Thomas Perry

Barrister and Solicitor

Thomas Perry is an employment and labour lawyer in Toronto, Ontario. He has experience with management-side employment and labour issues, and providing strategic HR advice to businesses.

He can be reached at thomasperry88@gmail.com

Any information provided should be considered for entertainment purposes only and is not legal advice. You should seek independent legal advice before making any decisions. Use of this website does not create a client relationship.

The Legal Risks of Misclassifying Employees as Independent Contractors in Ontario

By

Misclassifying employees as independent contractors is a common but costly mistake for employers in Ontario. While independent contractors and employees may perform similar work, their legal status under employment law is fundamentally different. Misclassification can lead to significant financial penalties, back payments, and legal disputes. This article outlines the key differences between employees and independent contractors, the risks of misclassification, and how employers can ensure compliance with Ontario’s employment laws.

Key Differences Between Employees and Independent Contractors

  1. Control and Independence:
    • Employees: Employers control how, when, and where the work is performed. Employees are integrated into the organization and typically use the employer’s tools and resources.
    • Independent Contractors: Contractors have control over how they complete their work, often using their own tools and methods. They operate as separate business entities.
  2. Economic Dependency:
    • Employees: Employees rely on the employer as their primary source of income and are economically dependent on the relationship.
    • Independent Contractors: Contractors typically work for multiple clients and bear the financial risk of their business.
  3. Legal Obligations:
    • Employees: Employers must provide statutory entitlements under the Employment Standards Act, 2000 (ESA), such as minimum wage, overtime, vacation pay, and termination notice.
    • Independent Contractors: Contractors are not entitled to ESA protections and are responsible for their own taxes, benefits, and business expenses.

Risks of Misclassifying Employees as Independent Contractors

  1. Back Payments and Penalties:
    • If a contractor is found to be an employee, the employer may be required to pay back wages, overtime, vacation pay, and other entitlements under the ESA.
    • The employer may also face penalties from the Canada Revenue Agency (CRA) for unpaid payroll taxes, Canada Pension Plan (CPP) contributions, and Employment Insurance (EI) premiums.
  2. Legal Disputes:
    • Misclassified workers may file claims with the Ministry of Labour, the HRTO, or the courts for unpaid wages, wrongful dismissal, or human rights violations.
    • Employers may also face class action lawsuits if multiple workers are misclassified.
  3. Reputational Damage:
    • Misclassification can harm an employer’s reputation, making it difficult to attract and retain talent.

How Courts Determine Worker Status

Courts and tribunals use a multi-factor test to determine whether a worker is an employee or an independent contractor. Key factors include:

  • Control: Does the employer control how the work is performed?
  • Ownership of Tools: Does the worker use their own tools and equipment?
  • Chance of Profit/Risk of Loss: Does the worker bear financial risk and have the opportunity to profit?
  • Integration: Is the worker integrated into the employer’s business?

No single factor is determinative; the court will look at the relationship as a whole.

Case Law Highlights

  1. McKee v. Reid’s Heritage Homes Ltd.:
    • The court found that a worker classified as an independent contractor was actually an employee, entitling them to ESA protections and termination pay.
  2. 1392644 Ontario Inc. (c.o.b. Cobble Hill Farms) v. Canada (National Revenue):
    • The Supreme Court of Canada emphasized the importance of the worker’s level of control and economic independence in determining their status.
  3. Keenan v. Canac Kitchens:
    • The court ruled that long-term contractors who were economically dependent on the employer were deemed employees, entitling them to termination pay.

Best Practices for Employers

  1. Review Worker Relationships:
    • Regularly assess the status of workers to ensure proper classification.
  2. Use Written Agreements:
    • Draft clear, detailed contracts that outline the nature of the relationship, including control, payment terms, and responsibilities.
  3. Avoid Over-Control:
    • If engaging independent contractors, avoid exerting excessive control over how they perform their work.
  4. Seek Legal Advice:
    • Consult an employment lawyer to review worker classifications and contracts.
  5. Educate Managers:
    • Train managers on the differences between employees and contractors to prevent misclassification.

Conclusion

Misclassifying employees as independent contractors is a significant legal and financial risk for Ontario employers. By understanding the key differences between these roles and taking proactive steps to ensure proper classification, employers can avoid costly penalties, legal disputes, and reputational damage. When in doubt, seek legal advice to ensure compliance with Ontario’s employment laws.