Misconceptions in the employee vs. contractor debate

Misconceptions in the employee vs. contractor debate

December 31, 2007

In Part 2 of a three-part series on the differences between employee and contractor, Toronto litigator Stefan Rosenbaum discusses the misconceptions.

The contract isn’t the last word on whether a worker is an employee or an independent contractor, Toronto labour and employment lawyer Stefan Rosenbaum tells AdvocateDaily.com.

“The most common misconception is that the contract itself is determinative, in the sense that if you have an agreement with an employer and it says you’re an independent contractor, that’s the end of the story,” says Rosenbaum, an associate with Shibley Righton LLP.

“Just because the two parties have decided that a worker is going to be an independent contractor does not mean the courts will necessarily agree.”

What often happens is when the work relationship ends, the party who’s designated an independent contractor will dispute the designation and argue that they were, in fact, an employee and entitled to the protections contained in Ontario’s Employment Standards Act (ESA), he says.

“Where you see this most often is with regards to severance pay and the notice period. If you’re an independent contractor, you’re governed by the contract. So, if it says you get one week’s notice, the employer can terminate the contract with one week’s notice,” says Rosenbaum.

The ESA covers such things as minimum wage, vacation pay, overtime, hours of work, maternity and parental leave, and notice of termination. Under the legislation, employees receive one week’s pay for every year worked, up to eight weeks, he explains.

“The Employment Standards Act exists for a reason. One of the main focuses is to protect employees. Judges usually want to give that protection to as many people as possible. So, they’ll look at the factors and decide whether they’re actually looking at an independent-contractor relationship,” Rosenbaum says.

One of the key factors the courts consider when making such a determination is the amount of control a worker has over their workplace, which includes such things as hours, whether they have their own tools and equipment, and risk of loss and chance to profit, he says.

“The courts look beyond what’s in the contract and look at all the factors. And they do that because of the idea that there’s an unequal bargaining position between workers and management, and the latter shouldn’t necessarily be able to take advantage of the contract to extricate themselves from the Employment Standards Act. I think the courts would say they’re evening things out.”

While many employers have good intentions when drawing up contracts and aren’t trying to avoid their obligations under the ESA when using independent contractors, they need to be aware that upon termination, a contractor may successfully challenge the designation in court, Rosenbaum says.

“All of a sudden, the employer could be on the hook for termination pay for the common law reasonable notice period,” he says.

On the other hand, independent contractors — who are able to reduce their income by declaring expenses that employees cannot and thereby lower their tax burden — should be aware that if they seek employee status in the courts after termination and are successful, “you’d be risking having a problem with the Canada Revenue Agency,” says Rosenbaum.

Stay tuned for Part 3 in the series, where Rosenbaum will discuss filing a claim with the Ministry of Labour for misclassification.

To read Part 1 — how to distinguish between employee and contractor — click here.