By Kaylyn Anthony
What employers should know & the risks of misclassification
Employment status is a spectrum, with employees at one end and independent contractors at the other. In the middle is the dependent contractor—a more recently recognized category of worker. The law places greater responsibility and obligation on an employer in relation to their employees than it does in relation to independent contractors. Therefore, misclassifying workers as independent contractors, or even dependent contractors, when there really exists an employer-employee relationship can have significant consequences and will result in additional expenses for employers.
Employment status is a spectrum, with employees at one end and independent contractors at the other. In the middle is the dependent contractor—a more recently recognized category of worker. The law places greater responsibility and obligation on an employer in relation to their employees than it does in relation to independent contractors. Therefore, misclassifying workers as independent contractors, or even dependent contractors, when there really exists an employer-employee relationship can have significant consequences and will result in additional expenses for employers.
Employees vs. independent contractors
Under Newfoundland and Labrador’s Labour Standards Act, an “employee” is defined as a natural person who works under a contract of service for an employer. A “contract of service” is further defined in the Act as a contract in which an employer either expressly or by implication in return for the payment of a wage reserves the right of control and direction of the manner and method by which the employee carries out the duties to be performed under the contract.
Independent contractors, on the other hand, are self-employed workers who serve clients through their own businesses. The contractor is said to be “in business on their own account” and party to a contract for service. Accordingly, they have greater freedom and control as to how work is performed, and their status is distinct from that of an employee. Therefore, employment law treats independent contractors very differently.
Employees enjoy much greater legal protection, and consequently, employers bear much greater burdens and obligations to employees than to independent contractors. For example, the majority of employees benefit from the minimum standard protections found in the Labour Standards Act, unlike independent contractors, who are not protected by the Act. Employers are responsible for remitting an employee’s Canada Pension Plan (CPP) contributions, Employment Insurance (EI) premiums, and income tax. However, independent contractors are personally responsible for their own remittances. In addition, employees are entitled to regular EI benefits, whereas independent contractors are not eligible.
The in-between: the dependent contractor
Dependent contractors are those workers who cannot be categorized as employees but who, unlike independent contractors, are economically dependent on a single employer. This economic dependence typically results from an exclusive working relationship between a contractor and an employer. While there is no single percentage of earnings indicating the threshold at which a worker’s dependence on a single employer can be characterized as exclusive, the Ontario Court of Appeal has held that in order for the contractor to be considered dependent, more than 50 percent of the contractor’s earnings must be derived from a single employer.
Dependent contractors are similar to employees in that they are entitled to reasonable notice of termination, but they are similar to independent contractors in that they must remit their own CPP, EI, and income tax amounts, and in most jurisdictions, are exempt from minimum standards legislation.
What if you get it wrong?
If an employer misclassifies a worker who is actually an employee as an independent contractor or dependent contractor, the employer can be exposed to many potential liabilities. For example, although contractor relationships are negotiated outside the minimum standards legislation, misclassifying a worker as an independent contractor can result in significant consequences for lead to the employer. These consequences may include orders to pay back wages (including overtime, vacation, and holiday pay) or penalties for non-payment of wages. They may also encompass compensation for workers who have suffered losses due to violations of minimum standards, including loss of earning, expenses incurred seeking new employment, benefit plan entitlements, and emotional pain and suffering. In addition, misclassification of a worker for CPP, EI, and income tax payroll deductions can have serious financial implications for employers, as they can be ordered to pay the missed CPP and EI contributions, along with income tax owed by employees.
Employers should ask . . .
The following are factors that the Supreme Court of Canada has approved as a summary of the various tests for independent contractor status. Employers should keep these considerations in mind when classifying workers in order to avoid and mitigate their risk. In addition to the questions below, when identifying a worker as a dependent contractor, employers should also keep in mind whether the contractor’s work is dependent on them as an employer.
What level of control does the employer have over the worker’s activities? The more control the employer has, the more likely the worker will be classified as an employee.
Does the worker provide their own equipment? If their equipment is provided by the employer, the worker is more likely to be classified as an employee.
Does the worker hire their own helpers? If so, they are more likely to be classified as an independent contractor.
What is the degree of financial risk taken by the worker? The greater the risk, the more likely the worker is to be classified as an independent contractor.
What degree of responsibility for investment and management is held by the worker? Again, the greater the degree of responsibility, the more likely the worker is to be classified as an independent contractor.
Finally, what is the worker’s opportunity for profit in the performance of their tasks? The greater the opportunity for profit, the more likely the worker is to be classified as an independent contractor.
Kaylyn Anthony
Kaylyn is an associate with Cox & Palmer’s St. John’s office. She has a general legal practice with a strong interest in the areas of labour and employment, administrative law, and insurance litigation. Kaylyn is also a member of Cox & Palmer’s start-up practice group and uses her exceptional research skills and attention to detail to provide valuable legal solutions to her clients. If you have employment questions, please contact Kaylyn at 709-570-5518.
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