • Ensure that the circumstances of the working arrangement support the worker’s designation as employee or independent contractor.

  • Engage legal counsel to assist in drafting a written contract to avoid misclassifying the worker.

  • Give employees an opportunity to seek independent legal advice prior to signing a contract.

Regardless of classification, workers are an integral part of any workplace. Employers who understand the distinction between independent contractors and employees, as well as the consequences of misclassification, will be better equipped to grow and manage their workforce.



Neala Kielley, Associate Lawyer, Cox & Palmer

Neala Kielley is an associate lawyer with Cox & Palmer (St. John’s), where she primarily practises in the areas of labour and employment law, administrative law, human rights law, and litigation.


Anna Cook, Partner, Cox & Palmer

Anna Cook is a partner at Cox & Palmer, St. John’s, where her practice focuses primarily on corporate and commercial, employment and labour, and privacy law. She handles matters including commercial financings, commercial real estate purchases, financing and leasing, share sales, asset sales, mergers and acquisitions, and joint ventures. She has extensive experience acting for clients ranging from small-business start-ups to large multinational and international corporations and has advised businesses at every stage of the business cycle. A strong supporter of women in business, Anna is an active NLOWE member and a presenter for the NLOWE Entrepreneur of the Year Awards.


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