How Are Employees and Independent Contractors Different?

Owning and operating a business takes dedication and hard work. If others work for you, it is important to understand the employment laws. If a legal dispute emerges over the status of someone who has worked for you, it’s important to contact a Toronto business lawyer at once.

What should employers in Ontario know about the legal distinction between employees and independent contractors? What is a “dependent” contractor? When should an employer seek legal advice from an Ontario business lawyer regarding the way that a worker is classified?

Whether you are an independent contractor, an employee, or an employer in or near the Toronto area, if you will keep reading this brief discussion about employers, employees, contractors, and their legal rights and responsibilities in Ontario, you will find the answers you may need.

What is the Employment Standards Act?

A worker’s legal status as an employee, an independent contractor, or a dependent contractor defines that person’s relationship with the employer. Employers who misclassify an employment relationship, whether mistakenly or intentionally, risk costly legal proceedings and fines.

The Employment Standards Act of 2000 sets forth the minimum legal standards for employers in Ontario, and it spells out the legal responsibilities and rights of both employers and employees.

What Makes a Worker a Legal Employee?

Employers in Ontario often choose to hire workers as independent contractors rather than as employees in order to avoid some of their legal costs and obligations under the Employment Standards Act, which defines an employee as someone who:

  1.  works for or supplies particular services to an employer in return for wages
  2.  is trained by an employer if the training is for a skill used by that employer’s employees
  3.  works from home for an employer but is not an independent or dependent contractor

Employers may try to classify employees as independent contractors to save on expenses like payroll taxes and employee health benefits. However, the law imposes penalties for wrongly classifying employees – penalties that may cost far more over time than any employee benefits.

What Defines an Independent Contractor?

Independent contractors have more control than employees over how their work is done. They typically work the hours they choose, provide their own supplies and facilities, and if there is no exclusivity agreement, they may work for more than one employer. Independent contractors are:

  1.  responsible for their own taxes, health insurance, and retirement savings
  2.  eligible for tax deductions and benefits that are unavailable to employees
  3.  not legally entitled to leaves of absence, vacation pay, or other employment benefits
  4.  responsible for their own profits, costs, and losses
  5.  fully liable for their own negligence or wrongdoing

What is a Dependent Contractor?

A third worker classification, the “dependent contractor,” is also recognized by the Ontario courts. A dependent contractor is a contractor who works mainly or exclusively for a single employer and makes half or more of his or her earnings from that one employer.

The main legal distinction between independent and dependent contractors is the nature of a contractor’s reliance on and relationship with a single employer. To determine whether a working person should be classified by an employer as a dependent contractor, the courts may consider:

  1.  the exclusivity, permanency, and dependency of the relationship with the employer
  2.  the contractor’s length of service to the employer
  3.  any contractual restrictions that prevent the contractor from working for competitors

What Are a Dependent Contractor’s Rights?

Neither independent contractors nor dependent contractors in Ontario are legally considered employees, and the Employment Standards Act provides contractors with none of an employee’s legal benefits or rights.

However, the courts have held that a dependent contractor in Ontario is entitled to “reasonable notice” of termination (or compensation in lieu of that reasonable notice) due to a dependent contractor’s reliance on a single employer.

In Ontario, what specifically constitutes reasonable notice for a dependent contractor isn’t spelled out by any law but is instead decided on a case-by-case basis by the courts after a thorough review of the contractor’s relationship with an employer.

Why Employers Must Avoid Worker Misclassification

If an employer misclassifies a worker who is a legal employee as a contractor, and if that worker takes legal action, the court may order the employer to pay the employee’s retroactive overtime and vacation pay, and in some cases, compensation in lieu of reasonable notice after termination.

An employer could also be ordered by an Ontario court to pay additional benefits, taxes, interest, fines, and other penalties for worker misclassification. If someone you have classified as a contractor takes legal action against you, arrange at once to consult a Toronto business lawyer.

What Else Should You Know About Worker Classification?

With the internet-enabled rise in the number of work-from-home jobs and with the explosive growth of companies like Uber, the number of contractors doubled in Canada from 2005 through 2020, according to a report issued in March 2023 by Canada’s Minister of Labour.

The report also indicated that about 250,000 Canadians worked as independent or dependent contractors in 2022. Delivery and rideshare services hire the most contractors.

The report cited the many challenges that independent contractors face: misclassification, unpredictable earnings, and restricted access to dispute resolution. However, the report also noted that contractors typically enjoy substantially more freedom and flexibility than employees.

Where Can an Employer Find Reliable Legal Help?

At Financial Litigation, we advise employers regarding worker classification, and we resolve classification-related legal disputes. If a dispute cannot be resolved privately or dismissed by the court, an Ontario business lawyer at Financial Litigation will fight in court on your behalf.

Our legal team has substantial experience in business and employment law. We offer the advice that helps employers avoid most legal disputes, but when disputes emerge, we have prevailed for clients that include start-ups and small and midsize businesses as well as large corporations.

Financial Litigation offers comprehensive legal services to employers in the Toronto area. We prepare and review employment contracts, and we work with business owners who are dealing with discrimination claims, regulatory issues, and the protection of their intellectual property.

We are a corporate law firm offering legal expertise in a number of practice areas. To learn more about our business and employment law services, or if you need a business lawyer’s advice and representation for a pending legal matter, call Financial Litigation now at 416-769-4107.