A.
INTRODUCTION
In difficult economic times, charities
and not-for-profit organizations may be faced with reduced
revenue and may be considering opportunities to reduce their
costs by examining alternative employment arrangements.
One alternative is to hire workers on contract
and classify those workers as “independent contractors”, and
not employees. However, organizations must be cautious in
classifying workers as either independent workers or employees,
as there are potential serious legal consequences arising
from an incorrect classification.
An employer has fewer legal obligations
when dealing with an independent contractor as opposed to
hiring an employee. Apart from the cost of benefits, the hiring
of an independent contractor will not trigger the employer’s
obligations to remit to the government all statutory payroll
taxes and deductions. Employers are required to deduct and
remit amounts for income tax, Canada Pension Plan (“CPP”),
Ontario Employer Health tax and employment insurance (“EI”).
For CPP and EI, the employer also has to remit an employer
premium. For some businesses, as well as charitable or not-for-profit
organizations, this makes hiring an independent contractor
rather more appealing.
A potential worker may request that (s)he
be classified as an independent contractor for their own financial
reasons. They may wish to receive monies without any statutory
deductions so as to maximize their immediate income. Also,
as employees are restricted in the types of expenditures they
are entitled to deduct from employment income, a classification
as an independent contractor would entitle them to deduct
all reasonable business expenses from their gross income.
While there may be benefits for both the organization and
the worker in classifying the worker as an independent contractor,
there are serious repercussions if the classification is later
found to be incorrect.
1.
Consequences of Incorrect
Classification
a)
Canada Revenue Agency:
An employer who fails to deduct income
tax at source, as well as the required CPP contributions and
EI premiums, must pay not only the unremitted taxes, but also
the employer’s share and the employee’s share of any premiums
owing, plus penalties and interest. The issue of whether a
worker is an employee or an independent contractor arises
frequently in the Tax Court of Canada. As a result, an improper
classification may be costly to the employer, both in terms
of not only the premiums, penalties and interest but also
the legal fees of defending a challenge by the CRA in the
Federal Court.
The CRA has prepared a guide entitled
“Employee or Self Employed?”
to assist employers and workers in deciding whether the person(s)
or individual is or will be considered an employee or an independent
contractor. A review of this publication is recommended for
any organization considering hiring an individual as an independent
contractor rather than an employee.
b)
Workplace Safety and Insurance:
What happens if the individual suffers
an injury and claims benefits under the Workplace Safety
and Insurance Act (“WSIA”)? Was the person a “worker”
within the meaning of that Act? Where it is determined by
the Workplace Safety and Insurance Board that independent
contractors are really employees under the WSIA, it can charge
an organization of being in breach of the WSIA for not remitting
premiums for these workers. The consequences of a breach of
the WSIA are serious and can lead to:
i)
Investigation by the Board;
ii)
The charging of the outstanding amount due on the organization’s
premiums together with interest;
iii)
A guilty finding in respect of a provincial offence
and the levying of substantial fines.
c)
Wrongful Dismissal Claims:
The termination of an independent contractor
who later claims to have been an employee may give rise to
a claim against the organization for an action for wrongful
dismissal, which could include monetary claims for such things
as pay in lieu of notice substantially in excess of the minimum
requirements of the Employment Standards Act, 2000
(Ontario) (“ESA”), as well as severance pay under the ESA.
Although the written contract between the so-called independent
contractor and the organization may provide fewer rights for
the contractor in the event of the termination of his or her
services, courts will disregard such provisions if it is found
that the individual was in fact an employee, as such a contractual
term would violate sections of the ESA that prohibit contracting
out of the minimum standards of that legislation.
The Ontario Court of Appeal recently awarded
a former employee of La-Z-Boy Canada Limited twenty months
pay in lieu of notice, finding that the designation by the
company of the employee as an independent contractor was not
valid: Braiden v. La-Z-Boy Canada Ltd.
