Contract Workers versus Employees

For some businesses the most alarming employment issue that they will ever face may come from an individual that in view of the company was never actually an employee at all.

The development of new technologies, business strategies, and consumer demands has had a significant impact on how businesses structure their operations and provide their services. As a result, the picture of what an employment relationship looks like, versus what a contracting relationship looks like, is also changing.

Increasingly, companies are seeking to utilize the services of contractors to meet their business needs. By doing so, the intent of the business it to contract with a third party to provide services instead of hiring an employee. For some individuals this arrangement is ideal, it allows them the autonomy of being their own boss and the flexibility to determine the amount of work they want to take on and which, and/or how many businesses they want to provide their services to.

However, people’s priorities and what they want can change over time:

• the individual’s business may be slow or struggling;
• the working relationship between the company and the individual may go sour; or
• or the Company may otherwise want to end the contract or arrangement.

This can motivate these contractors to file claims seeking a determination from an adjudicative body that they are an employee rather than an independent contractor. These individuals would be seeking the protections and entitlements that are granted to employees under statute and common law. For example, at the conclusion of a contracting arrangement the individual could allege that they are in fact an employee who has been terminated and claim damages associated with a wrongful dismissal.

A decision that an individual is an employee, not an independent contractor, can have significant cost consequences for a business. Consider the far reaching impact on operations for a company who relies on many of what it would consider to be independent contractors as part of its business model.

The law sets out and applies a number of factors that are considered in determining whether or not a person is in fact an employee. This involves asking the central question of whether or not the person who has been engaged to perform services is performing them as one who is in business for his or her self. A comprehensive summary of the factors considered can be found on the accompanying handout to this video posted on our website. On a general level a decision maker will examine:

• What level of control is exercised over the individual by the company.
• Exclusivity – does the individual have the flexibility to work for multiple other entities or clients – and do they in fact work for others
• The extent to which the individual is financially dependent on the company
• Who supplies the tools or equipment necessary to perform the work
• The chance for profit OR risk of loss the individual is taking on – is there a limit to the profit that the individual could receive and how much do they stand to lose
• Whether the work performed by the individual is an integral part of the business – or is incidental to the business

Another concept that businesses should be aware of is that in Ontario, the law recognizes the classification of a “dependent contractor”. This classification is used in cases where the factors point more toward the individual being classified as an independent contractor, however, the exclusivity of the relationship make it such that the individual is considered to be what is called a dependent contractor. Where this determination is made a dependent contractor has all of the same legal entitlements and protections of an employee and the company effectively steps into the role of an employer.

This analysis is likely to be given heightened attention as web-based applications linking service providers to customers become the new norm. The use of these web-platforms have created a novel situation where individuals have autonomy to work whenever and for whoever they choose. However, these individuals often rely on one application to source all their business, and the services they provide do not yield much personal profit. As a result, these contractors have been seeking out the protections that employees are entitled to. It is difficult to imagine how the contractors using these services to enhance their businesses could be classified as an employee, however courts and labour boards in California are starting to examine that very question with respect to Uber drivers.

The takeaway point is this: where a business enters into an arrangement with an understanding that it is contracting for an individual to provide services not hiring an employee, it wants to, and should be able to, rely on this mutual understanding. Counsel at Torkin Manes can assist a business in reviewing contracts and structuring these service arrangements to provide a level of protection to the business. A determination of whether an individual is an independent contractor, dependent contractor or employee, and how the contextual factors described earlier will be applied, is highly dependent on the factual circumstances of each particular case.

If you have questions or want to know more, WE CAN HELP.

Gillian Howe explains how the development of new technologies and business structures has increased the need to clearly define whether a worker is an employee or a contractor.