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In this complex world full of ride-sharing apps and delivery apps for every conceivable type of product, the lines between the traditional “employee” and “independent contractor” distinctions continue to blur. The flexible nature of the “gig” economy has required the courts to be flexible in their own right when it comes to the characterization of employment relationships.
This flexibility makes it difficult for employers and employees to hold a firm grasp on what exactly defines a relationship of employment versus that of a contractor providing services to a business. The relatively recent addition of a “dependent” contractor characterization further muddies the waters.
What is the difference between an employee and a contractor?
Employees are those individuals who provide services as part of the employer’s organization and, in so doing, contribute to the employers business in some fashion. Comparably, contractors are in business only for themselves. They may provide a select set of services to another organization, but they are doing so as an entrepreneur, bearing their own risks and reaping their own economic rewards. Unfortunately, too often this bright-line distinction is difficult to pin down in practice. An example of this is the concept of a “dependent” contractor. A dependent contractor is a contractor who is purely in business for themselves, but provides the vast majority of their services, and therefore derives the majority of their income, from a single “client”.
True employment relationships are governed by the Employment Standards Code, RSA 2000, c E-9, and accordingly employers are bound by the terms of that legislation. This means that employees are entitled to a minimum amount of notice upon termination, as well as vacation and overtime pay, among other entitlements. A contractor does not enjoy the benefits of employment standards legislation; they are only entitled to what benefits form part of the contractor agreement between the parties.
Employers are required to remit source deductions as well as CPP and EI payments to the CRA on behalf of the employee; the employment income actually received by an employee is a net after-tax amount. Contractors on the other hand are paid in gross amounts, and must remit their own taxes, CPP, and EI to the CRA.
On the subject of liability, employers will be held vicariously liable for any torts, such as negligence, committed by employees who were acting in the natural course of their employment. Comparably, subject to certain exceptions, employers are not vicariously liable for any loss or damage caused by an independent contractor’s negligence or other torts.
Most significantly, an employee is entitled to common law reasonable notice upon termination, as well as the minimum amounts of notice upon termination set out in the Employment Standards Code, unless a term of their employment agreements removes that entitlement. Employers should always keep in mind that, when an employee is terminated without cause, they are obligated to pay them a minimum amount of severance. Comparably, an independent contractor is only entitled to the amount of notice or termination pay agreed upon as part of their contractor agreement. If the terms of the agreement are adhered to, an independent contractor will not be entitled to any additional severance beyond the terms of their contract.
How do you tell if an individual is an employee or a contractor?
Unfortunately, there is no simple answer to that question. It depends on the circumstances in each case, and is particular to the relationship between the parties. The Courts have developed a number of different tests to determine whether an individual is an employee or a contractor, each of which looks at different factors and considerations to determine where along the spectrum the relationship falls. These factors include:
- Who controls the method of doing the work;
- Who owns the tools involved in doing the work;
- Who has the greatest chance of profit;
- Who has the risk of loss; and
- Whether the individual is integrated into or forms part of the employer’s organization.
The first four factors are generally summarized by asking whether the individual is carrying on business for himself, or is he carrying on his work for a superior. The last factor asks much the same question, and asks whether the individual is employed as “part of the business”, or whether he is “not integrated into it but is only accessory to it.”
Significantly, it is not what the parties call the relationship that defines it. Signing an agreement titled “Independent Contractor Agreement” does not make it so. It is the substance of the arrangement that matters.
The “Dependent” Contractor
The Courts have recognized that, in certain circumstances an individual does not fall into one of the two neat categories: an employee on one hand, acting as an integral part of the employers business, or an independent contractor on the other, in business for themselves. In response, the Courts have formulated an “intermediate” category, where the relationship between the parties reflects some aspects of both an employer/employee and independent contractor relationship. Recently, this “intermediate” category has become known as “dependent contractors”.
The effect of being labelled a “Dependent” contractor is that an individual is entitled to common law reasonable notice upon termination, despite not being a full “employee”.
