Law Times

Page 12 May 8, 2017 • Law TiMes www.lawtimesnews.com Companies should be mindful when classifying workers BY DALE SMITH For Law Times W hether a company is looking to cut costs or they're a startup, lawyers say there is an increasing temptation to classify workers as indepen- dent contractors instead of em- ployees. Employment lawyers say that while there can be some ben- efits to this trend, it also carries risks that employers need to fac- tor into their decision-making. "We see more challenges being made to the distinction whether or not somebody is an employee, an independent contractor or another class of pseudo-employees called depen- dent contractors," says Colleen Dunlop, partner with Ottawa employment law firm Emond Harnden LLP. For some workers, there is a preference to be classi- fied as an independent contrac- tor for tax reasons and the ability to claim expenses. For employ- ers, lawyers say using indepen- dent contractors can lead to sig- nificant savings on labour, while also retaining more f lexibility around termination. Unlike independent contrac- tors who are running their own business, the courts have rec- ognized an intermediate class between employees and inde- pendent contractors known as dependent contractors. The dis- tinction can mean that a depen- dent contractor can be entitled to notice or payment in lieu of notice upon termination of their agreement for services with the company with which they've contracted. For example, Dunlop points to a scenario of an IT profession- al who has contracted to a start- up firm for years and has used them as a sole source of income but still invoices and claims ex- penses like an independent con- tractor would. If the contract is terminated after three or four years and that's the sole source of income, says Dunlop, there is "some case law that the courts have recognized that there is this intermediate class. "That's where the courts have awarded common law pay in lieu of notice, which can be quite sig- nificant for employers," she says. If there is a blurring of the lines between independent con- tractors and employees, an em- ployer could face liability under the provincial Employment Standards Act for notice and severance pay. The employer could also face liability under the federal Income Tax Act for unremitted income tax, Canada Pension Plan payments or Em- ployment Insurance payments. Each different act has different tests around whether a worker is considered to be an independent contractor or an employee. The common tests include as- sessing who has autonomy over the work being performed, who owns the tools and equipment necessary for the job, whether the worker has the ability to sub- contract, whether the worker has more than one client and whether the worker carries the financial risks and reward and has the opportunity for profit. It also can include how integrated the worker is in the workplace, which can include whether em- ployees are invited to Christmas parties or get bonuses. An example of liability for an employer would be when some- one hired as an independent contractor hasn't remitted in- come tax to the Canada Revenue Agency. "Generally, [the CRA will] go to the employee first to say, 'You owe us this much in income tax,' but if they don't pay, who has the deeper pockets? That would be the employer," says Dunlop. "There is some real potential risk of liability." Dunlop says complaints tend to arise, usually around termi- nation, and often involve older workers who have few alterna- tives when their income stream suddenly ends. Stephen Moreau, partner with Cavalluzzo Shilton Mc- Intyre Cornish LLP in Toronto, has represented contractors who have sued employers regarding their relationship. "It's a legitimate, complex fac- tual fight to determine if some- one is truly an independent contractor or they're something else," says Moreau. "Although you might be sav- ing the costs of having to pay them to terminate their em- ployment, you might end up in a very large costly fight anyway to figure out whether they're an employee or a contractor." Moreau says that with the rise in startups and disrupters, he is seeing employers who are hedg- ing their bets, assuming that the person might be an employee, and then insert clauses into their written agreement how much they owe them upon termination. "These disrupters or new employers can be pretty savvy about it," says Moreau. "They're looking to focus more on cost than on creating a strong, stable, loyal workforce." Caroline Richard, partner with employer-side firm Bird Richard in Ottawa, has fought on behalf of employers at the tax court to prove that independent contractors are just that. "With the IT boom, there was a lot of that going on, and there was a lot of clamping down with CRA going back to the individu- als who reported that they were self-employed and trying to get back taxes and refusing some of the expenses they claimed," says Richard. "A lot of the federal govern- ment contracts require a busi- ness relationship as opposed to employees, so it created a lot of personal business incorpora- tions to represent themselves." Richard said that what often happened was that the CRA would not agree with the rela- tionship between the corpora- tion and contractor, and it would go to the corporation looking for CPP and EI contributions under the basis that the contractor is an employee. "I don't recommend to my employer clients that they clas- sify people as independent con- tractors unless they are actually behaving like independent con- tractors," says Marcus McCann, associate with Toronto boutique firm Symes Street & Millard LLP. "If you categorize someone as an independent contractor and they're not behaving like it, then you're introducing uncertainty into the relationship." 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