Dependent Contractors: An Intermediate Category between Employees and Independent Contractors
Many employers are familiar with the concept of a “contractor” or a “contract worker”, but the legal term for a contractor is an “independent contractor”. While there are many different tests used by the Courts to differentiate between an independent contractor and an employee, one of the commonly applied tests asks whether that individual is truly in business for themselves, or whether they are simply a part of the employer's business.
There are significant implications, including tax and financial implications, for characterizing a relationship as that of an independent contractor rather than an employee. One marker of an independent contractor relationship is that the worker will typically invoice for their services, and the employer will pay the invoices without remitting any amounts to the CRA or taking any deductions for CPP/EI. In the event the CRA or other governmental authority challenges the characterization of the relationship as that of an independent contractor, the employer could end up being responsible for remitting those CPP/EI contributions or other amounts that ought to have been remitted to the appropriate authorities, resulting in significant financial liability for the employer.
Severance Liabilities for Dependent Contractors
Another risk with improperly structuring a contractor relationship can come in the form of unexpected severance liability for the employer, in the event the employer decides to terminate the relationship with the contractor down the line.
An employee is entitled to reasonable notice of termination of employment at common law, inclusive of the minimum amount of required termination pay set out in the Employment Standards Code. Independent contractors are not entitled to any amount of reasonable notice of termination, except whatever is set out in their written contract (if there is a written contract).
However, Courts have recognized an intermediate classification between an employee and an independent contractor: that of dependent contractors. A dependent contractor is essentially an independent contractor that works almost entirely or exclusively for a single entity. If the employer and this contractor have signed a standard contractor agreement, but have provided that the contractor is required to work 9-5 for the employer and not do work for any other entity, that individual is almost certainly a dependent contractor.
Dependent contractors are entitled to some degree of common law reasonable notice, just as an employee would be. If a contractor is terminated and sues, claiming to be a dependent contractor, and the Court agrees, the dependent contractor could, depending on how long they provided services to the employer, have a claim for a significant amount of pay in lieu of reasonable notice.
Importance of Termination Clauses
The best way to ensure that an independent contractor relationship is truly that of an independent contractor and not an employee or a dependent contractor is to start with a properly drafted contractor agreement.
If an employer hires a contractor who will be doing work exclusively for the employer and no other “clients”, then to avoid severance liability as a result of being found to be a dependent contractor, the employer should ensure they have a termination clause that limits the contractor's entitlements on termination. That clause should ensure that at all times, the contractor would be receiving notice (or pay in lieu of notice) equal to or less than the minimums set out in the employment standards code to ensure that the termination clause governs even in the event a Court finds the worker to be a dependent contractor.
Conclusion
Before hiring any workers as “independent contractors”, it is important to ensure the relationship is, in fact, that of a contractor relationship and not simply an employee labeled as a contractor. Employers should obtain a properly drafted contractor agreement in order to reduce the likelihood of a finding of a dependent contractor, or worse, a finding of an employment relationship that was not intended, which can lead to significant and unforeseen added costs for employers.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.