- What is “misclassification”?
There are two types of working relationships through which a worker can provide services. Courts historically classified them as “contract of service” between an employee and employer and “contract for services” between a client and independent contractor.
“Misclassification” refers to the situation where a worker is determined to be providing their services through a working relationship other than their stated one. Typically this takes the form of workers who have been classified as independent contractors but who are determined under the law to be employees
Example: A company retains a worker who provides services in a capacity of an independent contractor. After an audit conducted by one of the government agencies, it was established that based on the level of control over the worker and overall working relationship, the worker is not a true independent contractor, but rather an employee of the company.
- What are the consequences?
There are many provincial and federal statutes and common law rules that govern employment relationships. However, these same rules do not apply to business relationships between independent contractor and a client. If misclassification is established, it will give rise to many legal ramifications for both the contractor and the client. Note, these ramifications are commonly retroactive in nature and will affect the whole length of the working relationship.
Independent contractors will likely be penalized by the Canada Revenue Agency and denied all businesses expenses and, if applicable, small business tax deductions.
For clients, misclassification may lead to various penalties under the employment-related and taxation statutes as well as common law for failure to comply with employer’s obligations, like vacation and sick pay, tax remittances and other benefits.
Furthermore, apart from interruption of normal working relationship, investigation and litigation is a very time consuming, burdensome and expensive process.
- How to assess the relationship?
There is no one conclusive test which can be universally applied to determine whether a person is an employee or an independent contractor. The central question is whether the person who has been engaged to perform services is performing them as a person in business on his or her own account.
When examining the issue of misclassification in Canada, the courts have ruled that the contract and intent of the independent contractor and the client is only part of the equation. There are a number of other considerations that factor into the courts’ evaluation of whether a worker is an employee or an independent contractor, however, the weighting of these factors varies depending on the circumstances.
In general, the courts have set out a “four-fold test” for determining whether a worker is an employee or an independent contractor. This includes:
- The degree or absence of control exercised by the organization over the worker;
- The ownership of tools;
- The chance of profit/risk of loss; and
- The integration of the worker into the organization.
No one test is conclusive. All of these factors are considered together on a case-by-case basis and each working relationship is assessed based on all the relevant facts.