To determine whether an individual is an employee or a contractor, the Courts will apply those tests set out above. Then, in those cases where the individual is clearly a contractor, the courts will look to certain factors to determine whether the individual is a dependent contractor, rather than an independent contractor. These factors include:
- The duration of the relationship;
- The degree of exclusivity;
- The degree of reliance or closeness of the relationship;
Generally speaking, the most determinative factor in finding a classification of “dependent” contractor is exclusivity (see Mckee v Reid’s Heritage Homes Ltd., 2009 ONCA 916 at para 30). An individual may demonstrate all of the hallmarks of an independent contractor, but if the employer is effectively their only client and the relationship lasts decades, that would favour a finding of a “dependent” contractor relationship.
Dependent Contractors in the “Gig” Economy
In a recent decision of the Ontario Labour Relations Board (the “Board”), Canadian Union of Postal Workers v Foodora Inc., 2020 CanLII 16750, the Board found that individuals acting as delivery couriers for the Foodora food delivery app (similar to Skip the Dishes or Uber Eats) were dependent contractors, for the purposes of the Ontario Labour Relations Act, 1995 (the “Act”).
In coming to their finding that the delivery drivers were dependent contractors, the Board found the following:
- The couriers did not, and could not, use substitutes to perform their work as this was prevented by the operation of the app and the service agreement with Foodora. An independent contractor in business on their own account is able to determine who performs the work at issue.
- The most important “tool” at issue was the Foodora App itself, which the Board found was owned and operated by Foodora. The couriers were merely permitted to use the app, in order to enable them to perform their services. While the couriers were required to provide their own cellphones and mode of transport, it was the App which allowed the business to exist.
- There was no opportunity for the couriers to engage in entrepreneurial activity while performing food deliveries. They were limited in how much they could gain based on the rules imposed by Foodora and the App. The couriers also had little to no risk of loss, as the couriers were paid through the App regardless of any issues with the customer or restaurant. The Board noted that working multiple jobs at the same time was not evidence of entrepreneurial activity, but rather “hard work
- Couriers were required by the services agreement to provide exclusive service to Foodora for the duration of their delivery shifts. While they were able to make other deliveries for another food delivery App at the same time, they were beholden to Foodora to ensure their deliveries were made on time.
- The Board found that it was not appropriate measure economic dependence purely on a numerical “threshold” (such as a dependent contractor must earn at least 51% of their income from a single employer to qualify) in sectors where services are performed on a part time basis. Rather, the key element of ‘dependence’ was that the couriers had no real ability to, on their own, generate their own income or customers or line of business.
- Furthermore, the App was operated in a way that Foodora controlled which drivers obtained which shifts, the number of shifts, and which drivers were considered “on-call”, based on ratings assigned by Foodora. This increased the degree of control Foodora had on the couriers, and the courier’s dependence on Foodora.
- The Couriers did not have the ability to vary the delivery fee they received for each successful delivery. The Board found this made them similar to employees receiving a standard wage-rate for work performed.
- There was a significant degree of integration by the Couriers within Foodora’s business. Without some form of delivery courier, Foodora’s App would not function. The couriers were integral to the business.
There is plenty of risk involved in having what the parties thought was an independent contractor relationship classified by the courts as an employee or a dependent contractor. To avoid such a situation, here are some practical tips to keep in mind:
- The contractor should control as much of how and where they do their work as possible. Allow them to set their own schedule. In certain situations, sub-contracting should be permitted.
- The contractor should be required to provide all of the tools and equipment required to perform the work. If the work is office-work, ideally the contractor should be working remotely with a computer and other office equipment which they have supplied.
- The contractor should issue invoices to the company.
- The contractor should assume responsibility for remitting all required taxes to the CRA and other government entities.
Regardless of how closely the parties come to creating a genuine “independent contractor” relationship, there is always a risk that a court or administrative decision maker might find otherwise. If you have concerns or questions about how to structure an independent contractor relationship, or what to include in a contractor agreement, please contact one of the members of our labour and employment team.
If you have an employment law question, reach out to a member of our Labour & Employment Team