While employees in Ontario have rights under the Employment Standards Act (the “ESA”), independent contractors do not. For example, under the ESA, most employees are entitled to paid overtime, paid vacation, and reasonable notice of termination. Independent contractors are not.
These are important and potentially costly differences. As a result, employers will often misclassify employees as independent contractors, intentionally or otherwise. However, whether a worker is an employee or an independent contractor is a question of law. A worker who is legally an employee cannot "agree" to be treated as an independent contractor, even through express contractual language.
Independent Contractors v Employees
The leading case in Canada on the distinction between employees and independent contractors is McCormick v Fasken Martineau DuMoulin LLP, 2014 SCC 39 ("McCormick"). In McCormick, the Supreme Court of Canada identified two key considerations: 1) the extent to which the employer controls the worker's working conditions and 2) the extent to which the worker is economically dependent on the employer. The Court characterized the relationship between these considerations as "synergistic" or mutually reinforcing.
A later decision of the Ontario Court of Appeal, Keenan v Canac Kitchens, 2016 ONCA 79 ("Keenan") identified five considerations:
- Whether the worker works exclusively for the employer;
- Whether the time, place, and nature of the worker's work are controlled by the employer;
- Whether the worker owns the tools that they use in the course of their work for the employer;
- Whether the worker has taken on risk in relation to the employer's business, such that the worker has a direct stake in the success or failure of the business; and
- Whether the worker is integrated into the employer's business (or, in the alternative, operates an independent business in the service of the employer)
The Keenan factors are best understood as elaborating on the McCormick factors—they speak to employer control and economic dependence. For example, a person who provides services to multiple employers is less likely to be economically dependent on a single employer, and so is more likely to be a true independent contractor. Still, it is important to note that no single factor is determinative or given more weight than the others.
In determining whether a given worker is an employee or an independent contractor, the courts consider the totality of the worker's relationship with the employer. In other words, if the relationship looks like an employment relationship, wherein working conditions are controlled by the employer and the worker is economically dependent on the employer, the worker will likely be found to be an employee.
In a standard employment relationship, the employer and the employee each make contributions to Employment Insurance (EI) and the Canada Pension Plan (the CPP). The employer deducts the employee's contributions from each paycheque. Independent contractors, by contrast, typically pay both the employer's and the employee's contribution. There are also different tax rules regarding business expenses that apply to independent contractors compared to employees.
Dependent Contractors v Independent Contractors
Some employees fall into the intermediate category of "dependent contractor." Dependent contractors are workers who, although genuinely self-employed, receive all or most of their income from a single client. The leading case on dependent contractors is Reid v McKee's Heritage Homes, 2009 ONCA 916 ("Reid"), where the Ontario Court of Appeal held that dependent contractors are, like employees, entitled to reasonable notice of termination.
Unlike a dependent contractor, true independent contractors will be limited to the notice of termination provided for in the agreement. In some cases, this will be little to no notice. However, where an employer terminates a fixed term contract prematurely, courts have held that the independent contractor is entitled to whatever amounts they would have received if they had worked the full term (unless the agreement says otherwise).
More recently, in Thurston v Ontario (Children's Lawyer), 2018 ONSC 2137, the Ontario Superior Court of Justice held that a lawyer who received an average of 40% of her income from a single client was economically dependent on that client. At present, the rights of dependent contractors are limited to 1) the right to reasonable notice of termination and 2) the right to unionize. Whether dependent contractors share other rights with employees has not yet been resolved.
Understanding the various benefits and costs of being treated as an independent contractor and the consequences of being misclassified is important. If you have questions about whether you are an independent contractor, reach out to the lawyers in our Employment Law and Litigation practice.
*Thanks to Robert Boissonneault, law student at the University of Ottawa Faculty of Law, for his work on this post.