Introduction

Not every relationship will be an employer-employee relationship. Some relationships will be between employers and independent contractors. The difference in the characterization of the relationship may greatly affect the benefits and liabilities of each of the parties to the relationship.

How the parties' characterize the relationship will not be determinative. The fact that an employer and a potential employee enter into a mutually agreeable contract that characterizes the individual as an independent contractor may not prevent a court of law from finding that the individual is in fact an employee.

Third party agencies such as Revenue Canada may also review the contractual arrangement and determine that the individual is not an independent contractor for tax purposes. The Ontario Labour Relations Board may similarly review the relationship to determine whether or not an individual is an employee for labour relations purposes.

A finding that an individual is an employee, and is not an independent contractor, may result in serious consequences for an employer. For example, an employer may be held liable for income tax withholdings, employment insurance withholdings, health tax payments, Canada Pension Plan payments, and Workplace Safety and Insurance payments. These payments may be owed even if the parties legitimately attempted to contract for other than an employer-employee relationship.

Determining the Nature of the Relationship

Typically, the employer-employee relationship is considered to be a contract of service, the employer-independent contractor relationship is considered to be a contract for services. Over time, various tests have been developed to determine which type of relationship exists. The following are the most commonly used methods of determining the status of the relationship:

1.  Four Fold Test:

The "four fold test" arises from the decision in Montreal v. Montreal Locomotive Works Ltd. et al, [1947] 1 D.L.R. 161. This test considers four factors in determining whether an individual is an employee or an independent contractor:

• The degree of control that the employer holds over the individual.
• Who owns the tools used to perform the tasks at issue.
• Which party has the benefit of the chance of profit.
• Which party has the burden of the risk of loss.

In other words, if the individual is not subject to the employer's policies, owns the tools to be used at the workplace and risks the profit or loss of the work being engaged in, then he or she is more likely an independent contractor than an employee.

For example, an employee does not, in the usual course, pay for the use of his or her office, desk, telephone, computer, etc. An employee also usually receives a salary, or has a guaranteed stream of income so as to eliminate the chance of profit or the risk of loss.

An independent contractor, on the other hand, is more likely to provide his/her own tools or rent them from the company, and does not receive a salary in the usual way. Instead, an independent contractor will generally receive payment on the submission of invoices for services rendered, or to be rendered.

Independent contractors are also generally responsible for their own statutory withholdings, including income taxes. They are also responsible for obtaining their own insurance, and making necessary arrangements with respect to complying with Workplace Safety and Insurance legislation and Occupational Health and Safety legislation. Independent contractors are generally not eligible for employee benefits including maternity or parental leave through the employer, access to employee benefit plans or pension plans, or access to sick pay.

2.  The Business Integration Test

The business integration test arises from the decision in Stevenson Jordon & Harrison Ltd. v. MacDonald and Evans, [1952] 1 T.L.R. 101. This test examines whether the work of the individual forms an integral part of the company's business, as opposed to an accessory to the business.

3.  The Economic Realities Test

The economic realities test was developed from the business integration test in the decision of Ready Mixed Concrete (South East) Ltd. v. Min. of Pensions and National Insurance, [1968] 2 Q.B. 497 and considers whether there are wages being paid, whether the employer has a degree of control over the employee, and whether the provisions of the contract are consistent with an employment relationship.

The Court in Ready Mixed Concrete, supra described 'control' for the purposes of the test as follows:

Control includes the power of deciding the thing to be done, the way in which it shall be done, the means to be employed in doing it, the time when and the place where it shall be done. All these aspects of control must be considered in deciding whether the right exists in a sufficient degree to make one party the master and the other his servant. The right need not be unrestricted.

Control has been described in other decisions as:

• The degree of authority held by the employer over the individual.
• The ability of the employer to scrutinize the employee's work.
• Whether the individual is subject to the employer's directions as they relate to the 'where and when' of work performance, the hours to be worked, the timing of breaks and lunch periods, appearance, work product, and disciplinary measures.

4.  Specific Result Test

Where the individual is contracted to achieve a specific result, or for a specific term, it is more likely that he or she will be found to be an independent contractor. Contracts of unlimited duration and/or for non-specific tasks tend to support a finding that an employer-employee relationship exists.

     A court of law may consider any, or all, of the above tests when determining whether or not an individual is an employee or an independent contractor. In addition, no single factor within a test will be conclusive in the determination. An assessment of the relationship will be made by viewing the overall terms and conditions of the contract, and the actual terms and conditions of the relationship.

Since the consequences to an employer of having an independent contractor found to be an employee are quite significant, it is important to ensure that independent contractor status, and the duties to be performed by the independent contractor, are clearly defined.

While the substance of the relationship will govern over the characterization given to the relationship by the parties, there are ways of creating a contract which may offer more protection to the parties.

Contracts with Independent Contractors

For example, the following should be set out in any contract with an independent contractor:

• The degree of control (or lack of control) to be exerted, both in terms of directing how and when the services shall be carried out. The more control exerted over the person in the performance of his or her duties, the more likely the relationship will be characterized as an employment relationship.
• The ability of the individual to decline work assignments and to work when the individual chooses. The ability to accept or decline work assignments is consistent with an independent contractor relationship.
• The inability of the employer to exert discipline. Independent contractors are not typically subject to the employee's disciplinary policies and are not typically "answerable" to a manager. Independent contractors typically manage their own affairs.
• The lack of a formal job title. Independent contractors do not have titles within an organization.
• The ability of the independent contractor to provide services to other employers. Independent contractors generally are allowed to provide services to other organizations during the contract.
• The terms of payment, and the supply of materials and manpower. Independent contractors bear the risk of loss and chance for profit. A key factor in determining whether an individual is an independent contactor or an employee is whether or not the individual is responsible for his or her business expenses. Furthermore, independent contractors will generally provide their own tools and materials and will not be provided with a phone, office, computer or other similar supplies. As well, independent contractors do not receive pay cheques; rather, they are paid upon the submission of an invoice.
• The fact that statutory withholdings and remittances will not be made on the individual's behalf. Statutory withholdings are not made for independent contractors. Furthermore, independent contractors hire their own staff, and are not provided with staff by the employer.
• The fact that the individual will not be entitled to the employment related benefits otherwise provided by the employer. Independent contractors do not get "vacations" or benefits typically provided by the employer.

Volunteers:

Although volunteers are not typically considered to have an employment relationship, it is important to recognize that even volunteers may be subject to certain protections at law. For example, volunteers have the same rights as employees when it comes to the protections offered by human rights legislation.

Most employment related legislation does not apply to volunteers. For example in Ontario, the Employment Standards Act, 2000 and the Occupational Health and Safety Act do not apply to volunteers. However, the Workplace Safety and Insurance Act may apply to volunteers in defined industries, such as volunteer firefighters. 

The status of an individual as a volunteer may also become relevant in the collective bargaining context and employers in union environments should carefully review their collective agreements to ensure there is no impediment to the use of volunteers.