Be aware of changes in contractor relationship: Low
By Tony Poland, AdvocateDaily.com Associate Editor
Knowing the distinction between an independent contractor and an employee is an important consideration for an employer, says Toronto employment lawyer Ellen Low.
Low, principal of Ellen Low Employment Law, says companies that go outside their own workforce to meet their production needs must ensure that the relationship with their contractors is clearly defined and that any change in their agreement is addressed immediately.
“I’m generally getting my employer clients to really think critically about whether or not the person that they’re engaging is actually an independent contractor, and if they are, we’re going to get them to sign a contractor agreement,” she tells AdvocateDaily.com. “We also have to revise the agreement bearing in mind an employer-worker relationship changes over time."
Low says it’s not uncommon for an independent contractor to start with a company and then slowly scale back on projects with their other clients to handle the workload. As the duties increase, the contractor may give up every other client and devote their efforts solely on the company.
“If they are starting to look more and more like a dependent contractor, or even like an employee, there’s some risk in allowing an independent contractor relationship to continue," she says. “We may want to revise the contract between the parties.
Low says the Supreme Court of Canada laid out two considerations to determine whether a person is an independent contractor or an employee.
“The first thing that they look at is the extent to which the employer controls the employee’s working conditions,” she says. “The second thing to look at is the extent the worker is economically dependent on the employer.”
In a 2015 Ontario Superior Court decision referenced five items to distinguish employees from independent contractors:
- Whether or not the worker is limited exclusively to the service of the employer.
- Whether or not the worker is subject to the control of the employer not only as to the product sold, but also as to when, where, and how it is sold.
- Whether or not the worker has an investment or interest in what is characterized as the tools relating to his service.
- Whether or not the worker has undertaken any risks in the business sense, or, alternatively, has any expectation of profit associated with the delivery of his service as distinct from a fixed commission.
- Whether or not the activity of the worker is part of the business organization of the principal for which he works. In other words, whose business is it?
Lows explains that under the Employment Standards Act (ESA), a dependent contractor is entitled to the same protection as an employee, which could have ramifications if the company is contemplating a termination.
She cites the Superior Court case as an example. There the court was told a husband and wife had worked for a kitchen cabinet company for 32 and 25 years respectively. In the early part of their career, they were listed as employees, but in 1987 they were told they would be working as independent contractors.
When the company closed in 2009 the couple was told their services were no longer needed and, as independent contractors, they were owed nothing in termination damages, court heard.
However, in his judgment, Superior Court Justice Graeme Mew writes that the couple “worked exclusively” for the company as contractors and were entitled to 26 months’ notice of termination.
She says the issue can get muddied because an ESA officer determining if an employee is an independent does not have to follow court rulings.
“Certainly they will look to the traditional tests,” she says. “But it’s important to remember that the ESA officer is not necessarily bound by the common law determinations.”
Also, even if you accept that the court has laid out a “five-part test that is the gold standard, you may find that there are workers who meet one, two and three, but they don’t meet four and five” of the criteria, Low says.
“It’s very rarely crystal clear,” she says. “Part of it is being aware of the issues, and that there are penalties for getting it wrong, and then being aware the relationship may change. If you really want this person to be an independent contractor, they have to be treated like an independent contractor the entire time, and if that is starting to change, you may need to revise the relationship.
“In fairness, it also falls to the contractor if they genuinely want to be a contractor they need to act like one too and make sure that they have more than one client.”