Employee vs. Independent Contractor

The use of the “Independent Contractor” relationship has both financial advantages and risks to both the Company retaining the contractor and the contractor.

The Company does not need to make contributions to the Canada Pension Plan or employment insurance, to make contributions to group insurance benefit plans or to deduct income tax.  The independent contractor can deduct business expenses from income.

Historically the distinction between employees and independent contractors was relevant to the issue of notice of dismissal.  While employees were entitled to reasonable notice of the termination of their employment, independent contractors were not entitled to notice.  While the distinction has narrowed over the last few years the issue is still important.

A number of independent contractors claim to be employees after the relationship terminates in order to obtain common law damages for wrongful dismissal, employment insurance benefits or Workplace Safety and Insurance benefits.

Sometimes a Canada Revenue Agency (“CRA”) audit determines that independent contractors are in law “employees”, resulting in penalties and interest charges for the company, and occasionally a requirement to pay income tax that should have been withheld and was not paid by the contractor.  On the contractor side a CRA audit could result in the disallowance of expenses and a requirement to pay additional income tax.

It is not sufficient to call yourself an “Independent Contractor” in any agreement signed with the Company.  Courts over the years adopted a range of tests to determine whether a person was an employee or an independent contractor. The central question in whether a person is an independent contractor is whether the person who has been engaged to perform services is performing them as a person in business on his own account.  In making this determination, the level of control the employer has over the worker’s activities will always be a factor. The Courts will also consider other factors such as whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.

It is important for both companies and individuals to obtain legal advice as to whether the relationship can meet the independent contractor test and how to best structure the relationship to meet the test.

In the event of a challenge to the independent contractor relationship I can assist in representation before the Tax Court of Canada or in Canada Pension and Employment Insurance appeals. In one case I successfully challenged the Federal Government’s assertion in the Tax Court of Canada that over 300 independent contractors should be classified as employees. [See My Cases: Strategium Media v The Minister of National Revenue]