Northern Exposure

Once bitten twice shy: Greater scrutiny ahead for employees misclassified as contractors

by Jackie VanDerMeulen

Organizations’ use of independent contractors (often also referred to as consultants) as opposed to actual employees has grown significantly over the years. This trend comes as no surprise in a changing economy where particular skill sets are required at specific times and where flexibility is a key driver of success. In some cases, the characterization of a relationship as one of independent contractor is driven by requests from workers themselves, often to take advantage of certain tax benefits.

There are lots of great reasons to use independent contractors as part of a workforce. Increasingly however, adjudicators, plaintiff lawyers, and legislators are challenging employers who “misclassify” workers as independent contractors. A finding that a worker (or group of workers) has been misclassified can result in significant liability for an organization. Employers may therefore want to think twice before using independent contractors.

Ontario recently announced that it will be cracking down on employers who misclassify workers as independent contractors as part of its Bill 148: Fair Workplaces, Better Jobs Act, 2017, which proposes amendments to the Employment Standards Act, 2000 (ESA). Bill 148 will now place the burden on the employer to prove that the worker is not an employee for the purposes of the ESA.

Independent contractor or employee?

There is no one single factor in Canada for determining whether a worker is an employee or independent contractor. Adjudicators look at the relationship between the parties as a whole to determine whether the workers are truly in business for themselves. The factors that are most commonly considered include:

  • the company’s control over the performance of the contractor’s work (for instance, whether the individual hires his own helpers and determines the timing and manner in which services are rendered);
  • the ownership of the equipment required to perform the work;
  • whether the contractor is economically dependent on the company;
  • whether the contractor has a meaningful chance of profit or risk of loss; and
  • the operational integration between the contractor and the company. (This includes whether the individual is incorporated).

The subcategory of “dependent contractor” has also emerged over the years for certain purposes, such as the common law entitlement to notice of termination and the right to unionize in certain jurisdictions. Dependent contractors may otherwise have all the characteristics of an independent contractor, except that they are economically dependent on one organization. However, dependent contractors are not generally entitled to entitlements reserved for employees under provincial employment standards legislation, such as under the employment standards legislation of Ontario, British Columbia, and Alberta.

Misclassification claims under Ontario’s Employment Standards Act, 2000

Among the recommendations adopted by the Ontario government in its Bill 148: Fair Workplaces, Better Jobs Act, 2017 was its special advisers’ recommendation to increase the proactive enforcement powers of the Ministry of Labour. Ontario announced its intention to hire 175 more employment standards officers to assist with its enforcement efforts, while increasing the penalties payable by noncompliant employers in forthcoming amendments to ESA Regulations.

Importantly, Bill 148 reverses the onus in misclassification cases under the ESA. This means that if an Ontario contractor claims to be an employee for the purposes of the ESA, and therefore entitled to overtime, vacation pay, or other relevant statutory entitlements, the employer will have the burden of proving that the contractor in question is not an employee.

Proving that a worker is not an employee can be particularly challenging for an employer who may not have access to information about the contractor’s business, such as whether the contractor has other sources of income or what tools the contractor uses to perform the work.

Implications for employers

Misclassification of contractors can lead to significant liability for employers, as these individuals can lay claim to vacation pay, statutory holiday pay, overtime pay, termination and severance pay, among other entitlements. These are all considered to be inalienable rights of true “employees” under employment standards legislation.

Of course, outside of claims under employment standards legislation, there can also be consequences for unremitted taxes, CPP, EI, health taxes or government health insurance, and workers’ insurance premiums in some cases. Significantly, both “employees” and “dependent contractors” may have common law entitlements upon termination.

The changes to Ontario’s ESA reflect a growing concern among lawmakers across Canada that workers and employers are operating outside of the traditional employer-employee framework. With these changes, we expect to see an increase in the number of misclassification cases brought against employers under employment standards legislation, and these cases should progress more quickly with the dramatic increase in enforcement officers. We also expect to see an increase in copycat claims from plaintiff lawyers, including class actions, as other similar cases play out in the Canadian and American news media.