Independent Contractors vs Employees – More Risks

If the proposed changes to employment law are enacted, businesses using independent contractors (“ICs”) instead of employees will need to be very careful indeed.

Employee Misclassification

The proposed legislation would prohibit employers from “misclassifying” employees as “independent contractors.” (ICs”). This is intended to address cases where employers improperly treat their employees as if they are self-employed and therefor, not entitled to the protections of the Employment Standards Act (“ESA”).

In our experience, some employers use ICs to avoid income tax, CPP, EI and WSIB paperwork and remittance obligations, as well as the more onerous employee entitlements and protections under the ESA. However, some employers are asked to treat their workers as ICs so that the ICs can claim broader deductions as a self-employed party.

In both cases, we advise our client that CRA and the Courts will look at the substance of the working relationship, and not the ostensible classification by the parties: a rose is a rose is a rose. Even before these proposed changes, both the employer and the IC are at considerable financial risk if they go with IC status when the relationship is, in substance, an employment situation (fines, penalties, interest, reassessment, payment of missed remittances). There are a number of factors that bear on this determination, and lots of cases reported. A legal adviser should be consulted as every situation is different, and the particular facts are paramount.

Under the proposed new law, employers that misclassify their employees could be subject to penalties including prosecution, public disclosure of a conviction and monetary penalties. In the event of a dispute, the employer would be responsible for proving that the individual is not an employee.

There will be no change to the definition of “employee” to include a “dependent contractor.” (workers who are really employees due to their history and work dependence on the employer. The current ESA definition is already quite broad, and changes to the definition are likely to have unintended consequences. The real issue is the misclassification of the employees.

As well, the Law Commission of Ontario, which recently studied this issue, specifically advised against a “dependent contractor” provision as its scope would be very difficult to define without inadvertently capturing true “independent contractors”. This would create significant legal and potentially economic uncertainties. If the proposed legislation passes, this proposal would come into force on Royal Assent, and the timing of that is unknown.

We are well aware of the advantages to businesses using ICs instead of T4 employees, but the proposed changes will definitely up the ante on risks for both parties if the authorities don’t agree with the classification.