As an employer, your responsibilities towards your workers are different depending on the nature of the work they are doing for you.
Misclassifying the status of your worker can land you with obligations concerning tax deductions, benefits, and firing procedures. Here are some of the ways the classification of your employment relationship can impact your responsibilities:
Deductions
When your worker is an employee, you have a responsibility under the Canadian Income Tax Act to withhold a portion of their salary or wage to go towards the worker’s income tax, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums. This is done on a “cash basis”, which means that the deduction needs to happen when the money is paid out to the worker. It is important to withhold this amount because misclassifying workers will make you subject to a penalty based on a percentage of the amount you failed to deduct.
When your worker is an employee, it is your responsibility to remit the amount that was withheld to the Canada Revenue Agency. For a worker with an independent contractor status, on the other hand, the income they receive is considered business income, and deducting a portion of their wage or salary is their responsibility, not yours.
Benefits
Employees often have benefits guaranteed to them by law, while independent contractors do not. For example, the Ontario Employment Standards Act requires a minimum wage, severance pay, overtime pay, vacation pay, paid leave days and other benefits for employees, but not for contractors. These entitlements can amount to a substantial financial liability if the worker is misclassified as an independent contractor when they are in fact an employee. In the event that this happens, the employee could make a claim for the benefits they where not given over the period of time they were misclassified as an independent contractor. A misclassification of workers could be costly, so make sure you are diligent when you decide whether you would like to treat someone as an employee or a contractor. It is best to avoid the misclassification of employees and contractors.
Termination and dismissal
The distinction between employee and independent contractor can also come into play when you are looking to end your relationship with the worker and fire them. If the worker is an employee, your obligations are determined by the employment standards of your province. This means that in certain circumstances, you may owe an employee either several weeks of notice or pay in lieu of that notice. For independent contractors, your obligations can be found in the terms of the contract you signed when they signed on to do the work. These will take the form of a “termination” clause. Just like with benefits, if a worker is misclassified as an independent contractor but is found to be an employee, you might be on the hook for paying for those weeks of notice they were supposed to receive.
So how can you tell whether they are an employee or an independent contractor?
Calling someone an employee or an independent contractor doesn’t automatically make them one. The common law courts (and the Canada Revenue Agency) look at a series of factors to determine whether a worker is a worker or an independent contractor. These include the level of financial risk the worker is taking on (including the risk of loss), whether their work is supervised, who owns the tools used for the work, the degree of control they have over their work, who decides when and where the work is done, and whether there is an independent contractor agreement or an employment contract. The courts look at the economic realities of the situation to determine whether there are any misclassified employees or contractors. Our legal tool can help you navigate these factors and predict how a court might decide the status of your worker.
Click here to use our free AI-powered employment law legal tool to help you determine whether your workers are employees, independent contractors or dependent contractors, and if you have misclassified workers.
Conclusion
When classifying workers, it is important to look at the work they will be doing and whether they fit more within the description of an employee or an independent contractor. It doesn’t have to be a hassle and you have tools available to help you. Taking the time to properly classify your workers now can save you from a headache in the future.
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.