Employees are entitled to the benefit of employment standards set out in legislation, however, independent contractors are not. As a result, it is crucial to ensure that workers are correctly and appropriately classified. 

This article reviews how to distinguish between employees and independent contractors and examines some possible consequences of misclassifying workers. In a recent Ontario Superior Court of Justice decision, a worker labelled an “independent contractor” argued that he was actually an employee with a fixed-term contract. Upon termination, he claimed he was entitled to be paid for the balance of the contract term.

Employee or independent contractor?

Under the Employment Standards Act (the “Act”), workers classified as employees have certain entitlements. For example, employees must be paid at least minimum wage and are entitled to other things such as sick leave and holiday pay. Employees also need to be given reasonable notice in the event of termination without cause. Employers must make various statutory payroll deductions, such as remitting income tax and making contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI).

A label used in an employment agreement is not always determinative of a worker’s status. Workers are classified depending on whether they are in business on their own account (independent contractor) or provide services for the benefit of another entity (employee).

As we have set out in more detail before, courts will examine several factors in deciding this question, such as the level of control the entity exercises over the work, whether the worker is limited to serving the entity and whether the worker has the opportunity for profit.

Consequences of employee misclassification

Failing to correctly classify a worker as an employee can attract various consequences, some of which are mentioned below.

Possibility of fines and penalties

Firstly, Section 5.1 of the Employment Standards Act specifically prohibits misclassifying an employee. The Ministry of Labour investigates claims filed by workers and can conduct its own inspections regarding classification. It can prosecute for non-compliance with the Act, which can lead to convictions and fines. 

It is also possible for penalties to be issued by other agencies, such as the Canada Revenue Agency for the failure of employers to remit income tax and CPP and EI contributions. 

Claims may be made by employees

Secondly, employees can seek to enforce their rights by bringing court claims. If an employee, erroneously labelled an “independent contractor” by their agreement, has been terminated, they may claim damages in lieu of a reasonable notice period. Depending on the circumstances, this may include common law damages for reasonable notice. If they have a fixed-term employment agreement, depending on the termination provisions, they may be entitled to payment for the balance of the term.

Additionally, individual employees can claim back pay so that the wages they have received meet the requirements of the Act, for example, in respect of unpaid vacation pay. Furthermore, some groups of workers have brought class action lawsuits arguing that they are employees and, as such, entitled to the rights provided by legislated employment standards.

Terminated “independent contractor” claimed that he had a fixed-term employment agreement

In Baker v Fusion Nutrition Inc., the plaintiff argued that he had been misclassified as an independent contractor. He started working with the defendant in September 2020 and signed a written agreement in March 2021, which described him as an “independent contractor.” 

Under the agreement, the plaintiff was paid a monthly amount to generate sales revenues. It was specified to be for a fixed term of one year, to expire on March 15, 2022. The termination provision stated that either party could terminate on 30 days’ notice and that the company was required to pay the monthly payment for four months. In addition, either party could terminate the agreement for cause without notice or payment.

After he was locked out of the office in August 2021, the plaintiff commenced legal proceedings against his employer. He argued that he was an employee entitled to be paid for the balance of the contract term and for unpaid vacation and holiday pay. The defendant did not appear in the proceedings, so the plaintiff proceeded to seek a default judgment.

The plaintiff was an employee, not an independent contractor

Justice Ramsay applied the various factors and decided that, despite the characterization of the relationship in the agreement, the plaintiff was actually an employee. In particular, her Honour emphasized that the plaintiff’s work was dictated by the defendant and that he had no opportunity for profit. His service was effectively restricted to the defendant, working full-time hours from the defendant’s office.

Court awarded payment for the balance of the contract term plus legislative entitlements

Justice Ramsay, as we have seen done many times by the courts, held that the agreement’s termination provisions were not enforceable. This was because the agreement allowed for termination for cause without any notice, in contravention of the Act.

As the fixed-term contract did not specify a valid notice period in the event of termination, her Honour determined that the plaintiff was entitled to the wages he would have received up to the end of the term which was approximately $54,000.

The Court also awarded the plaintiff, as an employee, damages for accrued but unpaid vacation and holiday pay under the Act which were calculated from the day he was hired until the termination date. 

Contact Grosman Gale Fletcher Hopkins LLP in Toronto for Advice on Worker Classification

The seasoned labour and employment lawyers at Grosman Gale Fletcher Hopkins LLP in Toronto advise organizations on mitigating the risks of misclassifying employees. We also assist employees to claim their legal rights.

Our lawyers are at the forefront of employment and labour law and have been recognized as leaders by their peers in Lexpert. We are one of the most recommended labour and employment law firms in Canada. Please contact us online or at 416.364.9599 to schedule a consultation.