There are many advantages to using independent contractors as part of a workforce. They often bring specialised expertise and tools, without the expectations of a long-term relationship. Further, they can parachute in and out of an organisation, setting their own schedules, taking on multiple projects and even bringing in their own employees to help. However, adjudicators, plaintiff lawyers and legislators are increasingly challenging employers that misclassify workers as independent contractors. Further, some adjudicators seem to have no problem with an individual reaping the benefits of being an independent contractor (typically, throughout the relationship) and later claiming to be an employee when it is advantageous to do so (typically, at the end of the relationship). A finding that a worker (or group of workers) has been misclassified can result in significant liability for an organisation.
The Ontario government is increasing the risks and penalties for employers that misclassify workers as independent contractors as part of the Fair Workplaces, Better Jobs Act 2017 (known as 'Bill 148'), which amends the Employment Standards Act 2000 (for further details please see "Once bitten, twice shy: greater scrutiny ahead for employees misclassified as contractors"). As a result, the burden is now on employers to prove that workers are not employees under the Employment Standards Act. This change of presumption will make it even more difficult for employers to defend claims filed by individuals challenging their status as an independent contractor in favour of being classified as an employee.
Independent contractor or employee? Reversed onus
Bill 148 reverses the onus in misclassification cases under the Employment Standards Act. This means that if an Ontario contractor claims to be an employee for the purposes of the act – and therefore claims to be entitled to overtime, vacation pay or other relevant statutory entitlements – the employer will have the burden of proving that the contractor is not an employee.
There is no set formula for determining whether a worker is an employee or an independent contractor in Canada. Adjudicators will consider the relationship between the parties as a whole to determine whether workers are in business for themselves. The factors that are most commonly considered include:
- the company's control over the performance of the contractor's work (eg, whether the individual hires their own employees or 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 (including whether the individual is incorporated).
Proving that a worker is not an employee can be particularly challenging for an employer that may not have access to information about the contractor's business (eg, whether the contractor has other sources of income or the tools that the contractor uses to perform the work).
Penalties for misclassification claims
Among the recommendations adopted by the Ontario government in Bill 148 was its special advisers' recommendation to increase the proactive enforcement powers of the Ministry of Labour. These proactive measures include:
- inspection blitzes in specific sectors to ensure compliance with the Employment Standards Act;
- conducting regular inspections in high-risk sectors; and
- providing additional resources to educate employees and employers on their rights and responsibilities under the act.
To achieve this goal, the government has announced that it will be hiring up to 175 additional employment standards officers to assist with its enforcement efforts, and has increased the penalties payable by non-compliant employers in recent amendments to the Employment Standards Act Regulations.
Employers that are found by an employment standards officer to have contravened the Employment Standards Act by misclassifying an employee as an independent contractor may face penalties of C$350, C$700 and C$1,500 for the first, second and third contravention, respectively. If the contravention affects more than one employee, these penalties will be multiplied by the number of employees that have been affected. Employers that violate the act may also face prosecution. If convicted, fines can range between C$50,000 and C$500,000 depending on whether the conviction applies to an individual or corporation, and if it is a first, second or third offence.
In addition to monetary penalties, Bill 148 empowers the Ministry of Labour to publish the names of employers that fail to comply with the Employment Standards Act. This publicly available list will include:
- the name of the employer;
- the date and description of the contravention; and
- the penalty charged.
Misclassification of contractors can lead to significant liability for employers, as these individuals can lay claim to, among other things:
- vacation pay;
- statutory holiday pay;
- overtime pay; and
- termination and severance pay.
These are all considered to be rights and entitlements of employees under employment standards legislation. Further, there may be consequences for unremitted:
- taxes;
- Canada Pension Plan payments;
- employment insurance;
- health taxes or government health insurance; and
- workers' compensation insurance premiums.
Employees and dependent contractors may have common law entitlements on termination. The amendments to Bill 148 are expected to increase the past bias in favour of determination of employee status.
To minimise the risks for misclassifying individuals as independent contractors, employers should take a proactive approach, including reviewing existing relationships, by:
- assessing independent contractor relationships to determine their status as an employee or independent contractor;
- reviewing independent contractor agreements for potential risks; and
- considering next steps where it is determined that an individual was misclassified as an independent contractor – this may include hiring the individual as an employee.
The changes to the Employment Standards Act reflect a growing concern among Canadian lawmakers that workers and employers are operating outside of the traditional employer-employee framework. With these changes, the number of misclassification cases brought against employers under employment standards legislation is likely to increase, and these cases should progress more quickly with the dramatic increase in enforcement officers. Copycat claims from plaintiff lawyers – including class actions – are also likely to increase, as other similar cases play out in the Canadian and US news media.
For further information on this topic please contact Ralph N Nero or Avneet Jaswal at Fasken by telephone (+1 416 366 8381) or email ([email protected] or [email protected]). The Fasken website can be accessed at www.fasken.com.
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