Are you an Employee or Independent Contractor?

by Gleb Malinovsky, B.A., J.D.

In the wake of coronavirus, we understand that many people have been forced to leave their jobs and are unsure of their employment opportunities in the coming months. In this light, we have decided to inform our readers on the differences between employees and independent contractors as the two titles have great variance in their respective levels of job security and financial assistance, both of which have become especially pressing areas of concerns over the past few months. This article will define both terms, explain their significance in the corporate world, and provide some real-world examples to help clear up any confusion.

What Does It Mean?

Firstly, an employee is someone in a contractual relationship with an employer wherein work or services are provided in exchange for payment. An independent contractor also provides work or services in exchange for payment but does not meet the other necessary criteria for employment. The criteria for employment include:

• Degree of control: An employee usually works scheduled hours and can be told what to do and how to do it by their manager or superior. An independent contractor, however, can only be told what to do and only works as required.
• Level of supervision: If the worker is under the direction and control of another person (i.e., a boss) then they are most likely an employee. Independent contractors do not usually report to a boss for instructions on how to perform their job.
• Payment for work: Employees are either payed through salaries or wages, the amount of which is determined by their agreement with the employer. Contrarily, independent contractors usually charge the employer a discretionary amount in exchange for their services. For example, consultants charge businesses a fee in exchange for advice.
• Ownership of tools: If the worker uses the tools owned by someone else (i.e., space, supplies, building) then they are most likely an employee. An example of an employee in this sense would be a teacher who uses the school’s classroom and teaching supplies. An example of an independent contractor in this sense would be a tutor who travels to client’s houses and brings their own teaching materials.

Why Is It Important?               

The distinction between “employee” and “independent contractor” can have various legal and financial consequences. For the purpose and scope of this article, we will be explaining how the two titles offer different protection during times of unemployment. Firstly, while they have less freedom compared to independent contractors, employees are generally better protected under various laws and regulations. Employment insurance, layoff durations, and mandatory notice or renumeration periods prior to or after termination are all statutory requirements that are intended to keep employees financially stable during frictional unemployment and layoff periods.

Independent contractors are not protected by law to the same extent as employees. They are not entitled to employment insurance and, unless otherwise stated in their contract, employers are not required to give them notice prior to termination; the contractual relationship between an employer and an independent contractor can usually end at any time and either party can initiate the termination. However, that is not to say that independent contractors are any more vulnerable to unemployment than employees, they are just protected differently. For example, depending on their contract, employees are usually not able to work for multiple employers at any given time. Independent contractors, on the other hand, can simultaneously work with multiple clients barring a non-compete clause in their contract. This allows the workflow for independent contractors to remain relatively steady if one or more employers choose to end the contractual agreement because the independent contractor can simply allocate more resources to their other clients.  

Who Decides?

As a final point, it is important to know that workers cannot just choose the title that works best for them and their business interests, it is assigned to them by the Canadian Revenue Agency (CRA) or a high-ranking legal authority. For example, if a worker and employer begin litigating to resolve a dispute, the arbitrator, mediator, judge, or whoever oversees the resolution process will examine the criteria for employment and assign a title to the worker based on their findings. An excellent example of this process can be observed in Acanac Inc. v. M.N.R. (2013), a case where two workers believed they were employees, and therefore entitled to employment insurance and pensions, while their employer believed they were independent contractors that were not entitled to any benefits.

To reach a judgement, the judge examined multiple factors, e.g., the degree of control that the employer had over the worker, the existence of managers and supervisors that the workers had the option to report to, the ability for the workers to subcontract, and the contractual relationship which labelled the workers as “independent contractors.” In conclusion, the judge decided that the workers were in fact employees of the company and thus entitled to employee benefits.

To clarify the above information, the Judge found the workers to be employees even though their contract labelled them as “independent contractors.” Therefore, it is important to note that, while contracts are certainly influential, they are not always binding during the litigation process.

The CRA also has the authority to audit an individual and decide if they are an employee or an independent contractor. If the CRA determines a worker to be an employee after they had been operating as an independent contractor, then there will be certain consequences for both the employee and their employer.

The employer will be assessed Canadian Pension Plan (CPP) and Employment Insurance (EI) premiums that should have been withheld and remitted in the past. This can be a substantial amount if the CRA assesses the breach over multiple years

The employee will be re-assessed on his tax returns and may have to pay income tax, interest, and penalties for previous years. Additionally, because independent contractors can claim more tax-deductible expenses than employees, the CRA will disallow expenses claimed by that person in previous years if they were claims that an employee would not have had access to.  

Need more information? 

We thank you for taking the time to read this article and we hope it gave you some valuable information on your powers as a worker and employer. For more information about employees, independent contractors, and Alberta Corporate Law, please feel free to contact Shelley Germann at (403) 995-1410 to arrange a consultation to discuss your unique situation and options in more detail.

The contents of this post are for informational purposes only and are not to be considered legal advice. It is advisable that you speak with a lawyer prior to making any significant decisions.

This article was co-written by Thomas Pugsley

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