March 5, 2003

Ensure Independent Contractor Not Employee

There are many advantages to employers and employees in characterizing their working relationship as one of an independent contractor.

For example the employer is saved making certain income tax, Workplace Safety and Insurance Act and Canada Pension Plan contributions while the independent contractor receives the gross amount of remuneration earned and is entitled to deduct some expenses which are not deductible by an employee.

But there are dangers in treating a working relationship like an independent contracting relationship only to have it found by the courts to be an employer-employee relationship. The employer may be required to pay all the appropriate contributions with interest and, perhaps, a penalty.

In addition an independent contractor may wish to claim he was actually an employee at the conclusion of the relationship in an attempt to obtain employee benefits such as vacation pay and severance. Here are a few suggestions for employers about how to assure independent contractors are found by the courts to actually be independent contractors.

Bullet-proofing your contract

Written contracts allow for certainty in the relationship and provide the forum for the characterization of the relationship as one of independent contractor as opposed to employment. But the content is key in ensuring it holds up in court.

  • A clear statement that the relationship is one of independent contractor rather than employment should be made. The label is not conclusive but it is a factor considered by the court in determining the nature of the relationship.
  • The contract should have a definite term. Independent contractors are most often hired for a particular project or period, while employees are usually hired on an indefinite basis. To help ensure the independent contractor is not found to be an employee a definite term to the relationship is helpful.
  • There should be an express acknowledgment by the independent contractor that the employer of his services is not deducting and remitting income tax, CPP contributions, employment insurance contributions or any other similar deductions and is not making the employer remittances in respect of employment insurance, CPP and Workplace Safety and Insurance. The acknowledgement should also include an indemnity from the independent contractor in respect of any remittances which are subsequently required, as well as any interest or penalties paid by the employer of his services. Due to the provisions of some legislation such indemnities may be unenforceable, but the inclusion of such a provision will lend credence to the argument the relationship is one of independent contractor.
  • An express provision stating the independent contractor has no authority to create any obligations on behalf of the employer of his services or to bind that person or entity should be included in an effort to limit the scope of the relationship. Similar provisions regarding the independent contractor’s inability to endorse cheques, accept returns and so on should be included.
  • The remedies of the employer of the independent contractor’s services in respect of any breaches of the agreement should be limited to the termination of the agreement. As such the independent contractor will not be subject to discipline by the employer of his services nor be governed by the policies of that person or entity. A statement that the independent contractor will conduct himself in accordance with normal business practices will not likely transform him into an employee.
  • A statement that the independent contractor is free to provide services to other clients should be made. But the contract may provide for a guarantee of a certain number of hours to be dedicated to his work or a deadline for completion of the project. The employer of the services should also ensure the provision of services to other clients is not in direct competition with its business.
  • A provision that the independent contractor shall not be reimbursed for expenses will support the argument he is not an employee.
  • A detailed list of the expectations or specifications which the employer of the services requires the independent contractor to meet, without requiring the independent contractor to be subject to day-to-day control, will assist in establishing the relationship.

Modifying your business practices

The independent contractor label does not necessarily govern the relationship and contractual terms don’t either. Parties to an independent contractor agreement must ensure they practice what their agreement preaches. Some points to bear in mind when structuring the relationship between the independent contractor and the employer of the services are the following:

  • Give the independent contractor as much control as possible. The control test is the first leg of the tests applied by the courts. If practical do not restrict the hours of work or the location at which the independent contractor is to provide his services. Similarly, if practical, don’t restrict the clients to whom the independent contractor can provide his services but rather restrict the locations at which the independent contractor can provide services.
  • Require the independent contractor to provide the tools necessary for the services under the agreement. In the case of relatively expensive tools, the employer of the services can subsidize the original purchase price or provide them on a conditional sales basis. Alternatively that person or entity can lease the tools to the independent contractor. The independent contractor can be charged on a monthly basis for the rental of things like office space, secretarial assistance, computer and phone.
  • Other possible modifications include requiring GST numbers and periodic invoices, exclusion from group benefit, vacation and sick pay entitlements and restrictions on participation in employee activities such as company picnics, parties and events.

Each situation calls for some creativity to help ensure the independent contractor will be found to be an independent contractor and cannot be characterized as an employee.

There are certainly advantages to both the employer and the employee of an independent contractor relationship. But if the parties characterize the relationship as an independent contractor one and, subsequently, the relationship is found to have been an employment relationship, the exposure to both parties is significant. While neither contractual clauses nor general modifications in practice can ensure a relationship will be characterized as one of independent contractor, taking such steps will increase the odds. A written agreement and input by a lawyer with special skill and knowledge in the employment law field with respect to the modification of the employer’s practices can be extremely helpful to an employer considering establishing such a relationship.

Peter Israel is the senior partner in the Toronto law firm of Israel Foulon LLP – Employment and Labour Lawyers. He can be reached at 416-640-1550 or pi@israelfoulon.com. A version of this article originally appeared in the Carswell publication, Canadian Employment Law Today.

LEGAL DISCLAIMER: This article is for informational purposes only and is not intended to provide legal advice, which in all circumstances must be tailored to the specific facts of any problem. You should obtain a proper legal consultation in order to determine how this article applies to your specific situation.
Please feel free to contact Israel Foulon LLP to learn more at 416-640-1550.

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