Employee, Independent Contractor, or Somewhere in Between? Beware the “Dependent Contractor”

For most people, the days of retiring with a gold watch after 40 years of service with the same company are long gone. In fact, many reports indicate that Millennials prefer short term or temporary work assignments, perceiving that this provides more freedom and flexibility.

It is becoming more common for these “freelance” workers to be classified as independent contractors rather than as employees. However, the common law recognizes another category of worker, that of the “dependent contractor”. The risk of misclassifying a worker’s status can be very costly for an employer, because dependent contractors are entitled to severance if terminated.

While the maximum severance obligation under the Employment Standards Act is eight weeks, employees and dependent contractors are entitled to much more than that under the common law. It is not unusual for a judge to award up to one month of severance for each completed year of service, up to a maximum of 24 months (although in some recent cases the courts have awarded as much a 30-36 months). So terminating a long-time contractor can have severe consequences if they are found to be a dependent contractor.

Employee or Contractor

Based on its understanding of the law, the Canada Revenue Agency lists six factors to determined whether someone is an employee or a self-employed contractor:

  1. Control – who determines how, when, where and by whom the work gets done
  2. Tools and Equipment – who provides the tools to provide the service
  3. Subcontracting or hiring assistants – must the services be provided personally, or can the worker subcontract or hire assistants
  4. Financial risk – who bears the financial risk of the worker not fulfilling the obligations of the contract, and who pays the expenses
  5. Responsibility for Investment and management – who makes the business decisions that affect profit and loss, and has the worker made an investment in its business in order to provide the services
  6. Opportunity for profit – to what degree does the worker control the revenue and expenses (being paid by piece rate or commission is not considered to affect the opportunity for profit)

The courts and the CRA look at all of these factors as a whole, and may consider other relevant factors, such as whether the work is integral to the business they are working for. One of the main questions ask is “whose business is it?”

Employers may be tempted to classify workers as independent contractors to avoid overtime, vacation pay and severance obligations, as well as payroll remittance obligations. However, two recent decisions in the BC courts confirm that the law recognizes a status somewhere between employee and independent contractor: the dependent contractor. The courts have developed this concept to provide protection to economically vulnerable and dependent workers who are not employees and thus do not have the legislative protections provided to employees.

Independent or Dependent Contractor

In determining whether a contractor is an independent contractor or a dependent contractor, the courts will look at these factors:

  • Whether the contractor was largely limited to the service of the principal, or does the contractor provide the services to others as well
  • Whether the relationship was long-standing – the more permanent the term of service, the more dependent the contractor
  • Whether the parties relied on one another and closely coordinate their conduct

The court has stated that dependent contractors are entitled to the same reasonable notice of termination as an employee. As stated above, the Employment Standards Act required termination notice equal to one week of notice for each completed year of service, to a maximum of eight weeks. However, under the common law an employee is entitled to “reasonable notice”, which is often equated to one month of notice for each completed year of service. It should also be noted that a contractor can be found to be dependent even if incorporated.

Takeaway

Employers can use written contracts to limit the amount of notice that must be given to an employee  or a dependent contractor upon termination, reducing the notice/severance requirement well below what would be awarded under the common law. Written contracts are also recommended for contractors so that they will be bound by the same duties as employees when it comes to confidentially and intellectual property.

If you have any questions or would like to put written contracts into place, we’re here to help.