Employee v. Independent Contractor v. Dependent Contractor - What's the difference? And why does it matter?

*Written by Hannah Goranson

Whether a worker provides services as an employee, dependent contractor, or independent contractor will have significant implications for both the hiring business and the worker. However, given the diversity of working relationships it can often be tricky to determine the "status" of a worker. In this post, we outline some of the key differences between each category of worker, and the corresponding impacts on workers' legal entitlements.

Employees versus Independent Contractors

The first distinction to make is between an employee and an independent contractor.

Throughout Canada, employees are protected by the applicable employment standards legislation in their presiding jurisdiction. In Ontario, that legislation is the Ontario Employment Standards Act (the "ESA"). The ESA entitles employees to paid vacation, job-protected leaves of absence, and notice of termination, amongst other entitlements.

In contrast, independent contractors are not covered by the ESA. Absent a term in a contract providing otherwise, an independent contractor is not entitled to paid vacation, job-protected leaves of absence, or notice of termination.

Further, while employers are required to withhold and remit taxes and make CPP and EI contributions on behalf of employees, employers are not obliged to do so for independent contractors. Independent contractors are responsible for paying their own taxes and making their own CPP and EI contributions.

The determination of whether a worker is an employee or independent contractor is based on the nature of the relationship between the parties. The status of the worker depends on the entirety of the relationship, including the context, history, and dependency of the parties. Simply labelling a worker as an "independent contractor" or "employee" is not conclusive.

The Ontario Courts have developed a number of indicia to distinguish independent contractors from employees. These indicia include:

• Whether the individual worked exclusively for the employer;
• Whether the individual was subject to the control and discretion of the employer;
• Whether the individual supplied the tools and equipment they used to carry out the work;
• Whether the individual was subject to the risks of the business or had an ability to profit from the venture; and
• The degree of integration of the individual into the employer's business - whose business is it?

Each factor must be assessed based on the unique relationship between the parties. However, the factors of exclusivity and control are given significant weight. For example, an individual who works exclusively for an employer and is subject to the direct supervision of an employer is likely to be classified as an employee even if they supply their own tools. Conversely, an individual who works for multiple employers with very little oversight or supervision is more likely to be a contractor, even if they use the employer's tools.

The Middle Ground - Dependent Contractors

With the rise of flexible work arrangements over the last few decades, many workers do not neatly fall within the categories of "employee" or "independent contractor". In light of this fact, a tertiary category of workers, "dependent contractors", has been recognized by the Canadian courts. The category of dependent contractors is intended to cover workers who genuinely provide services as contractors, but rely on one client for all or nearly all of their income. In such a case, the worker is said to be economically dependent upon that client.

To determine whether a worker is a dependent contractor, two questions must be considered:

• Is the worker an employee or contractor? This is assessed using the indicia listed above.
• If the worker is a contractor, does the worker work exclusively or nearly exclusively for the client?

In assessing exclusivity, the Courts will consider the amount of time and effort the contractor devotes to their work for the client, and the amount of income they earn from the client. A contractor must work exclusively or nearly exclusively for one client in order to be categorized as dependent.

Whether a contractor works in "near complete exclusivity" for one client must be considered in the circumstances. However, the Courts have held that a contractor must earn substantially more than 50% of their income from one client in order to be dependent upon that client. Thus, the fact one client is a major source of income for a contractor may not be sufficient for the contractor to be considered dependent.

Whether a contractor is classified as dependent or independent has important consequences. While dependent contractors are not covered by the ESA, dependent contractors are entitled to receive reasonable notice of termination of the contractor relationship or pay in lieu thereof based on the common law. This entitlement to reasonable notice reflects the fact that dependent contractors rely upon the income they receive from the client, and that the abrupt loss of such income could have significant financial repercussions.

Conclusion:

The option of hiring workers as employees, dependent contractors or independent contractors provides flexibility that can be advantageous to both businesses and workers. Businesses and workers can structure working relationships that suit both parties' needs.

However, correctly classifying the working relationship is crucial. Whether a worker is an employee, dependent contractor or independent contractor will determine the worker's rights and entitlements throughout the working relationship and following termination. The misclassification of workers can have costly legal and tax ramifications.

With that in mind, businesses are encouraged to speak to their employment lawyer about the hiring options available to them. Likewise, if workers have any doubts about their employment status, they should seek legal advice. Lee Workplace Law would be happy to help.