For business owners, knowing the difference between hiring employees and independent contractors is crucial as the nature of the relationship will impose different legal obligations. The distinction is not always clear and may depend on the particular circumstances of a working relationship.
The Employment Standards Act of Ontario
A primary source of employment law in Ontario is the Employment Standards Act, 2000. This legislation governs many employees in Ontario but does not apply to federally-regulated workers or independent contractors.
Under the Employment Standards Act, employers are required to provide employees with a minimum wage, overtime pay, paid vacation time, paid public holidays, and minimum notice periods for termination (or pay in lieu of notice). Note that these are minimum obligations and individual employment contracts may entitle employees to additional pay or benefits.
Who is an employee?
The Employment Standards Act defines an “employee” as including:
- a person, including an officer of a corporation, who performs work for an employer for wages,
- a person who supplies services to an employer for wages,
- a person who receives training from a person who is an employer, if the skill in which the person is being trained is a skill used by the employer’s employees, or
- a person who is a homeworker.
This statutory definition is not the only guidance on whether a worker is an employee or an independent contractor. Generally speaking, the nature of the relationship between a business and the individual working for them will determine whether they are an employee (and therefore whether the Employment Standards Act applies).
Characteristics identified in case law that suggests a worker is an employee include:
- the business determines the type of work the individual performs, their pay, and the time and place the work is done
- the business provides the individual with tools and/or equipment
- the work the individual performs constitutes an integral or central part of the business
- the individual does not have the ability to subcontract their work to someone else
- the business retains the right to dismiss or discipline the individual
Benefits of employee status
Many individuals prefer to be employees because the nature of the employment relationship provides them with greater job stability, limits risk by guaranteeing minimum pay, maximizes entitlements in the form of vacation time, and protects against arbitrary dismissal by ensuring minimum termination pay.
Who is an independent contractor?
Generally speaking, an independent contractor is someone who is in business for themselves. Factors that point to a worker being an independent contractor include:
- the individual takes on the risk of losing money from the work but also retains an opportunity to profit
- the individual can choose how, where or where, work is done
- the individual has the ability to subcontract work
- the individual invoices the business charges harmonized sales tax (HST) and/or is responsible for their own statutory deductions and tax
- the business can end terminate a contract for services with the individual, but cannot discipline the individual
Benefits of being an independent contractor
Some people prefer to be independent contractors because they would like to operate as a business themselves. Independent contractors have the opportunity to maximize their profit and enjoy certain tax benefits. They also retain autonomy over where, when, and how they work, and whether or not to subcontract work.
Volunteers, trainees, and interns
Volunteers are not considered employees under the Employment Standards Act. However, simply defining someone as a “volunteer”, “intern” or “trainee” is not on its own determinative of whether or not that person is an employee and whether the Act applies. The fact that no money is paid does not necessarily make someone is a volunteer, and the fact money is paid (such as an honorarium instead of wages) does not necessarily make them an employee.
The main factors that determine whether someone is considered a volunteer or an employee are:
- Who benefits most from the actions of the individual: the business or the individual? The greater the benefit to the business, the more likely they are to be considered an employee. On the other hand, the greater the benefit to the individual (such as learning useful skills), the more likely they are to be considered a volunteer.
- Does the individual consider the relationship for the purpose of making a living (as opposed to learning skills or deriving some other benefit)? This is particularly relevant in the case of family-run businesses, where the focus will be on whether the individual is providing services to make a living or simply in service of the family. If it is the former, they are more likely to be considered an employee, and if the latter, more likely to be considered a volunteer.
For interns and trainees, they will generally be considered to be an employee if they receive specific training from an employer which is similar or the same as skills that are used by the business’s employees. Note that this does not apply to an individual who is doing work under a program approved by a university, college, private career college, or high school student work experience program.
Considerations for worker classification
Business owners may be tempted to characterize their staff members as independent contractors because it can impose fewer legal obligations, such as the previously noted minimum wage and overtime and vacation pay. Independent contractors are also responsible for withholding their own tax and statutory deductions.
However, it is important to remember that an individual may be considered an employee even where an individual and the business have agreed (even in writing) that the individual is an independent contractor. Courts have held that it is the nature of the relationship between the individual and the business that determines the worker’s classification as an employee or independent contractor, not the label given to it.
Misclassification of workers can lead to significant liability
Under the Employment Standards Act, it is an offence for an employer to misclassify an employee as an independent contractor. Doing so could also result in a penalty or prosecution for the employer. If you are unclear as to the nature of an employment relationship with an individual, it is important to speak to an experienced lawyer to ensure you are fulfilling your obligations.
Contact Tierney Stauffer LLP in Ottawa, North Bay, and Eastern Ontario for Advice on Employment and Business Law Matters
At Tierney Stauffer LLP, we provide comprehensive and forward-thinking advice on worker classification matters. Our experienced team helps employees and employers understand their rights and obligations and assists in resolving workplace disputes. We also advise business owners on their employment, human rights, and human resources responsibilities to reduce their legal liability. To schedule a consultation, contact us online or call 1-888-799-8057.