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Key Points
- In general, workers are classified as either employees or independent contractors with different characteristics in the work position.
- Correctly classifying a worker is important because different sets of laws apply to employees and independent contractors.
- Employers may face several risk liabilities for misclassification because the wrongful treatment of an employee as an independent contractor or vice versa can lead to violations under employment laws.
- There are several key considerations when determining whether a worker is an employee or an independent contractor: control, opportunity for profit or loss, integration into the hirer’s organization, exclusivity of service, ownership of tools, and intention of the parties.
- Employers should ensure that the essential elements of the work position fall under the characteristics of either an employee or an independent contractor and clearly communicate this with the worker.
Employee vs Independent Contractors
The majority of workers fall into one of two categories:
1) Employees:
Employees are workers who are part of their employer’s business. They are employed by their employer, the boss, and must follow their employer’s instructions in regards to when and how they should work.
2) Independent contractors
Independent contractors run their own business and they are their own boss. They provide services to customers and control who they work for, and how and when they work.
Typically, employees and independent contractors differ on the following characteristics: term, hours of work, instruction and supervision, compensation, ownership of tools, business expenses, and exclusivity of service.
| Employees | Independent Contractors | |
| Term | Usually indefinite | Usually fixed according to the project |
| Hours of Work | Set by the employer | Free to decide own hours |
| Instruction and Supervision | Usually involves employer’s supervision | Free to decide how the work is to be performed |
| Compensation | Paid on a wage or salary based system | Paid on a project based system |
| Ownership of Tools | Usually owned by the employer | Usually provides for their own |
| Business Expenses | Employer pays | Not covered by employer |
| Exclusivity of Service | Usually restrictions are imposed from taking on other work | Free to take on work from other customers |
What is Worker Misclassification?
Misclassification occurs when a worker is labelled incorrectly. For example, a worker is treated as an independent contractor even though most of the characteristics of their work position is that of an employee. This leads to the issue of applying the wrong set of laws to workers.
Why is Worker Classification Important?
Classification is important because employees and independent contractors are subject to different laws. There are laws that typically apply to employees but not to independent contractors. Such as:
- labour laws which include rights to unionize and collectively bargain;
- reasonable notice under the common law which means an adequate period of time must be given for termination notice unless parties contract otherwise;
- minimum standards which include working hours, minimum wage, overtime pay, vacation, leaves, and termination notice;
- workers’ compensation for workplace injuries which are funded by the employer’s insurance; and
- payroll deductions which include mandatory employer deduction, contribution and remittance of income tax, CPP and EI.
Employees typically have less bargaining power than their employers. To help balance this unequal bargaining power, employees are protected under employment laws. Under these laws, it ensures employers to provide fair working conditions and wages.
Independent Contractors have much more bargaining power and so employment laws do not apply. This is because not only do they have more control in how they are to do their work but also the freedom to negotiate their working conditions.
What are the Risks of Worker Misclassification?
Misclassification carries several liability risks. If a worker has the characteristics of an employee but treated as an independent contractor, the employer could face liability risks such as:
- claims for wrongful dismissal damages and possibly employment termination;
- fines or other penalties under multiple employment legislation law;
- many other liabilities for unpaid income tax, wages, overtime pay, vacation pay, holiday pay, termination pay, CPP/EI contributions or worker’s compensation premiums; and
- facing class action lawsuits when a group of workers are misclassified.
Since misclassification carries multiple risks, employers should accurately classify their workers to minimize employment-related liability risks.
Key Considerations in Distinguishing Employees and Independent Contractors
When considering if a worker is an employee or an independent contractor, consideration should be given to:
- Control
- Opportunity for profit or loss
- Integration into the Hirer’s Organization
- Exclusivity of Service
- Ownership of tools
- Intention of the parties
These considerations help determine whose business one is working for. As mentioned earlier, Employees work for the company’s business whereas Independent Contractors work for their own business.
