Modern Work & the Gig Economy
By Matthew Larsen and Jordan Thompson, Fasken
The Gig Economy is often associated with the use of non-traditional working arrangements. The most common of these arrangements is that of independent contractor (also commonly referred to as consulting or freelancing). When used effectively, such arrangements can be mutually beneficial to both company and worker, providing flexibility and financial benefits. The flip side is that when mishandled, such arrangements can expose both the company and worker to considerable financial cost. For the company, this cost may include litigation expenses, court damages, unpaid statutory remittances, and administrative penalties. Of particular note, such costs can arise even when a worker and company mutually agree to an independent contractor arrangement and sign a corresponding written agreement.
The purpose of this article is to provide information to companies who are using or considering the use of contractor arrangements. We want to assist those companies to properly assess the relationship and to take appropriate precautions to minimize their risk.
Employee or Independent Contractor (or Dependent Contractor)?
Courts, tribunals and administrative bodies consider a number of factors when assessing whether an individual is an employee or an independent contractor. The weight given to different factors varies depending on the court, tribunal or administrative body, but consistently include certain key factors :
- control and direction over how the work is performed (for instance where and when the work is performed, and whether the contractor can sub-contract the work);
- ownership of tools and equipment to perform the work;
- whether the contractor is economically dependent on the company;
- whether the contractor has a meaningful chance of profit or loss; and
- operational integration between the contractor and the company.
Courts and tribunals have made it clear on numerous occasions that entering in to an independent contractor agreement is not conclusive. When assessing whether an individual is an employee or independent contractor, courts and tribunals will go beyond the wording of an agreement to assess the true nature of the relationship. There are many examples of situations in which an individual has entered in to such an agreement, carried on business as a contractor, only to later assert that they are an employee and claim an entitlement to employee entitlements such as overtime, vacation pay, or severance.
While many employers are familiar with the categories of employees and independent contractors, less are aware of a third category – dependent contractors. The hallmark of a dependent contractor relationship is that the contractor provides services to only one “customer” and is therefore economically dependent on that customer. Other key indicators of a dependent contractor relationship are a lengthy relationship and high level of integration within the company.
Consequences of mischaracterizing a worker as an independent contractor
Companies who engage the services of an independent contractor need to be aware of the consequences if an individual is found to be an employee or a dependent contractor. Some of these consequences carry significant financial costs.
We will briefly explain the reason for the financial cost of mischaracterizing a worker. An employee is entitled to certain statutory entitlements to which a contractor is not entitled. Some such entitlements are statutory holidays, vacation pay, overtime and termination notice or pay in lieu of notice. Moreover, companies have a legal obligation to deduct and remit payroll deductions to the Canada Revenue Agency for their employees, but not for independent contractors. Further, companies are required pay WorkSafeBC premiums for employees. Finally, unlike contractors, employees are entitled to statutory notice of termination or pay in lieu of notice. Generally speaking, notice of termination or pay in lieu under employment standards legislation amounts to one week per year of service to a maximum of eight weeks. Accordingly, where a worker is mischaracterized, companies often fail to provide these entitlements and fulfill these obligations.
Upon a declaration that an individual is an employee, the company is responsible for paying the unpaid statutory entitlements and outstanding remittances to the Canada Revenue Agency. In addition, the company may be required to pay penalties, interest and legal fees. If an individual is injured at the workplace and is deemed to be an employee by WorkSafeBC, an employer may be liable for the retroactive payment of unpaid premiums, interest and fines. Lastly, at the time of termination of the relationship, if the individual asserts that they were an employee rather than independent contractor, the employer could be liable for common law reasonable notice (or what is commonly referred to as severance). Depending on the length of the relationship, claims of this nature can result in significant liability for the employer (up to twenty-four or more months of lost pay).
Dependent contractors, like employees, are entitled to compensation based on length of service under employment standards legislation, and common law reasonable notice, albeit on a slightly lower scale than employees.
Key takeaways for companies using or considering the use of contractors
- Mischaracterizing workers can result in significant financial cost.
- At the outset of the relationship, prior to entering in to an agreement, it is critical to candidly assess whether an individual is an independent contractor or employee. This assessment should be made based on the facts. An agreement that an individual is an independent contractor is not conclusive.
- Once a determination has been made, but prior to the commencement of services, ensure that you enter into a contractor or employment agreement that properly reflects the nature of the relationship and limits exposure of the employer. Ensure that the agreement includes a termination provision that is appropriate in the circumstances and compliant with employment standards legislation, where applicable.
- For lengthier relationships, conduct a periodic review to ensure that the way the services are provided have not changed over time, the relationship continues to be characterized as a contractor relationship, and an appropriate written agreement is in force. A periodic review is a good practice for all agreements and workplace policies.
Matthew Larsen is a partner, and Jordan Thompson is an associate in the Labour, Employment and Human Rights practice group at the law firm Fasken. Fasken is one of Canada’s leading business law firms, with more than 700 lawyers, spread across 7 offices in Canada and 3 offices around the globe. More information can be found at www.fasken.com.
This column is intended to convey brief, timely, but only general information and does not constitute legal advice. Readers are encouraged to speak with legal counsel to understand how the general issues noted above apply to their particular circumstances.