Bill 148 Ups the Ante on the Employee/Independent Contractor Debate
Misclassifying an employee as an independent contractor has always been a live issue for Canadian employers. Whether intentional or accidental, misclassification can expose an employer to a claim for unpaid entitlements under employment standards legislation, including unpaid vacation pay, public holiday pay, overtime pay and termination pay.
The enactment of Bill 148 in Ontario, and the amendments to the province’s Employment Standards Act (“ESA”), has further raised these risks.
The employee vs. independent contractor test
To the frustration of many, that a worker is found to be an independent contractor under one statute (e.g., the Income Tax Act) is not determinative for the purposes of employment standards. The rationale for this distinction is that employment standards legislation is ‘benefit conferring,’ designed to ensure every employee receives certain minimum employment standards. Employment adjudicators therefore apply a broad and generous interpretation to the meaning of “employee”.
When assessing whether a worker is an employee or independent contractor, Canadian employment adjudicators ask this question: ‘is this worker in business for his/her own account’? If the answer is, ‘yes’, the worker will be considered an independent contractor.
To determine whether the worker is in business for his/her own account, five factors are considered:
- The level of control the entity has over the worker’s activities
- Whether the worker provides his/her own equipment
- Whether the worker hires his/her own helpers
- The degree of financial risk taken on by the worker
- The degree of responsibility for investment and management held by the worker
When assessing level of control common questions include: • Does the entity demand the exclusive service or can
the worker provide services to others?
- Was the worker hired for a limited scope project or duration?
- Can the worker refuse a project?
- Does the worker have the ability to subcontract the work?
- Does the worker set his/her own hours of work?
- Does the entity have the ability to discipline the worker?
- Does the entity have supervisory responsibilities over the worker?
When assessing financial risk common questions include:
- Does the worker bear financial risk associated with providing the services?
- Can the worker negotiate his/her compensation?
- Would the worker’s compensation be negatively impacted if work is performed poorly?
What should an employer do?
In Ontario, the government has announced its intention to hire up to an additional 175 Employment Standards Officers to enforce the ESA. Any entity that engages independent contractors, or is considering doing so, should carefully review these contractual relationships to ensure legal compliance, and minimize risk. Ignorance of the law, or turning a blind eye, has always created risk for employers. With Bill Bill 148, the Ontario government has upped the ante.
Effective November 27, 2017, misclassifying an employee as an independent contractor exposes an employer to a penalty of $350 per misclassified employee. This amount increases to $700 per employee for a second offence and $1,500 for a third offence within a three year period. These amounts are in addition to the requirement to pay any unpaid wage entitlement, such as vacation pay, public holiday pay or overtime pay. There is also the potential for negative publicity should the Minister of Labour make good on his recent promise to publically identify offending employers.
It is a common misconception that, if a worker operates through an incorporated entity, this is sufficient to establish the worker is an independent contractor. However, the test is broader and more nuanced and a decision-maker will look at the true nature of the relationship, examining factors such as: (1) whether the worker bears a risk of profit or loss, (2) who controls and directs the work performed and how it is performed, (3) who owns the tools and equipment used to perform the work, and (4) the ability of the worker to subcontract out work and perform services for others. Where there is a dispute whether a worker is an employee, the entity receiving the services bears the burden of proving the worker is not an employee under the ESA.
Why was this amendment made to the ESA?
According to Ontario’s Changing Workforce Review Final Report, of the province’s 5.25 million workers, 12% are reported as independent contractors; however, a significant portion of these workers ought to be classified as employees because they are in a position of economic dependence on an employer, and the relationship between the parties more closely resembles an employment relationship.
The government identified a variety of reasons why an employer might want to classify an employee as an independent contractor, including that the employer would not be obliged to pay vacation pay, public holiday pay, overtime pay, termination and severance pay, and premiums toward Employment Insurance and the Canada Pension Plan. However, many independent contractors prefer to be classified this way to trigger their own preferential tax treatment. Bill 148 fails to acknowledge this.