Determining whether a worker is an independent contractor or employee at law is an invariable challenge for administrators and lawyers alike. The mutual understanding of a particular working relationship may not in fact be supported at law at all. And the consequences of error can be significant.
The following is intended to assist in the process of distinguishing the independent contractor from the employee. Over the years, a number of legal tests have emerged to try and simplify the determination. Regrettably, as the modern employment relationship has evolved, legal tests have followed suit and in fact grown more complex. As illustrated in the above quote, such a determination requires careful consideration of a wide variety of factors and each situation will invariably require its own independent assessment.
The risks of an improper determination relate to third-party interests in the employment relationship; typically, government and administrative bodies. The following outlines some of the impacts of mistaken identity:
Canada Revenue Agency
Employers are legally obligated to deduct, contribute, and remit payroll deductions on behalf of their employees. Such deductions include income taxes, pension contributions, and insurance premiums. No such obligation exists for independent contractors because they are, by definition, employers themselves. Failure to properly identify an employee as an employee may obligate the employer to pay outstanding payroll deductions in addition to significant penalties, interest, and legal fees.
Workplace Safety and Insurance
An injured worker believed to be a contractor but deemed an employee by WorksafeBC will at minimum result in retroactive payment of unpaid premiums, interest and fines. Additional exposure may include increased future premiums, legal costs, and impacts upon reputation.
A judicial or arbitral finding that a terminated contractor was, at law, an employee could result in the adverse conclusion that legislative standards were violated giving rise to claims for unpaid overtime, maternity/parental leave, severance, special/general damages as well as legal fees and fines. Furthermore, such judgments are invariably public affecting not only the reputation of the employer, but possibly triggering domino claims by employees retained under similar terms.
Given the above, it is critically important that administrators understand how the law distinguishes between the two. When in doubt, it is strongly advised that HR Advisors are called upon to assist.
Note: any adverse ruling from the Canada Revenue Agency that a worker being treated as a contractor is, in fact, an “employee” will be borne by the department.
It is a common misconception that contractual language is determinative in itself. It is not, although a well-crafted contract can certainly reduce ambiguity as to the parties’ intent. Other criteria that are not solely determinative include the following:
- Worker has an official GST/HST number and charges tax;
- Business does not deduct for income tax, EI or CPP;
- Worker sets own hours and is not actively supervised;
- Worker works for several businesses;
- Worker submits an invoice for labour provided;
- Worker drives his or her own vehicle and provides own tools;
- Worker is paid by commission.
A thorough assessment of a worker-payer relationship comprises elements from each of the following common law tests:
- Control – most frequently used, this test assesses the ability, authority, or right of the payer to control the actions of the worker, including the amount, nature, location, and management of the work to be done including the right of the worker to delegate work.
- Economic Reality –this test explores the economic practices of the worker, including whether she bears the ultimate responsibility for any profit or loss of the contract. An individual who faces financial risk, bears all responsibility for profit or loss, and accounts for all costs incurred in the pursuit of profit, is likely to be determined a contractor. The absence of these factors likely reflects an employment relationship.
- Fourfold – this test incorporates elements of the Control and Economic Reality tests above. The presence of the following factors indicates an employee/employer relationship: (a) control; (b) ownership of the tools; (c) chance of profit; and (d) risk of loss. Control in itself is not always indicative.
- Organization/Integration – this test considers an individual’s role within an organization and presupposes that integral services more accurately reflect an employee relationship. However, if the services are ancillary or separate altogether, then the individual may be better viewed as a contractor. Note however that the ever increasing complexity and inter-dependency between businesses renders this test increasingly archaic.
Canada Revenue Agency
The CRA provides the following elements as a (non-exhaustive guide) to determining whether the responses better reflect a contract of service (employee) or a contract for service (contractor):
- The level of control the university has over the worker’s activities;
- Whether or not the worker provides the tools and equipment;
- Whether the worker is free to sub-contract the work or hire assistants;
- The degree of financial risk taken by the worker;
- The degree of responsibility for investment and management held by the worker;
- The worker’s opportunity for profit; and
- Any other relevant factors, including written contracts.
The following is a list of general distinctions between the two categories. You will note that independence and self-control factor largely in favour of the independent contractor.
|follows instructions on how to work||works without detailed directions on procedure|
|trained on how job should be done||uses own experience, expertise to do job|
|works within campus environment||works alone – not part of campus “team effort”|
|hired to work as an individual, based on skills, talent, and potential||hired to provide service many times, regardless of who actually does work|
|has indefinite employment status||hired for a set time period only|
|works under set hours||sets own hours|
|works for one employer at a time||may work for several employers at a time|
|works mainly on-site; employer-directed off-site||can work either on-site or off-site, without employer direction|
|works in employer-established order to allow for supervision||works any way desired to provide required service or product|
|reports on work efforts as part of supervision||reports only as agreed upon|
|compensated regularly, at specified time periods||paid on per-job basis in a lump sum|
|has work-related expenses paid by employer||pays own expenses out of expected compensation|
|has tools and supplies provided by employer||provides own tools and supplies|
|does not own or control work site||may own or control work site|
|generally does not work on profit / loss basis||generally works on profit / loss basis|
|gives employer exclusive effort||works for many contractors at once|
|cannot offer efforts to general public||markets services to anyone who wants them|
|can be fired at employer’s discretion (subject to employment agreement)||can be fired only if work falls short of expectations|
|can end employment at any time||responsible for completing job as agreed upon|
Assessment Tool for Administrators
Human Resources and Financial Operations have collaborated to provide administrators with a fast track assessment tool that endeavors to provide greater assistance in making determinations. The tool comprises four (4) questions that will determine whether an individual is a contractor or whether further assessment is required. Simply follow the instructions and remember that while every effort has been made to assure confidence in such an assessment, this tool cannot provide certainty.
Please complete the HR Fast Track Assessment form. Once it is completed and signed, keep it on file for your records.
Remember: if in doubt, consult with your HR Advisor. A list of HR Advisors can be accessed at http://www.hr.ubc.ca/administrators/contact/.