The general consensus is that the so-called “gig” economy is here to stay, and that it’s not just for startups or millennials anymore. In a gig economy, jobs are temporary and flexible rather than permanent and full-time; businesses hire workers as contractors or freelancers, rather than employees. This rise of the gig economy means that the tricky question for business owners of how to classify their workers – as independent contractors, employees, or somewhere in-between – is now more relevant than ever.
Below, we review why worker status matters and the pros and cons of classifying your workers one way or the other, before offering some “best practice” tips for those of you facing the worker classification conundrum.
Employee vs. Independent Contractor: Why Does it Matter?
A worker’s status is important for several reasons. Among other things, how you classify your workers affects:
- Whether they are entitled to notice or severance on dismissal.
- Their – and your – income tax obligations.
- Whether they – and you – are subject to Employment Standards laws relating to wages, hours of work, vacation, and overtime.
- Whether they are protected by human rights laws.
- Who must pay for their WorkSafeBC coverage.
Generally speaking, employees have access to a much wider array of work-related legal rights and protections than do their independent contractor counterparts. This is why the media is full of stories about gig workers filing lawsuits against companies such as Uber, Lyft, and GrubHub, claiming they are entitled to higher wages, overtime pay, vacation pay, and unemployment benefits (“employment insurance” in Canada).
Given the potential downside to employers if they misclassify their workers, why do many business owners continue to use the independent contractor label?
Independent Contractors: What’s the Advantage?
If an employer can successfully establish a contractor relationship with its workers, there’s plenty of upside from a financial perspective. Here are some of the costs and other obligations a business owner can avoid by creating a contractor workforce:
- Notice of termination / severance pay.
- Vacation, stat holiday, and overtime pay required by Employment Standards laws.
- Employer benefits such as medical, dental, and disability coverage.
- High overhead.
- WorkSafeBC premiums.
- Payroll deductions and remittances.
Of course, employers are not the only ones who benefit under a contractor model. Many workers prefer this arrangement because it offers various tax advantages (such as write-offs), as well as much greater freedom and autonomy when it comes to their work.
Creating a Contractor Relationship: Best Practice Tips
If you’ve considered the financial risks – which include government-imposed penalties and fines – of worker misclassification and wish to forge ahead, there are ways to increase your chances of successfully arguing that your workers are indeed independent contractors. Here are some “best practice” tips for business owners – otherwise known as…
Worker Classification Do’s and Don’ts:
- Don’t rely on labels. Many business owners believe – mistakenly – that calling a worker an independent contractor is enough to create a contractor relationship. In fact, neither the term nor your intentions are enough, legally speaking. Rather, what is important is the actual nature of the parties’ relationship.
- Do require the worker to use their own “tools” or equipment, from their business cards, to their computer to their car.
- Do let your workers set their own hours.
- Don’t impose uniformity on your workers in terms of what they wear or where they work.
- Do allow your contractors to subcontract or delegate their tasks and responsibilities to others.
- Do ensure that the worker bears both the risk of loss and opportunity for profit from their work.
- Do encourage the worker to work for other organizations.
Ultimately, there is no single test to determine whether a worker is an employee or independent contractor. However, if asked to make a decision about a particular worker’s status, Canadian courts and government agencies will look at the total relationship of the parties and consider whether the worker is performing the services in question on his/her own account.
Dependent Contractors: A Final Caution
There is a third category of workers that can further complicate the worker classification question: dependent contractors who, like employees, are entitled to notice or severance on dismissal (but not the other legal rights afforded to employees).
Even where a business owner “does all the right things” to create a true contractor relationship, a court may still conclude that the worker is a dependent contractor. The deciding factor is the degree of exclusivity present in the working arrangement. A work relationship is exclusive if the employer does not allow an individual to work for other businesses. Where there is significant – or complete – exclusivity, this may lead a court to find that a dependent contractor relationship exists, thereby opening the employer up to unexpected financial liability.
Simon Kent is the founder of Kent Employment Law, co-founder and partner at Connect Family Law, and knows a thing or two about where law, business, and family meet. He’s an entrepreneurial lawyer who gets business, understands the struggles of business owners, and knows how to help teams succeed. Kent Employment Law was also the first B Corp law firm in Canada, which really demonstrates their commitment to social and environmental performance, accountability, and transparency. They’re awfully nice lawyers.