Employees in Disguise: Are You Truly an 'Independent Contractor'?

The Ontario economy has been hit hard over the past several years. As such, many employers have sought ways to reduce workforce-associated costs. One common tactic has been to replace employees with contractors. Four significant and cost-limiting changes result when an independent contractor, rather than an employee, is engaged: 

  1. The 'employer' is no longer charged with the remittance of Canadian Pension Plan ("CPP") and Employment Insurance ("EI") payments. Unlike employees, the contractor bears this responsibility.
  2. Employer-funded pension plans generally do not extend to contractors. As many such plans are dramatically underfunded, the opportunity to limit additional strain is attractive.
  3. Contractors are not protected by the Employment Standards Act ("ESA"). Therefore, they cannot benefit from ESA protections around hours of work, vacation pay or, where applicable, severance and termination pay.
  4. Employers are not required to provide contractors with reasonable notice of termination (i.e. notice that employment will end, or in its absence, pay in lieu). As such, while an employee with 12-years' service who loses his job may receive 12 months' of pay, a contractor will be limited to the terms of the contract and likely receive significantly less.

In certain circumstances, replacing employees with contractors may be appropriate. A problem arises, however, where an employer merely changes an individual's title from 'employee' to 'independent contractor' but otherwise leaves their role unchanged.

The courts are wise to this strategy. In McKee v. Reid's Heritage Homes Ltd.(2009 ONCA 916), the Ontario Court of Appeal indicated there must be a substantive difference made to the nature of employment if an individual is to be considered an 'independent contractor'. The court further found that in addition to 'employees' and 'independent contractors,' a third, intermediate category exists. This category, referred to as the 'dependent contractor', is defined by complete or near-complete economic dependency.

The 'dependent contractor' category exists to safeguard individuals who are formally 'contractors' but remain in a position of economic vulnerability. As such, when an individual is found to be a 'dependent contractor,' he or she receives the same protections as an employee under the ESA and the employer is obligated to remit both CPP and EI on their behalf.

The courts determine if an 'independent contractor' is in reality an employee or a dependent contractor by considering a number of factors: which party possesses control in the relationship, which party has the chance for profit or risk of loss, and whether the worker is integrated into the business.

If you, as an individual or small business, are interested in learning more about the use of contractors in the workplace, please contact us directly at: 613-238-4430.