The issue as to whether an individual is providing services as
an independent contractor or performing services as an employee is
a perennial one. The Federal Court of Appeal recently weighed in to
reconcile competing tests on the proper way to determine whether an
individual is a contractor or truly an employee.
The particular appeal involved three individuals who worked for
Connor Homes, a licensed operator of foster homes and group homes
for children with serious behavioural and developmental disorders,
as area supervisors and/or child and youth workers. Each worked
under a contract that stipulated she was an independent contractor
"responsible for payment of all necessary remittances,
including Canada Pension Plan, Employment Insurance and Provincial
and Federal Taxes". Each was paid at a specified hourly rate
or flat rate that depended on the service provided and provided
those services in accordance with the homes' policies and
procedures manual. The Canada Revenue Agency had ruled that each of
the workers was engaged in employment for purposes of the Canada
Pension Plan and the Employment Insurance Act., a determination
with which Connor Homes disagreed.
At the outset of its analysis, the Federal Court of Appeal noted
that the question of an individual's working status has become
increasingly important with the trend towards outsourcing and
short-term contracts and the consequent effect on entitlements to
Employment Insurance and Canada Pension Plan benefits. The Court
also acknowledged that although the question is simple in theory,
it is difficult to apply with any degree of certainty given its
fact specific nature and the ever changing workplace. The Federal
Court of Appeal refined a number of lower court decisions into a
two-part test. The first step is subjective: is there a mutual
understanding or common intention between the parties regarding
their relationship? This step generally will be determined by the
written contractual arrangements and behaviour of the parties. For
example, is there a written agreement, were invoices issued for
services rendered, was the service provider registered for GST,
were the income tax filings consistent with that of an independent
If so, then the second step is objective: do the pertinent facts
support that the worker is providing services as a business on her
own account? The factors to consider include the level of control
exercised over the worker's activities, and whether the worker
provides her own equipment, hires helpers, manages and assumes
financial risk, and has an opportunity of profit in the performance
of her tasks.
On the facts before it, the Court of Appeal found that, although
the parties intended their relationship to be that of independent
contractors, they were, in fact, employees. The degree of control
exercised over their work was the same as that exercised over
employees, they were limited in what they could earn and they took
on no financial risks. Although the individuals were expected to
use their own motor vehicles, this factor was insufficient to
outweigh all others.
Many businesses run the risk associated with the
mischaracterization of some of their work force to avoid headcount
issues, the costs associated with benefits programs, etc. This
recent decision serves as a reminder that the Canada Revenue Agency
is prepared to pursue this issue and will not simply defer to the
manner in which the parties have described their relationship. The
risk of an incorrect characterization of a worker as an independent
contractor can expose an employer to liability for failing to make
income tax deductions at source, failing to make contributions to a
host of social programs, related penalties and interest, as well as
potential damage to their relationship with the individuals who
provide the services.
(See: 1392644 Ontario Inc. (Connor Homes) v. Canada
(National Revenue), 2013 FCA 85 (CanLII).)
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