Distinguishing Between an Employee and Contractor

In TBT Personnel Services Inc. vs. Canada, the Federal Court of Appeal revisited how the law distinguishes between an employee and an independent contractor.

The impact of an employee determination

The employer is required to pay employer portion of Canada Pension Plan and Employment Insurance Premiums and must remit source deductions on a regular basis.

Meanwhile, the employee:
• Is subject to statutory deductions at source
• Would not enjoy benefit of writing off business expenses reasonably incurred to earn income from self-employment.

Defining Contractor vs. Employee Terms

The appeal court indicated that the following question should always be asked: Did the employer engage the individual as a worker in business on his or her own account?

If yes, then the person is an independent contractor. If the answer is no then he or she is an employee. In order to answer these questions, one must determine who exercises control in the relationship.

• Does the individual set his or her own hours?
• Is the individual free to accept or refuse work?
• Is the individual subject to company policy?
• Is there an ability to subcontract work to others?

Keep in mind that it is whether the so-called employer has the ability to exercise control, not necessarily whether they actually do so.

The court also made reference to the traditional “fourfold test.” Applying this analysis, the following are indicators of an independent contractor relationship:

• Control
• Ownership of tools and equipment
• Ability to hire helpers
• Degree of responsibility for investment and management
• Chance of profit
• Risk of loss

Chance of profit and risk of loss

• Is the individual simply paid a salary, or
• Does Is the individual actually stand to gain or lose depending on how their services are provided?

The court also considered the intentions of the parties. There is always concern that the parties created a “share” relationship to avoid certain legal obligations. However, the law is also sensitive to the fact that people have the freedom to contract.

A court will consider all possible factors that may apply in a given situation. However, the level of control that the employer exerts over the individual is always a key factor.

If after considering the above factors, the relationship still remains unclear then one must consider how the parties viewed the relationship and conducted themselves. The substance of the relationship will trump its form.

Defining a contractor or sub contractor

Individuals are not simply independent contractors because they would like to be or have been given that label. The following tend to indicate an independent contractor relationship:

• Written fixed-term contract for services
• Workers are employees or independent contractors of their own corporation and the contract is with that corporation
• Workers may provide services to more than one company
• Remuneration is determined by negotiation and is piecemeal or by reference to the sales or the billings of the workers
• Workers submit an invoice for services rendered and charge the applicable GST/HST
• Workers pay their own expenses
• Workers set their own hours and do not receive vacation pay
• Contracting company does not supervise the workers’ activities

Defining an employee

The following tend to indicate an employment relationship:

• No written contract
• Workers participate in a company benefit plan
• Workers participate in a pension or retirement savings plan
• Workers are integrated into the employer’s operations
• Workers receive vacation pay
• Workers must perform services personally and exclusively

If an individual that has been treated as an independent contractor is deemed to be an employee, then the following will occur:

• The employer will have to make statutory deductions and remit retroactively (potential penalties and interest)
• In a wrongful dismissal action, individual entitled to reasonable notice of termination.