Business owners often want to characterize their staff members as independent contractors to avoid the hassle of having to deal with the legal requirements governing employment relationships. In Ontario, this includes making statutory withholdings from the employees pay and following Ontario’s Employment Standards Act rules for minimum wage, overtime, and vacation pay. However, it doesn’t matter if your worker has signed an employment contract or independent contractor agreement, treating an independent contractor like an employee comes with a risk that the courts will find the worker was actually an employee. In this situation, you may be found  liable for the results of the mischaracterization of the employee including back pay and fines, unpaid vacation pay, overtime hours, minimum wage violations, as well as outstanding payroll deductions, workers compensation, and termination pay (to name some of the consequences). Due to the significant financial risk that can come from misclassifying an employee, business owners should be aware of the legal indicators for whether a contractor is in fact an employee before they enter into an independent contractor agreement with their staff members.

Control Is the Primary Factor Used to Determine Whether a Contractor Is an Employee 

Independent contractors are technically their own business owners. Employees, on the other hand, serve their employers. Therefore, the more control you exercise over the contractor, the more likely it is that they will be found to be an employee. Having control over the contractor means having the ability to determine, when, where, and how the contractor’s work is performed. While not exhaustive, there are certain key factors that the courts will use to classify the nature of the employment relationship. These factors are:

Ability to Subcontract Work

A strong indicator of the control being exercised over the independent contractor is whether the contractor is able to further subcontract the work you have hired them to perform to someone else. Whereas employees cannot technically operate a competing business (unless agreed upon with the employer) contractors may hire their own staff or even outsource the work to a third party.

Supplying Tools

Another indicator is whether the contractor will be providing their own tools to perform the job they have been hired to perform. Supplying the contractor with the tools necessary to perform their work (which could include a company vehicle or laptop and cellphone) is more akin to an employer/employee relationship.

Risk of Profit and Loss

Whether there is an element of risk of profitability or loss for the contractor is another good indicator of their status. This is because, typically, employees are paid hourly for their time and while they may earn bonuses or commissions in the course of their employment, they usually do not incur losses if their employer’s business is not successful.

Restrictions on Business

Compared to employees, contractors are also free to choose who they offer their services to. Strict non-competition clauses and exclusivity agreements that require the contractor to only work for one business provides evidence that the contractor is not independent but bound to a single employer. Even where an employee is properly classified as an independent contractor, if the majority of the contractor’s work comes from your business, the courts may label your contractor as a “dependent contractor” and find you liable for common law reasonable notice pay when you end the relationship (depending on the particular employee this could range from several months to a couple of years worth of wages).

The Wording of the Agreement and Conduct of the Parties

Lastly, while the characterization of the relationship is not the strongest factor, the intention of the parties will form part of the analysis. The wording of the written agreement (i.e. independent contractor agreement) will help provide evidence of the parties’ intention that the worker be an independent contractor. Aside from the wording of the agreement (and more importantly) the courts will examine how the parties conducted themselves during the relationship such as whether the worker charged and remitted sales tax for their services or was free to engage other clients.

While at first glance, classifying your employment relationship with your workers as an independent contractor agreement may seem like a cost-effective way to avoid the legal requirements of being an employer, some business owners will eventually learn that a misclassification can result in significant financial costs.

As the purpose of an employment agreement is to reduce the employer’s liability from a wrongful termination lawsuit, before signing an independent contractor agreement, business lawyers should consult with a small business employment lawyer to determine how their contractual relationship should be structured.