Employees vs Independent Contractors : An Important and Potential Costly Misclassification

***Please note the following is not meant to be legal advice, it is simply a discussion about the topic.  If you or your business has any concerns regarding the classification of employees or independent contractors, please contact the lawyers at Nadi Law in order to schedule a consultation****

Independent Contractors vs Employees in Ontario: Understanding the Differences

Independent contractors and employees are two distinct forms of work arrangements in Ontario, Canada. Understanding the differences between the two is crucial for both employers and workers. This article will discuss the key differences between independent contractors and employees in Ontario, the legal definitions of each, and the rights and protections that employees are entitled to.

Defining Independent Contractors and Employees in Ontario

In Ontario, the legal definition of an independent contractor is someone who provides services to another person or company, usually for a fee, and who operates independently from the client. Independent contractors are not considered employees and, as such, are not entitled to the same benefits and protections as employees.

On the other hand, an employee is someone who is hired by an employer to perform work under the employer’s direction and control. Employees are entitled to a wide range of benefits and protections under Ontario law, including the right to a minimum wage, overtime pay, and protection under the Ontario Employment Standards Act. Consult Nadi Law if your business needs to consult regarding classification of employees or independent contractors.

Benefits and Protections for Employees in Ontario

In Ontario, employees are entitled to a range of benefits and protections, including:

  • Protection under the Ontario Employment Standards Act: The Ontario Employment Standards Act sets out minimum standards for working conditions in Ontario, including hours of work, public holidays, minimum wage, vacation pay and basic termination entitlements.
  • Unemployment Insurance: Employees are eligible for unemployment insurance if they lose their job through no fault of their own.
  • Reasonable Notice under the Common law: This is an important distinction as it can make a drastic difference between termination entitlements (or severance) should the employee or independent contractor be terminated

Rights and Protections for Independent Contractors in Ontario

While independent contractors are not entitled to the same benefits and protections as employees, they do have certain rights under Ontario law, including the right to:

  • The relationship is governed exclusively by terms of the contract between the parties or the “independent contractor agreement”.  This contract will typically set out the rate of pay, term of the contract, termination entitlements etc…
  • They are in business for themselves, therefore the employer does not exercise the same level of “control” over how or when the independent contractor does the work they are hired to do.  Independent contractors typically set their own schedules, use their own equipment, and they are typically not limited to working for one “client” or party
  • Given the independent contractor is in business for themselves, they can often enjoy taxation benefits such as writing off business expenses, setting themselves up as a corporation etc…

The Importance of Correctly Classifying Workers in Ontario

Correctly classifying workers as either independent contractors or employees is crucial for both employers and workers. Employers may feel that that it is more cost effective to classify a worker as an independent contractor compared to an employee, however, the courts, the labour board and even the Canada Revenue Agency are not bound by that classification.  Workers may miss out on key benefits and protections by being misclassified as independent contractors when they are actually an employees and have the ability to challenge that classification in a court of law or by filing a complaint with the Ministry of Labour.

Over the years, many workers have challenged their classification as independent contractors and there has been increased scrutiny over the use of independent contractors in Ontario, with several high-profile cases making their way to the courts.  One such case is Belton v. Liberty Insurance Co. of Canada [2004] O.J. No. 3358 where the Ontario Court of Appeal ruled that Insurance Sales Agents, while originally classified as independent contractors by Liberty Insurance, were actually employees and were entitled to reasonable notice upon termination.

The Supreme Court of Canada has clarified the appropriate factors to consider when determining whether a worker is an employee or an independent contractor. According to the Court in 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59, the central question is whether the person who has been engaged to perform the services is performing them as a person in business on his own account.

When making the above determination, the degree of control exercised by the employer over the employee will be an important consideration.  More specifically, factors that will be examined by a court include whether the worker provides his or her own equipment, whether the worker hires his or her own helpers, the degree of financial risk taken by the worker, the degree of responsibility for investment and management held by the worker, and the worker’s opportunity for profit in the performance of his or her tasks.

The distinction between independent contractors and employees is important because it affects a worker’s entitlement to various benefits and protections, including minimum wage, overtime pay, vacation pay, and the right to make a complaint under the Ontario Employment Standards Act. Independent contractors are generally not entitled to these protections and benefits.

One important exception is the Ontario Human Rights Code, which applies equally to both employees and independent contractors. This means that both employees and independent contractors have the right to be free from discrimination in the workplace based on protected grounds such as race, gender, and sexual orientation.

Another important aspect to consider when discussing the differences between employees and independent contractors is the matter of termination entitlements. Upon termination, employees in Ontario are entitled to reasonable notice under the common law, which is determined based on factors such as length of service, age, and position. Additionally, employees also have guaranteed entitlements under the Employment Standards Act, such as severance pay and notice of termination. These entitlements are intended to provide employees with some level of financial protection and stability after the loss of their employment.

In contrast, independent contractors in Ontario are only entitled to termination benefits as outlined in the contract itself. This means that if there is no provision for termination benefits in the contract, the independent contractor may not be entitled to any compensation or notice upon termination. It is therefore important for both parties to clearly define the terms and conditions of the contract, including termination entitlements, to avoid disputes and misunderstandings later down the road.

In conclusion, the determination of whether a worker is an independent contractor or an employee has significant implications for the worker’s rights and entitlements. Employers must be mindful of this distinction and ensure that they are classifying workers correctly. Failure to do so can result in significant financial penalties, as well as legal liability for breaches of employment standards legislation. The law in this area is constantly evolving, and it is recommended that employers seek legal advice to ensure compliance with the latest developments in this field.  In addition, independent contractors who have any concerns about their rights and possible entitlements should consult an experienced employment lawyer, such as the lawyers at Nadi Law to discuss their potential options.

  • The Team at Nadi Law
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