Organizations and individuals often perceive advantages to
casting their relationship as a "fee for service"
arrangement instead of an "employer-employee"
arrangement. Cast in that manner, the independent contractor claims
tax deductions not available to employees and the company avoids
paying taxes, CPP, EI and the dreaded notice period. These
perceived benefits are often incorrect. More often than not,
independent contractors are legally determined to be employees,
either by the courts or by the tribunals that administer various
What is the test?
Courts and tribunals apply a number of different tests to
determine whether an individual is an employee or an independent
contractor. The common thread in those tests is the element of
control. The following factors form part of the analysis:
The degree of control exercised by the individual over the
timing and manner of performance of the work;
Whether the individual owns the tools, supplies or equipment
required to perform the work;
Whether the individual has a chance of profit; and
Whether the individual has a risk of loss.
Does the distinction really matter?
Absolutely. From a practical day-to-day perspective, the
distinction may not appear to be important. However, the legal
consequences of mischaracterizing the relationship can be very
significant for the organization. For example, if your independent
contractor is found to be an employee:
The Income Tax Act will apply, which means the
organization has (and had) an obligation to withhold income tax
from the individual's salary. The organization can be liable to
pay the taxes it ought to have paid in addition to paying
penalties, fines and interest.
The Employment Insurance Act and Canada Pension
Plan Act will apply in which case the organization can be
liable to pay unpaid contributions, penalties and fines.
The Employment Standards Act will apply with a number
of possible ramifications (e.g., unpaid vacation pay, overtime
wages, leave benefits).
In the absence of a contract, the common law will apply to the
termination of employment, which can amount to a significant notice
There may be WSIB ramifications, depending on the
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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