The employee was terminated after 23 years of service with
the provision of just sixty days notice under the written
contract designating the sales representative an independent
contractor. The Court of Appeal held that the facts of the
relationship unequivocally pointed to the existence of an
employment relationship.
d)
Employer’s Duties under the
ESA.
There are a number of obligations under
the ESA that must be adhered to if the individual working
for the organization is characterized as an employee. While
an individual who is truly an independent contractor is ineligible
for certain ESA benefits, such as overtime pay, pregnancy
and parental leave, vacation pay, minimum termination pay
and, where applicable, severance pay, these are all benefits
available and potentially owing to employees. Therefore, the
incorrect characterization of a worker as an independent contractor
may result in orders being made by the Ontario Ministry of
Labour requiring payment of these various obligations. Also,
a failure to provide pregnancy or parental leave where required
under the ESA can lead to a discrimination complaint under
the Ontario Human Rights Code (“Code”). Due to the
recent amendments of the Code, individuals now have the resources
of the Ontario Human Rights Legal Support Centre to assist
them with their applications to the Ontario Human Rights Tribunal.
2.
Contractor or Employee?
Given all the risks associated with incorrectly
characterizing an employee as an independent contractor, it
is important for organizations to be familiar with the manner
in which the law distinguishes an independent contractor from
an employee. It is also important that the organization seek
legal advice if there is any doubt as to whether an individual
should properly be hired as an independent contractor or an
employee.
Various factors are considered by our
courts to decide the issue, including:
·
the level of control the payer has over the
worker;
·
whether or not the worker provides the tools
and equipment;
·
whether the worker can subcontract the work
or hire assistants;
·
the degree of financial risk taken by the worker;
·
the degree of responsibility for investment
and management held by the worker;
·
the worker’s opportunity for profit; and
·
any other relevant factors, such as written
contracts.
The CRA publication “Employer or Self
Employed?” has a detailed review as to what it considers to
be factors which are indicative of either an independent contractor
or an employment relationship.
The Federal Court of Appeal recently discussed
various tests and the difficulties inherent in applying them
in The Royal Winnipeg Ballet v. The Minister of National
Revenue.
In that case, the Tax Court of Canada had ruled that certain
dancers engaged by the Royal Winnipeg Ballet for a particular
period were employees and not independent contractors. A majority
of the Federal Court of Appeal (Justice Evans dissenting)
allowed the appeal and overturned the trial decision.
The court reviewed a number of decisions
where the issue had been previously raised, including the
leading Supreme Court of Canada case of 67112 Ontario Ltd.
v. Sagaz Industries Canada Inc.
(“Sagaz”); and the earlier case of Wiebe Door Services
Ltd. v. M.N.R ;
as well as Wolf v. Canada.
In Sagaz, the Supreme Court of
Canada enunciated the test for distinguishing between and
employee and an independent contractor, stating that:
The central question
is whether the person who has been engaged to perform the
service is performing them as a person in business on his
own account. In making this 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.
It bears repeating that the above factors constitute a non-exhaustive
list, and there is no set formula as to their application.
The relative weight of each will depend on the particular
facts and circumstances of the case.
It is important to note that a common
theme running through these cases is that the courts will
not be bound to the parties’ declaration as to the legal character
of their contract. However, nor will the parties’ stated intentions
in their contract necessarily be ignored. In the Royal
Winnipeg Ballet decision, the majority concluded that
the parties’ written agreement as to the nature of their relationship,
while not conclusive, was a factor to be considered by the
court in its determination that, on balance, the facts were
consistent with the conclusion that the dancers were self
employed.
B.
Conclusion
To conclude, a well-drafted contract can
serve to reduce an ambiguity regarding the status of a worker.
From a risk management perspective, organizations should take
care to ensure careful drafting of independent contractor
agreements to minimize the potential liability of the organization.
They also need to make a careful assessment of the position
being filled and whether their designation of a worker as
an independent contractor or employee would survive a close
scrutiny by the CRA and the courts.
