The traditional employee-employer relationship is no longer the sole model in today’s modern employment world. In Ontario, the concept of ‘dependent contractors’ adds another layer of complexity to employment law. It is important for both employers and workers to understand who qualifies as a dependent contractor, as the legal implications for both businesses and workers can be significant.

This blog post will explore who constitutes a dependent contractor and will distinguish dependent contractors from independent contractors and employees. It will also explore some of the legal implications of dependent contractors.

Dependent Contractor vs. Independent Contractor

An employee is defined as a person who works for someone else’s business and is a party to an employment contract.

A contractor, on the other hand, is a self-employed individual and operates their own business. In Canada, contractors are divided into two subcategories: independent and dependent. An independent contractor is an individual who operates a business providing services to clients. An independent contractor controls their work schedule, utilizes their own tools and equipment, and bears the financial risk for their work.

Dependent contractors retain a level of economic dependence on a single “principal” (the company that hires them). They are referred to as a middle category between an employee and an independent contractor. A dependent contractor is generally a worker who relies on a single client (employer) for work but, given their contractor characteristics, is not considered an employee of the company.

Distinguishing Factors

The primary factor distinguishing a dependent contractor is their level of economic dependence. However, as there is no single conclusive test used to differentiate between dependent and independent contractors, Ontario courts will consider several additional factors, including:

• Level of Worker Control: Factors such as the company’s control over the method of work, the payment of wages, the exclusive nature of the relationship, and the worker’s economic dependence on the company are considered when determining the level of worker control.
• Ownership: Ownership of equipment depends on the services, but also considers who (the worker or the company) controls the execution of services.
• Exclusivity: This considers whether the worker is crucial to the company’s business, whether the worker’s activity represents the company’s business, whether they are only permitted to deal with one employer, and the permanency and length of the working relationship.
• Profit and Loss Opportunity: This considers the degree of financial risk taken by the worker along with the worker’s responsibility for investment and management.

Individual vs. Corporate Contractors

While hiring a company as a contractor may generally pose less risk than hiring an individual, it does not completely remove the possibility that a contractor will be found to be a dependent contractor. Even if consulting services are provided through an incorporated company, the factors above may still deem them a dependent contractor. Similarly, the title of, or being labelled as a “contractor” is not determinative.

Consequences of Worker Misclassification

If a worker is incorrectly classified, serious legal ramifications may occur. Dependent contractors fall between independent contractors and employees. Although a dependent contractor may not be included on an employer’s payroll or classified as an employee under their employment agreement, the law tends to treat them more like employees. Because of this, dependent contractors have certain rights and entitlements.

For instance, employees are guaranteed minimum entitlements under Ontario’s Employment Standards Act, such as minimum wage guarantees, overtime and vacation pay, and termination notice. If a worker is misclassified, they may retroactively be entitled to these benefits. Employees are also entitled to reasonable notice of termination under common law principles. As such, a dependent contractor may be permitted to sue for wrongful dismissal if their employment relationship is severed without adequate notice. Moreover, the employer and the dependent contractor may be subject to various tax implications in the event of misclassification, such as Canada Pension Plan (CPP) remittances and Employment Insurance (EI) contributions.

If a court or tribunal deems a worker to be a dependent contractor, the amount of termination notice they are entitled to will follow the general common law reasonable notice guidelines, in consideration of the Bardal factors:

• Age;
• Character of employment;
• Length of service; and
• Availability of similar employment.

Ultimately, the test to determine the proper amount owed requires a holistic assessment of the evidence and relevant contingencies in the circumstances.

Key Takeaways Regarding Contractors

Properly classifying a worker is an important aspect of any employment relationship. Moreover, a business must always consider the risk when hiring a business or individual worker as an independent contractor, as worker misclassification can result in substantial financial and legal consequences. Employers should take additional precautions and seek legal advice to ensure that contractual safeguards are proactively implemented to help reduce the risk of later adverse outcomes. If a dispute arises, thorough planning and extensive documentation may help mitigate the likelihood of costly litigation.

Contact the Toronto Employment Lawyers at Grosman Gale Fletcher Hopkins LLP for Advice on Employee Classification Matters

The skilled employment lawyers at Grosman Gale Fletcher Hopkins LLP in Toronto regularly advise employers on their responsibilities regarding hiring, employee classification and employment agreements. We help employers identify and mitigate potential disputes and represent both employees and employers when disputes arise in the workplace. To speak with a member of our team regarding your employment law matter, contact us by phone at 416.364.9599 or reach out to us online to arrange a consultation.