Independent Contractor Issues in Your Workforce?

How to structure your company’s workforce as you grow your business is an ongoing challenge. Broadly speaking, companies can either hire employees or engage individuals (or their personal services corporations) as independent contractors.

There are many reasons as to why a company might choose to engage in the services of an independent contractor rather than hire someone as an employee. These include:

  • Limiting workforce headcount.
  • Reducing required deductions, withholdings and payroll levies that would otherwise apply to employment income.
  • Fewer applicable regulations and fewer administrative obligations.

As a result, it’s understandable that companies often come to think that it is preferable or “easier” to engage a worker as an independent contractor as opposed to an employee. However, there are significant differences in the eyes of the law about the characterization of a worker as an employee as compared to an independent contractor and the labels that the parties have chosen for themselves are not always determinative. Indeed, there are many reported cases where adjudicators look to the true nature of the relationship, rather than its form, when classifying a worker for either tax purposes or employment-related claims. The relevant factors that an adjudicator will consider include whether the worker provides service exclusively for the company; the degree of control the worker has over the services to be provided (such as when, where, and how they are to be performed); and the ownership of the tools necessary to provide the services.

In most cases, adjudicators generally err on the side of finding workers to be employees rather than independent contractors. This is because the various and numerous regulations that apply to employment relationships are there to protect individual workers, which the law considers to be on unequal footing when bargaining with employers. The consequences of such a determination may result in unexpected termination and severance liabilities and tax withholding penalties in connection with the worker. In some ways, pursuing independent contractor relationships where they are unlikely to be justified on the facts is also a “missed opportunity” to manage risk and enter into a properly drafted employment agreement that protects the company.

Moreover, the Ontario government recently proposed legislative amendments that may limit the use of independent contractors. If the bill passes, employers can face penalties for misclassifying workers as independent contractors. Further, in the context of an Employment Standards investigation, the onus will be on the employer to prove the worker is not an employee; in other words, the law will assume the worker is an employee, and it is the company’s burden to prove otherwise.

As a practical matter, recently announced changes to the federal tax code that reduce the incentive to earn income through a corporation may dampen workers’ enthusiasm for proceeding with an independent contractor relationship. Given the risks outlined above, it is generally unwise for a company to insist on an independent contractor relationship with a worker who would prefer to be an employee unless the company is confident that the individual is properly classified as per the applicable legal tests.

It is important for companies to be aware of the full range of trade-offs between engaging someone as an independent contractor versus hiring them as a traditional employee. A sometimes overlooked advantage of an employment relationship is that it allows the company a greater degree of flexibility of the role in which it engages the employee as that role can reasonably change along with the company’s evolving priorities and projects (even more flexibility for changes to the role can be reserved in the employment contract).

When it comes to structuring their workforce, companies should balance business and operational needs with the associated legal risks and take care to accurately characterize and appropriately document the nature and terms of the relationship. Putting in the necessary time, effort and forethought at the start of the relationship can save you a potentially large legal headache in the future – especially because not all relationships have happy endings.

Steven Dickie is an associate in the Labour & Employment Department at Osler, Hoskin & Harcourt LLP in Toronto. A central focus of Steven’s practice is assisting technology companies of all sizes in navigating employment laws and managing human resources related risks. Thanks to Melanie Simon for her assistance in preparing this blog post.

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