In Ontario, the distinction between being classified as an independent contractor or an employee has significant implications for both the worker’s entitlements and the employer’s obligations under the law. Employers and workers may choose to enter into agreements where the worker provides services as an independent contractor for various reasons that can be mutually advantageous. From the employer’s perspective, there are fewer regulations when it comes to contractors, and from a worker’s perspective, they may benefit from more autonomy than if they were an employee.
However, there can be negative consequences to this characterisation, especially if the employer misclassifies an employee as an independent contractor. This blog post delves into the core differences between employees, independent contractors, and dependent contractors, and examines the legal tests used to define these working relationships.
Definitions and Core Differences
Typically, employees work under an employment contract (verbal or written) where the employer controls the work performed, the work schedule, and the manner of task completion. Employees are covered by the Employment Standards Act (the “ESA”) and are entitled to various protections and benefits such as vacation pay, overtime pay, and statutory holidays.
Independent contractors operate under a contract for services and usually have greater control over how they perform their work, including working conditions and schedules, as well as the ability to contract their services to multiple clients simultaneously. On the flip side, they are not protected by the ESA.
A dependent contractor is a third type of working relationship more recently recognized by Ontario law. Dependent contractors are not employees but often have contracts classifying them as independent contractors. While dependent contractors share characteristics similar to independent contractors, the key distinction lies in their level of economic dependency on a particular client. The Ontario Court of Appeal recently determined that, to be classified as a dependent contractor, the financial interdependence with a single client must account for more than 50% of the contractor’s total income.
Legal Test for Classification
The terms of an employment contract are not definitive when determining a worker’s status as an employee or contractor. Ontario courts and tribunals consider several factors to determine the nature of a working relationship. One of the primary considerations is control: a greater level of employer control over the work performance suggests an employer-employee relationship, whereas a greater level of
independence enjoyed by the worker indicates a client-contractor relationship. Courts also consider the following factors:
- Who provides the tools needed to perform the work;
- Whether the worker is free to work for multiple clients concurrently or is beholden to one primary employer;
- The worker’s risk of financial loss or chance of profit;
- Whether the worker was contracted to achieve a certain objective as opposed to being hired for personal services with no specific objective; and
- How integral the worker is to the business.
Significance of the Classification
Understanding whether you are an employee, a dependent contractor, or an independent contractor is crucial due to the significant implications associated with each classification.
For employees, tax obligations are simplified as employers withhold income tax, CPP contributions, and EI premiums. Conversely, independent and dependent contractors must manage these contributions themselves, which can lead to liabilities if not handled correctly. Employees also enjoy protections under the ESA, including entitlements to minimum wage, overtime pay, and notice of termination.
Dependent contractors are not considered to be employees and do not receive statutory protections or benefits. However, due to their financial reliance on a single client, courts have determined that dependent contractors, similarly to employees, are entitled to reasonable notice of termination or pay in lieu of notice. The amount of reasonable notice owed to a dependent contractor is not governed by the ESA but is determined by courts on a case-by-case basis.
Misclassification as an independent contractor instead of an employee can result in
missing out on statutory protections and can lead to legal disputes involving unpaid
wages, overtime, and other employment benefits.
At Simes Law, we are dedicated to helping workers understand their rights and
navigate the complexities of employment classification. If you need assistance
understanding your classification, asserting your rights under the ESA, or resolving
employment law disputes, our team of experienced employment lawyers is here to support you.
If you are unsure whether or not to contact us, here are 3 reasons to have an Employment Lawyer review your contract.
Please note that the information contained in this article is for informational purposes only and does not constitute legal advice of any kind.
