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Employers: Are Your Contractors Independent or Dependent? The Wrong Answer Could Cost You

One of the benefits to employers who hire independent contractors to assist in the workplace is that there is no obligation to provide reasonable notice of termination or pay in lieu when the relationship ends. The danger to employers is that, like employees, dependant contractors are in fact owed reasonable notice on termination and the distinctions between an independent and dependant contractor are not always clear.

A decision of the Ontario Superior Court of Justice from earlier this year demonstrates just how costly mischaracterizing such relationships, whether intentionally or not, can be for employers.

In Keenan v. Canac Kitchens, the employer, Canac Kitchens (“Canac”), maintained what it believed to be independent contractor relationships with two individuals, Lawrence and Marilyn Keenan, for 25 and 32 years respectively. On that basis, when it came time to end the relationship, Canac did not provide any notice of termination or pay in lieu.

Despite having written agreements with Lawrence and Marilyn that purported to confirm they were independent contractors, the Court disagreed with the Canac’s characterization of the relationship and found the individuals to be dependant contractors instead.

In coming to its decision, the Court looked at the following factors:

  1. Whether or not the agent is limited exclusively to the service of the principal.
  2. Whether or not the agent is subject to the control of the principal not only as to the product sold, but also as to when, where, and how it is sold.
  3. Whether or not the agent has an investment or interest in what are characterized as the tools relating to his service.
  4. Whether or not the agent 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.
  5. Whether or not the activity of the agent is part of the business organization of the principal for which he works. In other words, whose business is it?

The Court found that each of the above factors favoured the interpretation that the Keenans were dependant contractors. Given their 25 and 32 years of service, the Court awarded each individual substantial damages representing 26 months’ notice of termination.

While not discussed in this case, employers who mischaracterize independent contractor relationships may also be faced with legal exposure relating to the Canada Revenue Agency (“CRA”) and Workplace Safety and Insurance Board (“WSIB”).

If the CRA reviews and reclassifies an independent contractor relationship as a dependant one, the employer could face significant costs and penalties. For example, in some cases employers can be made to repay not only their share but also the dependant contractor’s share of Canada Pension Plan contributions, Employment Insurance premiums and or withholding taxes. Penalties and interest may also be levied on the under-remittance of these taxes. Employers can also be required to make retroactive Employer Health Tax payments. Such reclassifications by the CRA are not rare.

As well, with limited exceptions, all persons working in the construction industry (whether employers, workers or contractors) must register with the WSIB.  Without regard to the industry in which the employer and contractor operate, the WSIB has the authority to determine whether an individual is an independent operator or a worker of an employer.  The degree of dependence of that individual on one client may result in a finding that the person is a worker of that client, irrespective of any agreement or contract between the workplace parties.  Once the individual is determined to be a worker, the “employer” is responsible for the payment of WSIB premiums for that individual as well as all of the other obligations that an employer has to a worker under the Workplace Safety and Insurance Act.

The lawyers at CCPartners have experience in all aspects of wrongful dismissal claims including assisting employers with proactively and appropriately structuring work relationships. Click here for a list of lawyers who can assist you with all your employment-related litigation issues.

Please Note: This blog has been prepared as an informational service for our clients and other interested parties. It is not intended to constitute legal advice, a complete statement of the law or opinion on any subject. Although we endeavour to ensure the accuracy of the content, no one should act upon the information provided without a thorough examination of the law after the facts of a specific situation are fully considered.



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