As I indicated in my last blog post, generally it is not difficult to identify an employment relationship. Whether or not a worker is an independent contractor rather than an employee is often more difficult to determine.
Generally speaking, this is not a distinction that would be apparent to members of the public. If I walk into a car dealership to buy a car, and I am met by a smiling salesman wearing a golf shirt with the dealership’s logo on it, and the salesman hands me a business card with the dealership’s name as well his own name, possibly with words like “sales associate” on it as well, I will assume that I am dealing with someone who is there to sell me a car on behalf of the dealership. More than likely, I would not have the first clue as to whether or not the relationship between the salesman and the company is that of employee or independent contractor. And chances are, I won’t care.
But while the distinction may not be readily apparent to the public, and it is probably not particularly important to the public either, it is important both to the parties to the relationship and to Canada Revenue Agency for a variety of reasons.
As I indicated in my last blog post, the first reason that the distinction is important is that employees and independent contractors may have different termination rights.
Secondly, there are very different benefits that the worker can expect during the course of the relationship. Employees will receive benefits according to company policy together with statutory benefits contained in provincial legislation. For an independent contractor, the extent to which the company provides benefits will depend on the bargain struck between the parties but there is no applicable legislation that would apply.
Finally, there are profound and serious tax considerations at play and Canada Revenue Agency will be extremely interested, in many cases, in the question as to whether a worker is an employee or an independent contractor. In fact, the vast majority of the jurisprudence that has been generated on the point involves prosecutions in the Tax Court of Canada initiated by CRA. Most often, these are prosecutions under the Employment Insurance Act and the Canada Pension Plan legislation.
Simply put, under the Employment Insurance Act, employers are responsible for remitting to the government particular amounts in respect of every worker engaged in “insurable employment”. Similarly, remittances have to be made by employers for workers engaged in “pensionable employment” under the Canada Pension Plan, subject to a number of exceptions. If a worker is engaged by a company as an independent contractor, no such payments have to be made. Similarly, income tax withholdings are to be made where a worker is an employee. None of these is required where the worker is an independent contractor.
The potential problem is obvious. Suppose a company engages a worker on the understanding that the worker is an independent contractor. No statutory withholdings take place and the worker is paid in full for his services on an ongoing basis. At some point years down the road, CRA shows up and takes the position that the worker is actually an employee. If that position is ultimately sustained by a judge, the employer is in for what might be a very substantial payment, with interest and penalties. The company may or may not be in a position to recoup that amount from the worker, who may not even be around any longer.
From the prospective of the worker, someone who considers himself to be an independent contractor may well be filing income tax returns claiming all kinds of deductions for expenses that an independent contractor is entitled to claim, but an employee is not entitled to claim. If a court determines that the worker is actually an employee, all of those deductions will be disallowed.
The courts have developed a series of tests to determine whether or not a worker is an employee or an independent contractor and these tests have evolved over time. It does appear clear that the court will reach its conclusion on the basis of a series of factors none of which is conclusive by itself. All of them will be considered as the court tries to determine the nature of the relationship between the parties in its totality. At the end of the day, the court will try to get at the answer to one basic question: Can it be said fairly that the worker is at least to some reasonable extent in business for himself?
One interesting point to note is that the intention of the parties is not determinative of the answer. In other words, the parties may enter into a contract that specifies either that the parties are in an employment relationship, or that the worker is an independent contractor, but that is not going to be final. At best, it will serve as a “tiebreaker” if the court’s assessment of the other relevant factors shows an equal number of factors on each side of the equation.
For example in the important Federal Court of Appeal case of Royal Winnipeg Ballet v. Minister of National Revenue, both sides testified that they intended the relationship to be that of an independent contractor. This case involved dancers hired by the ballet company and the court noted that the dancers:
- were engaged for a particular season
- were assigned roles and received instruction and coaching
- needed the ballet company’s consent to accept any other engagements
- were supplied by the company with shoes, belts and costumes
- were told by the company what works would be performed, the time and location of performances, and the time and location of rehearsals
- received direction with respect to the performances
- had no management or investment responsibilities
- bore little financial risk for their work
On the other hand:
- The parties had a common understanding that the dancers were independent contractors
- Each dancer’s artistic expression was unique
- Each dancer personally paid the costs of fitness rehearsal wear, make-up and health-related items
- The dancers were registered for GST purposes and charged GST for their services
- The company did not withhold any tax
On balance, the Federal Court of Appeal ruled (overturning the lower court decision) that the dancers were independent contractors just as the parties said they intended.
The best one can do is to consider the various factors and try to determine which side appears stronger.
I have been able to distill from the cases a series of factors that are commonly considered:
- What is the degree of supervision by the company
- Can the worker turn down assignments
- Does the worker wear a uniform and carry company business cards
- At whose expense are problems remedied
- Are invoices rendered, and how is the worker paid
- Does the worker receive any company benefits
- Is there any job security
- Is there exclusivity, or can the worker also work for others
- Who determines when, where and how the work will be done
- Does the worker have any management or investment responsibility
- Does the worker operate out of the company’s space
- Does the work take place through a business structure established by the company
- Are the worker’s hours and days integrated with the company’s operations
- To what extent does the worker receive training by the company
- Who establishes the worker’s clientele
- Can the worker hire others to complete the work or must the worker perform the services personally
- Must the worker attend company meetings
- Does the worker provide any supplies, materials or equipment necessary to complete the work
This is not a complete list but almost all of the cases seem to raise at least some of these factors.
While the unpredictability of the cases is unfortunate, parties interested in establishing one or another particular type of relationship might consider these factors and try to structure their relationship accordingly.