In this complex world full of ride-sharing apps and delivery apps for every conceivable type of product, the lines between the traditional “employee” and “independent contractor” distinctions continue to blur. The flexible nature of the “gig” economy has required the courts to be flexible in their own right when it comes to the characterization of employment relationships.
This flexibility makes it difficult for employers and employees to hold a firm grasp on what exactly defines a relationship of employment versus that of a contractor providing services to a business. The relatively recent addition of a “dependent” contractor characterization further muddies the waters.
What is the difference between an employee and a contractor?
Employees are those individuals who provide services as part of the employer’s organization and, in so doing, contribute to the employers business in some fashion. Comparably, contractors are in business only for themselves. They may provide a select set of services to another organization, but they are doing so as an entrepreneur, bearing their own risks and reaping their own economic rewards. Unfortunately, too often this bright-line distinction is difficult to pin down in practice. An example of this is the concept of a “dependent” contractor. A dependent contractor is a contractor who is purely in business for themselves, but provides the vast majority of their services, and therefore derives the majority of their income, from a single “client”.
True employment relationships are governed by the Employment Standards Code, RSA 2000, c E-9, and accordingly employers are bound by the terms of that legislation. This means that employees are entitled to a minimum amount of notice upon termination, as well as vacation and overtime pay, among other entitlements. A contractor does not enjoy the benefits of employment standards legislation; they are only entitled to what benefits form part of the contractor agreement between the parties.
Employers are required to remit source deductions as well as CPP and EI payments to the CRA on behalf of the employee; the employment income actually received by an employee is a net after-tax amount. Contractors on the other hand are paid in gross amounts, and must remit their own taxes, CPP, and EI to the CRA.
On the subject of liability, employers will be held vicariously liable for any torts, such as negligence, committed by employees who were acting in the natural course of their employment. Comparably, subject to certain exceptions, employers are not vicariously liable for any loss or damage caused by an independent contractor’s negligence or other torts.
Most significantly, an employee is entitled to common law reasonable notice upon termination, as well as the minimum amounts of notice upon termination set out in the Employment Standards Code, unless a term of their employment agreements removes that entitlement. Employers should always keep in mind that, when an employee is terminated without cause, they are obligated to pay them a minimum amount of severance. Comparably, an independent contractor is only entitled to the amount of notice or termination pay agreed upon as part of their contractor agreement. If the terms of the agreement are adhered to, an independent contractor will not be entitled to any additional severance beyond the terms of their contract.
How do you tell if an individual is an employee or a contractor?
Unfortunately, there is no simple answer to that question. It depends on the circumstances in each case, and is particular to the relationship between the parties. The Courts have developed a number of different tests to determine whether an individual is an employee or a contractor, each of which looks at different factors and considerations to determine where along the spectrum the relationship falls. These factors include:
- Who controls the method of doing the work;
- Who owns the tools involved in doing the work;
- Who has the greatest chance of profit;
- Who has the risk of loss; and
- Whether the individual is integrated into or forms part of the employer’s organization.
The first four factors are generally summarized by asking whether the individual is carrying on business for himself, or is he carrying on his work for a superior. The last factor asks much the same question, and asks whether the individual is employed as “part of the business”, or whether he is “not integrated into it but is only accessory to it.”
Significantly, it is not what the parties call the relationship that defines it. Signing an agreement titled “Independent Contractor Agreement” does not make it so. It is the substance of the arrangement that matters.
The “Dependent” Contractor
The Courts have recognized that, in certain circumstances an individual does not fall into one of the two neat categories: an employee on one hand, acting as an integral part of the employers business, or an independent contractor on the other, in business for themselves. In response, the Courts have formulated an “intermediate” category, where the relationship between the parties reflects some aspects of both an employer/employee and independent contractor relationship. Recently, this “intermediate” category has become known as “dependent contractors”.
The effect of being labelled a “Dependent” contractor is that an individual is entitled to common law reasonable notice upon termination, despite not being a full “employee”.
To determine whether an individual is an employee or a contractor, the Courts will apply those tests set out above. Then, in those cases where the individual is clearly a contractor, the courts will look to certain factors to determine whether the individual is a dependent contractor, rather than an independent contractor. These factors include:
- The duration of the relationship;
- The degree of exclusivity;
- The degree of reliance or closeness of the relationship;