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 contractor?
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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