Is Your Contractor Actually a Contractor?

The following article is provided for informational purposes only and is not a substitute for qualified legal advice. By reading this article, you understand and agree that there is no solicitor-client relationship between you and the author of this article.

When a business needs an additional worker, it generally has two choices: hire an employee or hire a contractor. Often, businesses choose the latter without much thought. This can be a big mistake. Deciding whether to hire a contractor or an employee is a serious decision which requires careful consideration. Misclassifying your workers as contractors, when they actually should be employees can be a costly and time-consuming mistake that can even result in investigations by WorkSafe BC, the Employment Standards Branch, and the Canada Revenue Agency.

So if hiring contractors is so risky, why do businesses do it? For many businesses, hiring a contractor can be a prudent business strategy. Contractors can be easier to dismiss if they are underperforming, administration can be simpler, and engagement of contractors can be more cost effective (for example, no need to pay overtime or vacation pay). But, the key word here is can. As many businesses learn after being on the wrong end of a demand letter or, worse yet, a Canada Revenue Agency investigation, engaging contractors may not be so prudent after all.

The benefits of engaging a contractor are real, but they arise only if (a) the worker is correctly classified as a contractor; (b) the payer-contractor relationship is established properly in the first place between the parties; and (c) the relationship is properly maintained from beginning to end. If your business is simply trying to save money by hiring workers as contractors, when they really should be employees, or if your business lacks properly drafted contracts with its contractors, or if the contractor arrangement isn’t carefully maintained, your business could face significant liability in a multitude of ways. The good news? Sound legal guidance can help your business avoid these problems.

How It All Goes Wrong: Worker Misclassification

Misclassification of a worker as a contractor can create serious problems, and it can occur in more circumstances than you may think. Unfortunately, the intentions of the parties don't always dictate whether your worker is a contractor. For example, the worker may call herself or himself a contractor, you and your contractor may intend that the relationship be a payer-contractor relationship, your contract with the contractor may be titled “Independent Contractor Agreement,” and the contract may even explicitly state that the worker is a contractor, but is your contractor actually a contractor? One would think that these factors would be enough to confirm that a worker is a contractor rather than an employee, but in fact, these factors standing alone, or even combined together, are likely insufficient to properly classify your worker as a contractor.

Instead, whether a worker is a contractor is determined after assessing a number of factors, including whether the worker owns its own equipment, sets its own hours, controls the manner it performs its work, and has a chance to profit. The worker's level of integration into your business is also another relevant factor considered when a worker classification determination is being made. Typically, such a determination occurs as a result of a complaint made to the employment standards branch, the Canada Revenue Agency, or a court.

So What’s The Risk?

Companies, and their directors, can face significant liability and penalties if they improperly engage workers as contractors when they are actually employees. If an employee is misclassified as a contractor, your company (and its directors) may be liable for:

• Years of unpaid vacation pay calculated at 4% or 6% of all past wages;
• Months worth of vacation days;
• Countless hours of overtime pay;
• Months of severance pay (also known as damages in lieu of reasonable notice) if the worker was wrongfully dismissed;
• All costs connected to the worker’s injury, if they get injured while working for your business;
• Payment of previously owed worker’s compensation contributions;
• Penalties for non-compliance with employment standards legislation;
• Penalties for non-compliance with workers’ compensation legislation;
• Past Canada Pension Plan (CPP) contributions for that misclassified worker;
• Past Employment Insurance (EI) contributions for that misclassified worker;
• Income tax remittances for the misclassified worker;
• 10% penalty on monies not remitted or deducted;
• Interest on owed CPP and EI;
• Fines of up to $25,000; and
• In some cases, directors of companies may even face imprisonment as a consequence of their misclassification of a worker.

Suffice it to say, misclassification of a contractor can have serious and wide ranging consequences for all involved.

There Is a Solution

The above paints a scary picture for businesses. Misclassification of a contractor could result in staggering financial liability. Thankfully, a lawyer knowledgeable in employment law can help your business properly classify its workers and can prepare contractor agreements that protect your business in the event an authority determines that a misclassification has occurred. With sound legal advice, a business can enjoy the advantages of contractors while minimizing the risk. If you’d like to find out more, feel free to give me a call at 604-629-5401 or email at d.mchugh@segev.ca.