There are many great reasons to use independent contractors as part of a workforce. Independent contractors often bring specialized expertise and tools, without the expectations of a long-term relationship. They can parachute in and out of an organization, setting their own schedules, taking on multiple projects, even brining in their own employees to help. Increasingly however, adjudicators, plaintiff lawyers and legislators are challenging employers who "misclassify" workers as independent contractors. Furthermore, some adjudicators seem to have no problem with an individual reaping the benefits of being an independent contractor (typically, throughout the relationship), and later claiming to be an employee when it is advantageous to do so (typically, at the end of the relationship). A finding that a worker (or group of workers) has been misclassified can result in significant liability for an organization.
Ontario is increasing the risks and penalties for employers who misclassify workers as independent contractors as part of Bill 148: Fair Workplaces, Better Jobs Act, 2017 ("Bill 148"), which amends the Employment Standards Act, 2000 ("ESA"). As a result, the burden is now on the employer to prove that the worker is not an employee for the purposes of the ESA. This change of presumption will make it even more difficult for an employer to defend claims filed by individuals challenging their status as an independent contractor in favour of being classified as an employee.
Independent Contractor or Employee? Reversed Onus
Bill 148 reverses the onus in misclassification cases under the ESA. This means that if an Ontario contractor claims to be an employee for the purposes of the ESA, and therefore claims to be entitled to overtime, vacation pay or other relevant statutory entitlements, the employer will have the burden of proving that the contractor in question is not an employee.
There is no set formula in Canada for determining whether a worker is an employee or independent contractor: adjudicators look at the relationship between the parties as a whole to determine whether the worker is truly in business for themselves. The factors that are most commonly considered include:
- the company's control over the performance of the contractor's work (for instance, whether the individual hires his own employees, or determines the timing and manner in which services are rendered);
- the ownership of the equipment required to perform the work;
- whether the contractor is economically dependent on the company;
- whether the contractor has a meaningful chance of profit or risk of loss; and
- the operational integration between the contractor and the company (this includes whether the individual is incorporated).
Proving that a worker is not an employee can be particularly challenging for an employer who may not have access to information about the contractor's business, such as whether the contractor has other sources of income, or what tools the contractor uses to perform the work.
Penalties for Misclassification Claims under Ontario's Employment Standards Act, 2000
Among the recommendations adopted by the Ontario government in Bill 148 was its Special Advisors' recommendation to increase the proactive enforcement powers of the Ministry of Labour. These proactive measures include inspection blitzes in specific sectors to ensure compliance with the ESA, conducting regular inspections in high-risk sectors, and providing additional resources to educate employees and employers on their rights and responsibilities under the ESA. To achieve this goal, Ontario has announced that it will be hiring up to 175 additional employment standards officers to assist with its enforcement efforts, and have increased the penalties payable by non-compliant employers in recent amendments to ESA Regulations.
Employers who are found to have contravened the ESA by an employment standards officer for misclassifying an employee as an independent contractor may face penalties of $350, $700, and $1,500 for the first, second and third contravention or more, respectively. Where a contravention of the ESA affects more than one employee, the above-noted penalties will be multiplied by the number of employees that have been impacted. Employers who violate the ESA may also face prosecution. If convicted, fines can range between $50,000 and $500,000 depending on whether the conviction applies to an individual or corporation, and if it is a first, second or third offence.
In addition to monetary penalties, Bill 148 empowers the Ministry of Labour to publish the names of employers who fail to comply with the ESA. This publicly available list will include the name of the employer, the date and description of the contravention, and the penalty charged.
Takeaway for Employers
Misclassification of contractors can lead to significant liability for employers, as these individuals can lay claim to vacation pay, statutory holiday pay, overtime pay, termination and severance pay, among other entitlements. These are all considered to be rights and entitlements of true "employees" under employment standards legislation. Furthermore, there can also be consequences for unremitted taxes, CPP, EI, health taxes or government health insurance, and workers' compensation insurance premiums in some cases. Significantly, both "employees" and "dependent contractors" may have common law entitlements upon termination. The recent amendments to Bill 148 are expected to increase the past bias in favour of determination of employee status.
To minimize the risks for misclassifying individuals as independent contractors, employers are encouraged to take a proactive approach, including taking a second look at existing relationships, by:
- assessing the independent contractor relationship(s) to make a determination on their true status as an employee or independent contractor;
- reviewing independent contractor agreements for potential risks; and
- considering next steps where it is determined that an individual was misclassified as an independent contractor - this may include hiring the individual as an employee.
The changes to Ontario's ESA reflect a growing concern amongst lawmakers across Canada that workers and employers are operating outside of the traditional employer-employee framework. With these changes, we expect to see an increase in the number of misclassification cases brought against employers under employment standards legislation, and these cases should progress more quickly with the dramatic increase in enforcement officers. We also expect to see an increase in copycat claims from plaintiff lawyers, including class actions, as other similar cases play out in the Canadian and American news media.