Control
Control relates to where, when and how the work is to be performed by the worker. As Employees work for a boss,they do not have high levels of control. This means the employers have the right to control the employees in relation to the work being performed. As for Independent Contractors, they are their “own boss” thus, they are subject to low levels of control and can choose when, where, and how to do work.
If a worker does not have control over their day-to-day work, it is then likely that the worker is an employee. Below are some questions which helps determine the level of control:
- Is the worker required to adhere to workplace policies and procedures?
- Who instructs the worker on the method of doing the work?
- Who sets the work location?
- Is the worker required to wear a uniform?
- Is the worker required to attend meetings or provide reports?
- Who sets the hours of work and approves time off?
- Is there discipline for worker misconduct?
Generally, the employers have the rights to dictate the employment terms. If this is the case, the worker is likely an employee.
Hiring Helpers
Another element of assessing control is whether there are restrictions on a worker’s ability to hire helpers. Employees are usually not allowed to hire anyone to help them perform the work. Oftentimes, employees must first obtain permission from the employer to delegate their work. Independent contractors, however, are typically able to delegate work to their own employees or other contractors, as they have the right to dictate who performs the work.
Opportunity for Profit and Loss
Whether one has the opportunity for profit and loss is a rather simple consideration which can help distinguish an employee from an independent contractor. Employees are only compensated for the amount of time they have worked and reimbursed for their expenses. Other than working longer hours, they have no opportunity to make additional profit. Compared to Independent Contractors who carry their own expenses for their work, they are therefore able to make profit or suffer losses.
Integration into the Hirer’s Organization
Performing essential functions is usually an indication that a worker is an Employee. This means that the worker has “integrated” into the company’s business. An Independent Contractor typically does not perform the company’s essential work because they are their own business. Hirers should also avoid placing independent contractors in the company directory or representing the company publicly as its face.
Exclusivity of Service
If there are restrictions on who a worker can work for, it usually indicates employment. Employees are usually subject to restrictions such as non-compete clauses or non-solicit agreements in favour of the employer. Employees are also usually required to dedicate all of their working hours to the company. Independent Contractors are usually free to take on additional work from other customers and they are able to choose how to dedicate their time.
Ownership of Tools
Employees usually do not have ownership of tools required for their work—they are owned by the employers and loaned to the employees for use. For Independent Contractors, it is up to them to acquire the tools. They typically have ownership of their own tools. Some examples of tools are: vehicles, computers and electronic devices, client lists and so on.
Intentions of the Parties
It is important to note that the intentions of the worker and employer (the “parties”) are usually given less weight when assessing worker classification. However, the intention of the parties may be a deciding factor when all else are equal. Employers should ensure that the essential elements of the work position fall under the characteristics of either an employee or an independent contractor and make it clearly known to the worker. These intentions are best demonstrated through:
- Different forms of payment: Standard payrolls are typically paid to Employees compared to submitting an invoice for work which is common for Independent Contractors;
- Providing different benefits: Generally, Independent Contractors have benefits that differ from the standard employee;
- The words used in the contract such as “Independent Contractor” vs. “Employee”; and
- Subjecting the workers to different taxes: For Employees, deductions are usually made for income tax and CPP/EI, whereas Independent Contractors charge GST/HST to the company.
Conclusion
Since different sets of laws apply to employees and independent contractors, employers may face serious liability risks if they misclassify a group of workers. It is essential that employers ensure that the core elements of the work position aligns the intended worker status. Parties should clearly define the work relationship and set expectations prior to engaging any work.
Are you an employer seeking to correctly classify your workers or a worker questioning your employment status? Use our “Am I an Employee or Contractor tool”
Disclaimer: The information provided in this response is for general informational purposes only and is not intended to be legal advice. The content provided does not create a legal client relationship, and nothing in this response should be considered as a substitute for professional legal advice. The information is based on general principles of law and may not reflect the most current legal developments or interpretations in your jurisdiction. Laws and regulations vary by jurisdiction, and the application and impact of laws can vary widely based on the specific facts and circumstances involved. You should consult with a qualified legal professional for advice regarding your specific situation.