Employees vs. independent contractors

Tyler Cassack (00:05): Deciding whether to hire people as an independent contractor versus an employee is one of the first decisions you will have to make when building out your startup team. What’s often missed, though, is that the choices you make will not only impact how your team is structured, but also present significant legal consequences if you do not correctly follow the laws that dictate your relationship with the people you engage.

I’m Tyler Cassack and I’m here with Tom Stevenson to discuss the key differences between employees and independent contractors and what that means for your startup. So, Tom, firstly, what’s the difference between an independent contractor and an employee?

Tom Stevenson (00:36): Million-dollar question. So, fundamentally, an independent contractor, which is often referred to as a consultant, is somebody who you would engage to provide either a specific task or a specific kind of service, and is often seen as a contract for services contrast that with an employee who is somebody who you usually engage on an indefinite period basis, and is often seen as a contract of services.

And what we mean by that is that when we’re engaging folks, on that basis, what is the degree of control that you want to have over the person? And so, if it’s somebody who you want to sit on the outside who is going to run independently of the business, then that would be somebody who would more likely fall into an independent contractor category versus somebody if you intend to have a large amount of control over their operations—what they do when they do it, how they do it, where they do it—that’s somebody that’s more likely to fall into an employee category because you have a lot more direction and control over how they provide their services. Similarly, one of the factors that would come into that is how integrated do you want this person to be within your business?

Is it somebody who is someone you’re just going to engage to do something specifically, they’re going to do their role and then off they go? In which case an independent contractor versus somebody who you want as an integral piece of your business as part of your team, working with everybody, directing tasks, receiving tasks and supervision. That’s someone more likely to fall into an employee category.

Another one of the considerations will be who is going to provide the tools with which the person is going to do their services. An independent contractor will provide their own laptop, their own work, their own vehicle, transportation, you name it, versus an employee is somebody who you give the tools and equipment to do their job. You give them an office, you give them a desk, you give them a computer, all of those sorts of things.

And then finally, it’s how do you intend to compensate this person? Is it somebody who you’re providing regular wages or a regular base salary, in which case that’s an employee. They’re receiving wages on a regular, consistent basis. It’s not based on productivity or efficiency versus a contractor. One of the hallmarks of that relationship is whether there’s a chance of a profit or risk of a loss.

And so, these are a lot of the factors, but they’re also a lot of the tests that courts will look at to determine whether somebody falls into one category or the other.

Tyler Cassack (03:05): So, in speaking of courts, a major difference between independent contractors versus employees is that employment laws such as the Employment Standards Act don’t apply to independent contractors. And so, what does that mean? That means that companies who hire independent contractors don’t have the same legal obligations they do to their employees to pay them a minimum wage, overtime pay, vacation pay, or to provide them with reasonable notice of termination depending on their length of service or termination paid in lieu thereof.

With employees, it’s also important to remember that you may need to register with the appropriate provincial Workplace Safety and Insurance Board, pay their necessary premiums, and also withhold income tax, CPP contributions, and employment insurance premiums from their wages. If you fail to make those required deductions and contributions, you could be liable for fines, penalties, interests in addition to any amounts that should have been paid by the company to the employee. So, contrast that with an independent contractor who’s responsible for paying their own taxes and contributions after you pay them. And so, all that sounds a lot simpler and might entice me to hire and classify somebody as an independent contractor over an employee that’s not without its own risks.

And so, Tom, say I hire someone to work for my startup, you know, as an independent contractor. And I have a contract with them that states that’s the case. I don’t withhold income tax, don’t withhold any contributions from their payments, or follow any of the processes that we’ve talked about here today. And then months later, after our relationship ends, I’m informed by the CRA that I’m being fined for not withholding those taxes, contributions. And on top of all of that, the person is also claiming unfair dismissal. What are my options?

Tom Stevenson (04:44): First, call your Torys lawyer. Second, you know, the fact that you have a contract in place with this person is a good thing, right? Because as far as courts are concerned, they’re going to look to the written agreement to say what was the intention of the parties here? How did they define the relationship? What was the scope? How did they contract for their services, whether it’s of service or for services? One of the challenges, though, is that the written contract isn’t determinative in terms of the analysis and that courts and tribunals, they look to the substance of the relationship over the form of the written agreement. And so, it’s, pardon the analogy, but if it looks like a duck and it walks like a duck and quacks like a duck, the court is going to say it’s a duck, it’s not a moose.

And so, in addition to the contract, they’re going to look at a lot of the other factors in the relationship, which include some of the things we’ve talked about, you know, the degree of control, how integrated are they into the operations. Is there the chance of profit or a risk of loss? Who provided the tools and equipment for the job?

And they’ll look at all those things to say, was this person, in fact, and in law, an employee or an independent contractor? And if they are an employee, then as you mentioned, then the employer could be on the hook for things such as vacation pay, overtime pay, notice of termination, any of those other employment law hallmarks. Which is why it’s all the more important that you classify your workers properly at the outset, to make sure that you can avoid those situations down the road.

Tyler Cassack (06:14): Make sense. So ultimately, whether or not you decide to have employees or independent contractors will really depend on the needs of your startup. And so, in the event of a dispute, the courts are going to consider a number of factors to determine if someone who worked for you is properly classified as an employee or an independent contractor. So, for that reason, the best thing you can do is clearly define from the very start what the relationship will be and ensure that you follow the correct processes that are to be expected based upon the agreed upon relationship.