You're about to hire an employee. But he has his own
business and wants to be an independent contractor. That way,
he'll pay less tax. And it's easy for you too - you
will just have to pay his invoices and won't have to include
him in your employee head-count. But wait. There can be
significant consequences from incorrectly characterizing an
employee as an independent contractor. Not only can the
individual, at the end of the relationship, claim he was really an
employee and entitled to significant severance benefits, the tax
authorities can also come knocking, as was the case recently in Quebec (PDF -
available in French only).
Mr. Darveau is the principal director and executive officer of
four companies. Through a trust, he owns 100% of a holding company
(Groupe Bermex Inc.), which has full control over three
subsidiaries operating in the furniture industry (Bermex
International Inc., Finition Chez Soi Inc. and Confortec 2000
After the Department of Revenue completed its tax audit and the
companies answered a questionnaire, all four companies received
notices of assessment for 2003, 2004 and 2005 totalling
$177,653.69, on the grounds that the amounts paid to Mr. Darveau as
management fees for the years in question should have been
considered employment income and subject to the deductions at
Although the companies challenged them, the assessments were
The issue before the Court of Québec and the
Québec Court of Appeal was this: is Mr. Darveau a
self-employed worker bound by a service contract or an employee who
is a party to a contract of employment?
According to the Court of Québec, although the control he
exerts over the companies gives him a freedom similar to that of a
self-employed worker, he nonetheless is a salaried employee.
The Court of Appeal confirmed this decision
(PDF - available in French only), indicating that the relationship
of subordination and control is the main criterion used to
distinguish a contract of employment from a service contract. To
determine that relationship, the Court of Appeal examined the
extent to which the worker was integrated into the business'
activities. It found that this criterion, although developed in
common law in provinces outside Quebec, was equally applicable
under Québec civil law.
The following elements were indications that Mr. Darveau is
highly integrated into the companies' activities, and thus is a
The nature of the services rendered to the companies, namely
the development of policies, procedures and resolution of
The considerable income drawn from the companies and the
absence of any need to develop a clientele;
The absence of any written agreement;
The fact that no consulting services were rendered to other
The fact that there were no replacements in the event of his
The absence of any report to the companies of the activities
engaged in and evaluation criteria for the services rendered;
The active role in determining his own duties.
Furthermore, the following factors were inconsistent with Mr.
Darveau being an independent contractor:
Absence of any risk of losses or chance of profits;
The monthly remuneration was received as constantly as a
Fees were invoiced in advance, without any subsequent
adjustment to reflect time actually worked;
The work was performed in the companies' offices;
No tools or equipment were provided by Mr. Darveau; and
Mr. Darveau brought no particular expertise.
Lessons to Employers
This Québec Court of Appeal decision confirms that
improperly identifying the contractual relationship can have a
considerable financial impact on employers. As in the case in all
provinces, it is therefore important to accurately characterize an
individual as an employee or independent contractor from the very
Even though a written contract characterizing an individual as
one or the other may be useful when evaluating the parties'
intent, it won't be determinative. Instead, the courts will not
hesitate to go beyond the text to examine the true nature of the
relationship between the parties.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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